The key issues in foreign investment law

Foreign Investor

Knowing the foreign investor is very important because it is related to territories with different governments. For example, from the point of view of capital exporting countries, the act of diplomatic support according to bilateral and multilateral treaties is subject to verifying that these persons are considered as foreign investors based on the specified criteria and are the holders of this title. On the other hand, this issue is also important for the capital hosting country, because it is necessary to attract investment in accordance with the conditions and characteristics stipulated in the relevant laws and regulations of that country. On the other hand, arbitration tribunals also care about verifying the concept of a foreign investor, because filing a lawsuit in these tribunals that is either established on ad hoc basis or is an organization depends on the claimant having the title of a foreign investor based on the treaty concluded regarding the investment.

Foreign investment

Foreign capital in any country originates from two sources: First, it is related to subjects of international law, including the World Bank and the International Monetary Fund, as well as foreign governments. The second source of investment is from foreign private individuals. Although the Law of Encouragement and Support in Iran has included investment from the foreign government in the second category the importance of knowing the concept of foreign investment is because the eligibility and activity of some companies, as well as the transfer of some foreign funds, as well as the competence of some international authorities, are dependent on knowing the scope of the concept of foreign investment.

From the point of view of lawyers, from the point of view of the Washington Convention, from the point of view of bilateral investment treaties and from the point of view of domestic laws, it has different definitions. From the point of view of some lawyers, International investment is defined as a practice whereby capital is transferred from one country to another for some time longer and is transferred against mutual obligations that in case the investor is a government person it is called public investment and if the investor is private, it is called private investment. The criticism of this definition is the lack of distinction between loan and investment. In the encyclopedia of international investment law, this concept is defined as the “Transfer of funds or materials from a country is known as a capital exporting country to another country known as a host country for use in establishing an economic enterprise in the latter country in exchange for direct or indirect participation in the profits of that enterprise. The way of using this money in the administration of an economic enterprise is the distinguishing feature of foreign investment from international trade. In simpler terms, foreign investment can be interpreted as the acquisition of company assets by foreign institutions and individuals. The thing to keep in mind is that investment is different from just earning money, and the difference between the two issues is that the investment process takes place over a relatively long period. The Washington Convention of 1965 does not define foreign investment, and only in the first part of Article 25, it briefly deals with its jurisdiction, which is the origin of disputes from foreign investment. In general, the convention’s disregard for the definition of investment is because the referral of the dispute to the ICSID arbitration centre is due to the consent of the governments, which also defines this term in the first articles of the treaties. In bilateral investment treaties, the first of which was between Germany and Pakistan in 1959, investment is defined as follows: “The term investment must include the transfer of capital to invest in the territory of the other party to the treaty and it can be in various forms in the form of currency, goods, proprietary rights, privilege and technical knowledge, this term also includes the return of investment and any kind of partnership, company and property formed through the aforementioned property.

Domestic laws

In the domestic laws of countries, there are different views on the definition of investment. Some have defined it explicitly, some have defined it implicitly, and some have kept it silent, Some have also referred it to the definitions in international conventions and treaties. In Iran’s investment promotion and protection law approved in 2008, investment means “the use of foreign capital in a new or existing company after obtaining an investment license”.

Foreign capital

In Article 1 of the Law on Encouragement and Support of Foreign Investment approved in 2008, the scope of foreign capital has been further expanded and includes cash that can be converted into foreign currency through the banking system or other transfer methods approved by the Central Bank of the Islamic Republic of Iran. Importing Machinery, tools and spare parts, separate parts, and additional and auxiliary raw materials, patents, technical know-how, names and trademarks and specialized services, dividends transferable to foreign investors and other things are allowed with the approval of the governing board. According to the law, it is possible to support the use of foreign capital in all sectors, industrial, mining, and agriculture and service with the purpose of urbanization and production activities, agriculture, mining, industry and services, and despite the rule of the law on the acquisition of immovable property of foreign nationals approved in 1310 and the prohibition Land acquisition for foreign investors, there are no restrictions on investment in Iran. The only limitation is expressed by the opposite concept of Article 2 of the Promotion Law, according to which, if foreign investment threatens national security and public interests, destroys the environment, disrupts the country’s economy, and spoils production based on domestic investment, or causes concessions by the government to foreign investors, which means special rights privilege that puts foreign investors in a monopoly position, is prohibited and cannot be protected by this law. Therefore, to support domestic investment and production, Article 2, Clause D stipulates that the share of the value of goods and services produced by foreign investment to the value of goods and services in the domestic market at the time of issuing a license in each economic sector is 25%. And it will not be more than 35% in each field. The only exception to this regulation is a foreign investment for the production of goods and services for export, except for crude oil.

Foreign Investor

From the point of view of international law, any natural or legal person who invests in a country other than his own country is considered a foreign investor. Despite this international law, it gives the countries the authority to specify the foreign investors who are subject to support and encouragement according to the economic, social, and other conditions. Two issues arise in connection with the definition of investors. Be considered and what criterion should be considered to determine the persons. Two categories of persons may be included in the definition of investor, natural persons and legal entities, which are also called legal or legal entities. Sometimes the word investor is not used, and in bilateral and multilateral agreements, they use the term nationals or companies, the former refers to natural persons and the latter refers to legal entities.

 Concerning a natural person, the element of citizenship generally determines the actual relationship, although other criteria such as permanent residence, residence, residency or a combination of these can be used, and the criteria for determining citizenship for natural persons in investment agreements generally refer to the national laws of the states. In most cases when a natural person and an investor seek to obtain protection from investment agreements, he is a citizen of another contracting state.

However, in cases of dual citizenship, the arbitration rulings refrain from applying the general rule of effective citizenship. Under the rules of customary international law, a state can exercise diplomatic protection on behalf of one of its nationals in connection with a claim against another state, even if the citizen of this country must also have the citizenship of another state. Provided, of course, that citizenship is active and the effective person is related to the government applying for political support. Normally the agreements about investing in dual citizenship are silent.

Legal entities can be defined to exclude or include some types of entities. Entities may be exempt based on their legal form or purposes or capital ownership .Differences in the legal form of a legal entity may be important for the country of the amount of capital, for example, the contracting governments are interested in state companies that are formed by sovereign capital.

Due to the legal restrictions that exist in the parties to their contract, they exclude from the definition of investor, and instead, the host government may stipulate that the legal entity has an effective and real economic relationship with the country it belongs to. In this way, only the investors of the contracting government have the right to enjoy the benefits of the agreement. Sometimes, instead of defining the internal laws, it is enough to state the examples of the investor. In Vietnam, a foreign investor can be a company, a production unit, whether private or public, an international organization, or a natural person. In South Korea and Bangladesh, a natural or legal person, and in Spain, any natural person, whether resident or not. Legal entities of foreign governments or government agencies, as well as Spaniards living abroad, were designated as examples of foreign investors. While in the Law of Encouraging and Supporting Investment in Iran, the person of origin is before his citizenship

Foreigner puts capital as their distinguishing feature from domestic investment and therefore Iranian investors can also be considered foreign investors under certain conditions.

The importance of knowing the foreign investor

Benefits are determined in laws and bilateral treaties for foreign investors, there are two approaches to determining the protection policies for foreign investors. The first approach is the principle of non-discrimination and the only advantage granted to foreign investors is equality in rights and benefits with domestic investors of that country. The second approach, by applying the principle of awarding points, seeks to gain the attention and desire of foreign investors. At the same time, what is very important is that the determination of the treatment of foreign investors is based on the principle of non-discrimination.

The principle of equity and fair treatment

Fair treatment, is the comparability of the treatment given to the foreign investor with the same treatment towards the investor of any third country. In paragraph one of Article 8 of the promulgating agreement, The support and guarantee of investment between member countries of the Organization of Islamic Conference are emphasized that the investors of each contracting party in the field of economic activity in the territory of the other contracting party have used their funds, they should receive at least the same favorable treatment, rights and privileges to enjoy that in the field of similar economic activity in the case of investors from other countries members of this agreement applies.

The principle of non-discrimination

The foreign investor has immunity to the principal capital as well as the profit from it and other legal rights. According to the principle of non-discrimination, foreign investor companies, like domestic companies, have the right to make decisions in the purchase of required items such as machinery and equipment and raw materials, fuel, separate components, accessories, means of transportation and office equipment. The principle of non-discrimination can also stand out in the ability to sell products in the domestic market. Article 8 of Iran’s foreign investment promotion and support law, in order to apply the principle of non-discrimination, includes the foreign investor with all the protection rights and facilities that are available for domestic investments. In Article 9 of the same law, the foreign investor is assured that his investment will not be expropriated and nationalized except in special circumstances that are non-discriminatory, legal and in return for compensation based on the real value of his capital.

The principle of awarding points

In addition to the main principle of non-discrimination, some countries have accepted the granting of extra privileges to their domestic investors. Applying such an approach increases the motivation and willingness of foreign investors to pour their capital. According to China’s foreign investment regulations, tax exemptions are available to foreign investors under certain conditions. Foreign investors who invested in the form of joint ventures are exempted from paying export duties in encouraged sectors. On the other hand, regarding the import of required items such as fuel, raw materials, and necessary industrial devices, they are exempted from paying customs duties.

The principle of national treatment

The concept of this principle is that the host country should treat foreigners in the same way it treats its citizens. This is a condition that is mentioned in bilateral and multilateral treaties.

Article 8 of the Iran Investment Promotion and Support Law explicitly emphasizes this principle. Clause 1 A of Article 2 of the bilateral investment agreement between Iran and France regarding National treatment states that each contracting party in its territory with management, activity, maintenance, use, benefits, sale and liquidation of investments, treatment towards the investors of the other party, It will show the treatment applied towards its investors or the treatment applied towards whichever is more favorable should not be more unfavorable to third-country investors. So the national treatment should be the same in all fields. The legal document for applying the principle of national treatment is Article 8 of Iran’s Foreign Investment Promotion and Protection Law, which grants the foreign investor the same rights and benefits as the domestic investor whose capital actually has a domestic origin, the same exemptions. The tax prescribed in Articles 132 and 133 of the Law on Direct Taxes for production and mining units within specified periods, or the exemption from the income of cooperative companies or the export of finished products of industrial goods to the extent of 100%, according to Article 141 of the same law, also includes foreign investors.

Appeal to the arbitration center for settlement of investment disputes

The domestic laws of encouragement and support, including Iran’s Foreign Investment Support and Encouragement Law, the method of resolving disputes between the investor and the host government is first to compromise, otherwise, the presence of domestic courts is an apparently unreliable method for the foreign investor. They usually seek to create more benefits than these. States usually include an international center for the settlement of investment disputes in a treaty in several ways: First, some treaties require a contracting state to submit an investment dispute to arbitration upon request by an investor who is a national of another contracting state or refer to the arbitration of the International Center for Settlement of Investment Disputes, Netherlands and Indonesia, Serbia and Egypt, England and Bangladesh, France and Singapore, the United States and Senegal. Second, there are other types of treaties that only stipulate that if the investor requests, he has the condition of referring the dispute to the international center, such as the treaty between France and Malaysia.

Some other treaties favor the foreign investor to choose compromise or refer to the arbitration center. Including the condition of referral to arbitration in bilateral and multilateral investment treaties does not necessarily mean giving jurisdiction to the ICSID Arbitration Center, but there are other arbitration authorities such as UNCITRAL arbitration, International Chamber of Commerce. In fact, some treaties allow the right to choose to refer to one of the above centers.

Since this arbitration center makes decisions in the field of investment, it is a privilege for the benefit of the investor. Therefore, it is very important to qualify as a foreign investor to benefit from the benefits of other treaties and to qualify for ICSID.

Expropriation and compensation

One of the events that can happen to a foreign investor in the host country is the expropriation of his capital and its nationalization. Bilateral investment treaties rarely prohibit a country from nationalizing an investment in the public interest. On the contrary, it recognizes this right, but states that the host country should not expropriate property that is in the public interest or is discriminatory, or take place in situations that effective and adequate compensation is not provided for.

Special protections in bilateral investment treaties

In addition to general provisions, bilateral investment treaties may also stipulate specific protections. Including Article 5 of the agreement between Iran and Kazakhstan, which is subject to the provisions of the mutual encouragement and support agreement, “the model plan that stipulates, regardless of the terms stipulated in this agreement, more favorable conditions that are agreed between each of the contracting parties and an investor of the other contracting party taken or placed will be applicable, each contracting party guarantees the continuous compliance of the obligations that it has undertaken in relation to the investments of the investors of the other party, which is the same as the principle of most favored nation.