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ZURICH | GENEVA | ZUG | LONDON | MADRID
Seminar «De-offshorization and protection of
your investments in Russia and the CIS -
Smart treaty planning»
June 7, 2016 ...
Russian De-offshorization and Its
Possible Impact on Swiss Wealth
Management Industry
Dmitry A. Pentsov, Partner
FRORIEP
1...
1. OFFSHORIZATION IN RUSSIA: MAGNITUDE
 The message of President Putin to the Federal Assembly, delivered on December 12,...
2. DE-OFFSHORIZATION CAMPAIGN IN RUSSIA: ORIGINS
 De-offshorization" of the Russian economy is an economic development go...
2. DE-OFFSHORIZATION CAMPAIGN IN RUSSIA: ORIGINS
 The message of President Putin to the Federal Assembly, delivered on De...
3. LEGISLATION ON CONTROLLED FOREIGN COMPANIES AS
ONE OF THE PILLARS OF THE DE-OFFSHORIZATION
CAMPAIGN
 Federal Law No. 3...
4. LEGISLATION ON FOREIGN BANK ACCOUNTS FOR CERTAIN
CATEGORIES OF PERSONS
 Federal Law No. 79-FZ "On the prohibition to c...
5. MEASURES AIMED AT DISADVANTAGING OFF-SHORE
PARTICIPANTS IN RUSSIAN JUDICIAL PROCEEDINGS
 Decision No. 14828 of the Pre...
6. THE MEANING OF A “CONTROLLED FOREIGN COMPANY”
UNDER THE RUSSIAN TAX CODE
 Under the Tax Code, a controlled foreign com...
6. THE MEANING OF A “CONTROLLED FOREIGN COMPANY”
UNDER THE RUSSIAN TAX CODE
 As controlled foreign company shall also be ...
7. SETTLOR AS A “CONTROLLING PERSON"
 Under the general rule prescribed by the Code, the settlor of a trust is presumed t...
8. PERSONS OTHER THAN A SETTLOR AS “CONTROLLING
PERSON"
 As concerns persons other than settlors (for example, beneficiar...
9. REVOCABLE AND IRREVOCABLE TRUSTS AS
“CONTROLLED FOREIGN COMPANIES”?
 A revocable trust with extensive reserved powers ...
10. DISCRETIONARY AND FIXED INTEREST TRUSTS AS
“CONTROLLED FOREIGN COMPANIES”?
 Discretionary trusts may be defined as tr...
11. TAXATION OF FOREIGN TRUSTS WHICH ARE RECOGNIZED
AS “CONTROLLED FOREIGN COMPANIES”
 Once a certain foreign trust is re...
11. TAXATION OF FOREIGN TRUSTS WHICH ARE RECOGNIZED
AS “CONTROLLED FOREIGN COMPANIES”
 Article 25.14(1) of the Tax Code o...
12. REPORTING REQUIREMENTS: PRACITAL CONSIDERATIONS -
2016 / 2017
 In 2016 the controlling persons of foreign trusts shou...
12. REPORTING REQUIREMENTS: PRACTITCAL
CONSIDERATIONS - 2016 / 2017
 While the recognition of trusts as a "controlled for...
DMITRY A. PENTSOV
 His international private client work includes wealth
transfer and structuring, including trusts, acqu...
What are the advantages of
arbitration in Switzerland?
Chamber of Commerce Switzerland-Russia & CIS Seminar
Geneva, 7 June...
WHAT ARE THE ADVANTAGES OF ARBITRATION?
Arbitration is an alternative to state courts for dispute resolution, in
which the...
WHY SWITZERLAND?
 Long-standing tradition in international
arbitration
 First-choice as “seat” of the arbitration
Why?
...
WHY SWITZERLAND ? (CONT.)
 International orientation of the Swiss economy and presence of
international organisations
 I...
SWISS RULES OF INTERNATIONAL ARBITRATION
 Adopted in 2004 (950 cases managed)
 Adaptation of well-established UNCITRAL A...
ARBITRATION IN SWITZERLAND UNDER THE SWISS RULES &
RUSSIA – CIS DISPUTES
 Safe and neutral legal framework
 Flexibility ...
JEAN MARGUERAT
 Practice includes international judicial assistance,
debt collection and bankruptcy proceedings
 One of ...
Can you protect your client's investment in
Russia and the CIS through investment
treaties? What is it and what protection...
PURSUING INVESTORS’ TREATY RIGHTS
• Usual remedies against adverse Government action and regulation
• Lobbying on domestic...
“INVESTMENT” AND ARBITRATION CLAUSE
 Is there an investment under the treaty?
• Usually broad definition of investment, w...
STATISTICS I
696 treaty-based cases filed through 2016
107 States have faced claims
Forums of arbitration
ICSID or its add...
STATISTICS II
The outcomes (through 2016; out
of 444 concluded cases)
162 cases decided in favor of States
(36,5%)
117 cas...
STATISTICS III
Enforcement
 How often is enforcement against a State required?
 States reportedly comply with arbitral a...
THE CLAIMANT / THE DEFENDANT
 Who is the investor claimant?
 Individuals as well as legal entities can be investors
 Tr...
TREATY PLANNING
 Ensure there is a “qualifying investor“ with a “qualifying investment“
• Locate the investor/holding com...
TREATY PLANNING IN SWITZERLAND
 Legitimate to organize investments in order to maximize protection under existing
treatie...
STANDARDS OF PROTECTION
 Does the adverse measure violate any standard of treatment under the
treaty?
 No expropriation ...
DURATION, COSTS AND FINANCING
 Duration
 Jurisdiction phase (approx. 12 months)
 Merits phase (approx. 10-14 months)
 ...
ENFORCEMENT
 ICSID Convention
 Recognition of award as binding; enforcement of “pecuniary” obligations as if the award
w...
DR. FRANZ STIRNIMANN FUENTES
 Fellow of the Chartered Institute of Arbitrators (CIArb)
 More than 15 years’ experience i...
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FRORIEP - «De-offshorization and protection of your investments in Russia and the CIS - Smart treaty planning»

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FRORIEP - «De-offshorization and protection of your investments in Russia and the CIS - Smart treaty planning»

  1. 1. ZURICH | GENEVA | ZUG | LONDON | MADRID
  2. 2. Seminar «De-offshorization and protection of your investments in Russia and the CIS - Smart treaty planning» June 7, 2016 Geneva  Russian de-offshorization and its possible impact on Swiss Wealth Management Industry (Dmitry A. Pentsov)  What are the advantages of arbitration in Switzerland (Jean Marguerat)  Can you protect your client’s investment in Russia and the CIS through investment treaties? What is it and what protection do you get? A look inot Investor-State Arbitration (Dr. Franz X. Stirnimann) 10 June 2016 | Page 2
  3. 3. Russian De-offshorization and Its Possible Impact on Swiss Wealth Management Industry Dmitry A. Pentsov, Partner FRORIEP 10 June 2016 | Page 3 Chamber of Commerce Switzerland-Russia & CIS Seminar Geneva, 7 June 2016
  4. 4. 1. OFFSHORIZATION IN RUSSIA: MAGNITUDE  The message of President Putin to the Federal Assembly, delivered on December 12, 2012:  the offshore nature of the Russian economy has become a byword; the experts call this phenomenon as a "run from jurisdiction";  according to certain estimates, nine out of ten significant transactions, concluded by large Russian companies, including, by the way, companies with the state participation, were not governed by domestic law.  The message of President Putin to the Federal Assembly, delivered on December 12, 2013:  the sale of shares in TNK-BP for the amount of 50 billion US dollars was carried out outside of the Russian jurisdiction, although it was well known that the sellers were Russian citizens, whereas the buyer – one of the largest Russian companies;  according to expert estimates, in 2012 Russian goods with a total value of 111 billion US dollars (one fifth of Russian export) passed through off-shores or semi off-shores;  one half of 50 billion US dollars of Russian investments to other countries passed through off-shores. 10 June 2016 | Page 4
  5. 5. 2. DE-OFFSHORIZATION CAMPAIGN IN RUSSIA: ORIGINS  De-offshorization" of the Russian economy is an economic development goal set by President Putin in his address to the Federal Assembly, delivered on December 12, 2012:  the need of a comprehensive system of measures aimed at de-offshorization of the Russian economy and the request to the Government to propose these measures;  the necessity to ensure the transparency of the offshores, as many countries do through negotiations with off-shore zones and signing of the appropriate information exchange agreements;  the necessity to correct deficiencies in the court system, law making and law enforcement;  the need to abolish the presumption of guilt of business, the accusatory tendency in law- enforcement and judicial practice. 10 June 2016 | Page 5
  6. 6. 2. DE-OFFSHORIZATION CAMPAIGN IN RUSSIA: ORIGINS  The message of President Putin to the Federal Assembly, delivered on December 12, 2013:  since 2012 nothing was properly done in the area of "de-offshorization", and the results are hardly visible;  the profits of offshore companies, whose final beneficiary is a Russian person, shall be subject to taxation on the basis of Russian law and their tax payments shall go to the Russian budget;  the companies incorporated in a foreign jurisdiction shall not be entitled to receive measures of state support, including the loans of the Foreign Economic Bank (Vnesheconombank) and state guarantees;  these companies shall not be allowed to perform state contracts and contracts with entities with state participation. 10 June 2016 | Page 6
  7. 7. 3. LEGISLATION ON CONTROLLED FOREIGN COMPANIES AS ONE OF THE PILLARS OF THE DE-OFFSHORIZATION CAMPAIGN  Federal Law No. 376-FZ "On introduction of changes into Part One and Two of the Tax Code of the Russian Federation (as concerns the taxation of profits of controlled foreign companies and profits of foreign organizations)," dated November 24, 2014 (as subsequently amended) (the "De-Offshorization Law").  Federal Law No. 140 FZ "On voluntary declaration of assets and bank accounts (deposits) by individuals", dated June 8, 2015 (the "Capital Amnesty Law").  The key element of Capital Amnesty Law is the voluntary declaration program. It offers to natural persons the guarantees of liberation from tax, administrative and criminal liability in exchange for the reporting to the tax authorities their asses (plots of land, other real estate, means of transportation, securities as well as participations in a share capital of Russian and/or foreign organizations), controlled foreign companies where they are "controlling persons", foreign bank accounts as well as bank accounts with respect to which they are considered as beneficial owners pursuant to the Russian legislation.  The special declaration may be filed with the tax authorities from July 1, 2015 to June 30, 2016.  The form of the declaration as well as the procedure for its filing is prescribed by the Annexes Nos. 1 and 2 to the Law. 10 June 2016 | Page 7
  8. 8. 4. LEGISLATION ON FOREIGN BANK ACCOUNTS FOR CERTAIN CATEGORIES OF PERSONS  Federal Law No. 79-FZ "On the prohibition to certain categories of persons to open and possess accounts (deposits), to keep cash and assets in foreign banks, situated outside the territory of the Russian Federation, to possess and(or) to use foreign financial instruments", dated May 7, 2013.  Article 2 of the Law No. 79-FZ provides the list of "restricted persons", including:  persons occupying state positions; a consolidated list of "state positions" could be found in the Decree No. 23 of the President of the Russian Federation "On the state positions of the Russian Federation", dated January 11, 1995;  persons occupying positions at state corporations (companies, foundations and other organizations, created by the Russian Federation on the basis of federal laws, where the appointment and the removal are made by the President of the Russian Federation and the Government of the Russian Federation);  spouses and minor children of these persons.  Other "restricted" categories include officials of public prosecutor’s office, judges, members of the Federative Council and State Duma of the Federal Assembly of the Russian Federation, customs officials and military personnel (see, Federal Law No. 102-FZ, dated May 7, 2013, on introduction of modifications into certain legislative acts of the Russian Federation, following the adoption of the Federal Law No. 79-FZ). 10 June 2016 | Page 8
  9. 9. 5. MEASURES AIMED AT DISADVANTAGING OFF-SHORE PARTICIPANTS IN RUSSIAN JUDICIAL PROCEEDINGS  Decision No. 14828 of the Presidium of the Supreme Arbitration Court of the Russian Federation in the case Partnership of Apartment Owners "Skakovaya" v."ARTEX Corporation", dated March 26, 2013 (the "Skakovaya" case).  Facts: "ComEks" LLC, a Russian company, acquired property rights to the space belonging to the common property of residents of a multi-apartment house and subsequently re-sold this space to "ARTEX Corporation", a company incorporated in the Commonwealth of Dominica. The acquisition of the property rights was registered in the State Registry. The claims of the Partnership of Apartment Owners for vindication of this property were rejected by the Arbitration Court of the City of Moscow, the Ninth Appellate Arbitration Court and the Federal Arbitration Court of the Moscow Region. On appeal, the Supreme Arbitration Court of the Russian Federation annulled the previous decisions and sent the case to a new consideration.  Legal Issue: Who bears the burden of proof of bad faith in connection with the acquisition of property or other facts, considered by the law as grounds for the protection of third parties, when the buyer is an offshore company?  Held: The Supreme Arbitration Court placed the burden of proof of bad faith in connection with the acquisition of property or other facts, considered by the law as grounds for the protection of third parties, when the buyer is an offshore company, on this offshore company. 10 June 2016 | Page 9
  10. 10. 6. THE MEANING OF A “CONTROLLED FOREIGN COMPANY” UNDER THE RUSSIAN TAX CODE  Under the Tax Code, a controlled foreign company is a foreign organization which simultaneously satisfies the following conditions:  the organization is not considered as a Russian tax resident;  the controlling persons of these organizations are organizations and (or) natural persons considered as tax residents of the Russian Federation.  Individuals as "Russian tax residents": those individuals, who are actually present in the country for at least 183 calendar days during twelve consecutive months. This 183-days period of physical presence does not have to be uninterrupted. It is calculated by adding all calendar days when an individual was present in the Russian Federation during these twelve months.  Organizations as "Russian tax residents": Under the Tax Code, the following categories of organizations are considered as tax residents of the Russian Federation:  Russian organizations;  foreign organizations recognized as tax residents of the Russian Federation in accordance with an international treaty on the tax matters – for the purposes of application of this treaty;  foreign organizations, whose place of management is located in the Russian Federation, unless provided otherwise by international treaty on tax matters. 10 June 2016 | Page 10
  11. 11. 6. THE MEANING OF A “CONTROLLED FOREIGN COMPANY” UNDER THE RUSSIAN TAX CODE  As controlled foreign company shall also be recognized a foreign structure without legal personality, the controlling persons of which are organizations and (or) natural persons considered as tax residents of the Russian Federation.  A foreign structure without legal personality – organizational form, created in accordance with the legislation of a foreign state (territory) without creation of a legal person (in particular, foundation, partnership, trust, other forms of making collective investments and (or) trust management), which in accordance with its personal law has the right to carry out activities aimed at making profits (income) in the interests of its participants (shareholders, principals or other persons) or other beneficiaries.  The "control" over foreign structures without legal personality, including trusts, is defined by the Tax Code as the exercise or the possibility to exercise the decisive influence over the decisions taken by the person carrying out the management of assets of this structure, with respect to the distribution of received after-tax profits (income) in accordance with the personal law and/or constitutive documents of this structure. 10 June 2016 | Page 11
  12. 12. 7. SETTLOR AS A “CONTROLLING PERSON"  Under the general rule prescribed by the Code, the settlor of a trust is presumed to be its "controlling person", unless he/she simultaneously meets the following conditions:  this person does not have right to receive (to demand the receipt), directly or indirectly, the profit (income) of this trust, in full or in part;  he/she does not have right to dispose of the profit (income) of the trust, in full or in part;  he/she did not retain the right to assets, transferred into the trust (or, in other words, the assets are irrevocably transferred into the trust), and this right is absent during the whole period of existence of the trust as well as in case of its termination;  he does not exercise control over this trust.  Even though a certain person does not have any of the above rights, he/she may still be recognized as a controlling person of a foreign trust when he/she preserves the right to obtain these rights. 10 June 2016 | Page 12
  13. 13. 8. PERSONS OTHER THAN A SETTLOR AS “CONTROLLING PERSON"  As concerns persons other than settlors (for example, beneficiaries), in order to acquire the "controlling" status, in addition to the exercise of "control" within the meaning of the Code, this person should also satisfy one of the following three criteria:  to have the actual right to profit (its part);  to have the right to dispose of the assets of trust; or  to have the right to receive assets of trust in case of its termination.  In light of these statutory provisions, the "controlled" status of a foreign trust in Russia essentially depends on whether this trust can be subsequently revoked by its settlor, or, in other words, whether it is revocable or irrevocable as well as on the exact scope of powers of its settlor and protector (if appointed by the settlor) with respect to the trust’s assets and their distribution. 10 June 2016 | Page 13
  14. 14. 9. REVOCABLE AND IRREVOCABLE TRUSTS AS “CONTROLLED FOREIGN COMPANIES”?  A revocable trust with extensive reserved powers of settlor, including a power of appointment, consisting in the possibility to direct the distribution of trust income and capital to certain beneficiaries, and the power to add to or remove from the class of beneficiaries should normally be recognized in Russia as "controlled foreign company".  The same result may be expected in case of an appointment of a Russian tax resident as protector of a foreign trust with dispositive powers with respect to that trust’s assets, including the power to consent to or veto dispositions to be made by the trustee.  Is unlikely to be recognized as "controlled foreign company" an irrevocable trust without reserved powers of settlor and a protector who is not a Russian tax resident. This likely outcome would not be affected by the existence of a letter of whishes signed by the settlor and containing non-binding instructions to the trustee as to the desired course of action in respect of trust administration and the distribution of trust property. 10 June 2016 | Page 14
  15. 15. 10. DISCRETIONARY AND FIXED INTEREST TRUSTS AS “CONTROLLED FOREIGN COMPANIES”?  Discretionary trusts may be defined as trusts where the trustee is under a duty to select from among a class of beneficiaries those who are to receive, and the proportions in which they are to receive, income or capital of the trust property (Warner J in Mettoy v Evans [1990] 1 WLR 1587).  A settlor may find it appropriate to record his/her wishes in a non-binding letter of wishes or ask trustee to draw up a memorandum and keep on file for further reference. The existence of these documents should not result in the recognition of a certain trust as a "controlled foreign company".  Reserved powers may take form of powers of appointment, under which an "appointor" can direct the application of trust income and capital to certain beneficiaries.  Fixed interest trusts may be defined as trusts in which the trustees have no discretion as to the objects of the trust and no discretion as to how the trust fund is to be divided among the objects of the trust.  Irrevocable fixed interest trusts should not be recognized as "controlled foreign companies", because the settlor and the beneficiaries of these trusts do not normally exercise control over the decisions taken by the trustee with respect to the distribution of received after-tax profits (income). 10 June 2016 | Page 15
  16. 16. 11. TAXATION OF FOREIGN TRUSTS WHICH ARE RECOGNIZED AS “CONTROLLED FOREIGN COMPANIES”  Once a certain foreign trust is recognized as a "controlled foreign company", its profits shall be included into the taxable base of its "controlling person".  Under the Tax Code, as profits (losses) of this trust shall be considered the amount of its pre-tax profits (losses) determined on the basis of its financial reporting, composed in accordance with its personal law for a financial year, provided one of the following two conditions is satisfied:  the permanent location of this trust is a foreign state which has an international treaty with the Russian Federation on tax matters, with the exception of states (territories) which do not ensure the exchange of information for the tax purposes with the Russian Federation;  an audit report is prepared with respect to the financial accounting, which does not contain a negative opinion or a refusal to provide an opinion.  What is a "permanent location" of a trust? 10 June 2016 | Page 16
  17. 17. 11. TAXATION OF FOREIGN TRUSTS WHICH ARE RECOGNIZED AS “CONTROLLED FOREIGN COMPANIES”  Article 25.14(1) of the Tax Code of the Russian Federation:  duty to report the creation of a foreign trust within one month from the date of its creation;  Order No. MMB-7/14-177@ of the Federal Tax Service of the Russian Federation "On the approval of the form and format of submission in electronic form of notification about the participation in foreign organizations (about creation of foreign structures without legal personality), as well as of the procedure for filling the form and the procedure of submission in electronic form of notifications about participation in foreign organizations (about creation of foreign structures without legal personality)", dated April 24, 2015.  duty to report a controlled foreign trust until March 20 of the year, following the tax period in which the profits of this trust are attributable to this controlling person.  The first reporting deadline – March 20, 2017 (see Letter No. ED-3-13/1427@ of the Federal Tax Service of the Russian Federation, dated April 4, 2016). 10 June 2016 | Page 17
  18. 18. 12. REPORTING REQUIREMENTS: PRACITAL CONSIDERATIONS - 2016 / 2017  In 2016 the controlling persons of foreign trusts should determine whether for them it would be more beneficial to distribute profits generated in 2015 or, instead, to pay Russian taxes on the undistributed profits in 2017.  These profits shall be included into the taxable base of the controlling person as of the date when the decision to distribute them is taken, or, in the absence of such decision, on December 31, 2016.  The amount of attributed profits shall be determined on the basis of the amount of profits to which the controlling person has the right (shall have the right) in case of their distribution among persons, entitled to receive them.  In 2017, the controlling persons of foreign trusts shall include into their tax declarations filed with Russian tax authorities the undistributed profits of these trusts.  When the controlling person is an individual (or, in the Code’s terms, a "natural person"), the declaration shall be filed until April 30, 2017, whereas the tax shall be paid until July 15, 2017.  On the other hand, when the controlling person is an organization, the declaration shall be filed and tax shall be paid until March 20, 2017.  Depending on whether the controlling person is a natural person or an organization, the applicable tax rate would be 13 percent or 20 percent, respectively. 10 June 2016 | Page 18
  19. 19. 12. REPORTING REQUIREMENTS: PRACTITCAL CONSIDERATIONS - 2016 / 2017  While the recognition of trusts as a "controlled foreign company" could result in additional tax burden for their controlling persons, the insertion of this concept into the Tax Code also creates new opportunities for the legitimate use of this instrument by Russian clients, notably in succession matters.  Provided that a certain trust respects the mandatory inheritance rules of the Russian legislation, it could be an efficient tool for a smooth transfer of foreign movable assets to the settlor’s heirs outside of the scope of formal succession proceedings before a Russian notary and, in particular, without the need to respect a mandatory six-month waiting period imposed by Article 1163 of the Civil Code of the Russian Federation.  Since an irrevocable discretionary trust without the reserved powers of its settlor and veto powers of Russia-based protector should not be considered as controlled foreign company, a Russian tax resident may set up such structure for the benefit of his/her children without the need to pay domestic taxes on its undistributed profits resulting from the use of the trust’s assets.  Although the settlor will still be required to notify domestic tax authorities about the creation of such trust, he/she should no longer be subject to a yearly tax reporting requirements applicable to controlled foreign companies. 10 June 2016 | Page 19
  20. 20. DMITRY A. PENTSOV  His international private client work includes wealth transfer and structuring, including trusts, acquisition of aircraft and real estate, and relocation to Switzerland  Very experienced in the legal aspects of exploration, acquisition and development projects in oil, gas and other natural resources  Other areas of practice include representing foreign investors in joint-venture projects; the purchase and sale of securities; custodial relationships; the creation of investment funds and institutions; and brokerage contracts  Extensive legal experience in Russia, other republics of the former Soviet Union, and New York 10 June 2016 | Page 20 An associate in our Geneva office since 2006 and partner since 2016; his specialisms include banking and finance, international arbitration, and corporate and commercial law. dpentsov@froriep.ch | Geneva Office | +41 22 839 63 00
  21. 21. What are the advantages of arbitration in Switzerland? Chamber of Commerce Switzerland-Russia & CIS Seminar Geneva, 7 June 2016 Jean Marguerat, Partner FRORIEP 10 June 2016 | Page 21
  22. 22. WHAT ARE THE ADVANTAGES OF ARBITRATION? Arbitration is an alternative to state courts for dispute resolution, in which the parties submit their dispute to a panel of neutral specialists selected by them, who eventually issue an award.  Neutrality  Autonomy of the parties  Confidentiality  Efficiency  Enforcement (New York Convention)  Preferred dispute resolution method for commercial matters 10 June 2016 | Page 22
  23. 23. WHY SWITZERLAND?  Long-standing tradition in international arbitration  First-choice as “seat” of the arbitration Why?  Neutrality of Switzerland  Political, economical and judicial stability  Swiss law: respect of the autonomy of the parties, combination of different legal traditions 10 June 2016 | Page 23 The ASA was created in 1974
  24. 24. WHY SWITZERLAND ? (CONT.)  International orientation of the Swiss economy and presence of international organisations  Ideal geographic location and logistical considerations  Favorable arbitration legislation (PILA)  Swiss courts experienced in matters of international arbitration  Internationally renowned legal community (both as counsel and arbitrators)  Cost competitive: limited appeal possibilities (Art. 190.2 PILA) and effectiveness of the Swiss Supreme Court (5 months to render a decision) 10 June 2016 | Page 24
  25. 25. SWISS RULES OF INTERNATIONAL ARBITRATION  Adopted in 2004 (950 cases managed)  Adaptation of well-established UNCITRAL Arbitration Rules (1976)  Administered by the Swiss Chambers’ Arbitration Institution (SCAI)  Free choice of seat, law, language and arbitrators  Innovative aspects in order to increase efficiency (consolidation and joinder (Art. 4) / set off (Art. 21.5) / emergency arbitrator (Art. 43))  Confidentiality ensured: awards, orders and materials submitted (Art. 44)  Salient feature: expedited procedure (Art. 42) - applicable for cases below CHF 1 mio. or if agreement of the parties - sole arbitrator - one exchange of briefs - one hearing - 6 months to render the award - 40% of the cases 10 June 2016 | Page 25
  26. 26. ARBITRATION IN SWITZERLAND UNDER THE SWISS RULES & RUSSIA – CIS DISPUTES  Safe and neutral legal framework  Flexibility (choice of the arbitrator, law, seat, language)  Internationality (80% of the parties not Swiss, many Russian and CIS users)  Cost effectiveness (reasonable administrative fees, fees of the arbitrator controlled by the arbitral institution)  Confidentiality (orders, award and materials submitted by the parties)  Expeditious (expedited: 6 months / normal: 11 months)  Reputation: easy recognition and enforcement worldwide 10 June 2016 | Page 26
  27. 27. JEAN MARGUERAT  Practice includes international judicial assistance, debt collection and bankruptcy proceedings  One of the authors of the Commentary on the Swiss Rules of International Arbitration (2005)  Working languages French, English, Spanish and German  A “quick thinker” (Who’s Who Legal 2016) 10 June 2016 | Page 27 Specialised in dispute resolution, with particular expertise in international arbitration and in international litigation. jmarguerat@froriep.ch | Geneva Office | +41 22 839 63 00
  28. 28. Can you protect your client's investment in Russia and the CIS through investment treaties? What is it and what protection do you get? A look into Investor-State Arbitration Dr. Franz X. Stirnimann, Partner FRORIEP 10 June 2016 | Page 28
  29. 29. PURSUING INVESTORS’ TREATY RIGHTS • Usual remedies against adverse Government action and regulation • Lobbying on domestic level, regulatory proceedings, domestic litigation • Investment treaty arbitration – powerful tool to challenge the regulation in a more high- profile legal framework • Close to 3’000 BITs in force as well as numerous FTAs and multilateral free trade agreements such as NAFTA, ECT, ASEAN • Substantial increase in investment arbitration cases since 1995 (696 treaty-based cases filed through 2015) • Examples of investment treaty claims (based on Swiss BITs)  Failure to honour a 1996 contract with SGS Société Générale de Surveillance for pre-shipment inspection services (SGS v. Paraguay)  Alleged expropriation of commercial farms, forestry plantations and alleged failure to take adequate action to prevent illegal squatters from invading the forestry (Border Timbers v. Zimbabwe)  Alleged expropriation of trademark rights as a result of anti-tobacco legislation (Philip Morris v. Uruguay) • Strategic advantages of treaty arbitration:  Possibility of “treaty planning and protection” (based on dual nationality or foreign subsidiaries of investors)  Review of regulation according to different, international legal standards  Potential additional advantage to local regulatory proceedings: claim of damages 10 June 2016 | Page 29
  30. 30. “INVESTMENT” AND ARBITRATION CLAUSE  Is there an investment under the treaty? • Usually broad definition of investment, with a catalogue of examples (including movable and immovable assets, stocks, bonds, IP, goodwill, concessions) • Special requirements under ICSID (contribution, duration, expectation of return, assumption of risk)  Is there a forum under an investment treaty? • Usually broad arbitration options • Typical BIT arbitration clauses provide several options (e.g. Article 10 Switzerland-Kenya BIT) “[...] l'investisseur aura le choix entre: • (a) le Centre international pour le règlement des différends relatifs aux investissements (CIRDI), institué par la Convention pour le règlement des différends relatifs aux investissements entre Etats et ressortissants d'autres Etats, ouverte à la signature à Washington le 18 mars 1965 (ci-après la “Convention de Washington”); et • (b) un tribunal arbitral ad hoc qui, à moins que les parties au différend n'en disposent autrement, sera constitué conformément au règlement d'arbitrage de la Commission des Nations Unies pour le droit commercial international (CNUDCI).” 10 June 2016 | Page 30
  31. 31. STATISTICS I 696 treaty-based cases filed through 2016 107 States have faced claims Forums of arbitration ICSID or its additional facility (432) Ad hoc arbitration under UNCITRAL Rules (212) Stockholm Chamber of Commerce (34) ICC (4) Moscow Chamber of Commerce and Industry (4) Ad hoc arbitration (4) 10 June 2016 | Page 31 ICSID UNCITRAL SCC ICC MCCI Ad hoc UNCTAD Investment Policy Hub, 2016
  32. 32. STATISTICS II The outcomes (through 2016; out of 444 concluded cases) 162 cases decided in favor of States (36,5%) 117 cases decided in favor of investors (26,4%) 114 cases settled (25,7%) 8 cases decided in favor of neither party (liability found but no damages awarded) (1,8%) 43 cases discontinued (9,7%) 10 June 2016 | Page 32 UNCTAD Investment Policy Hub, 2016 States Investors Settled Neither Discontinued
  33. 33. STATISTICS III Enforcement  How often is enforcement against a State required?  States reportedly comply with arbitral awards as often as 90% of the time, per 2008 PwC study  Settlement by (partial) payment and/or re-negotiation of investment contract  Examples of awards that States paid without need for enforcement:  Czech Republic paid over $270 million  Slovak Republic paid over $867 million  Certain States are notorious in resisting compliance with awards:  Argentina (historically – not anymore), Kazakhstan, Russia, Zimbabwe 10 June 2016 | Page 33
  34. 34. THE CLAIMANT / THE DEFENDANT  Who is the investor claimant?  Individuals as well as legal entities can be investors  Treaty Planning on personal level: multiple nationality of individuals  Treaty Planning on corporate level: companies with foreign affiliates  Who is the investment treaty defendant?  Host State  Possible limitations of responsibility of host State for acts of a State agency  Limitations and Extensions  Ratione temporis (all existing investment covered or only when made after the entry into force?)  Admission requirements (e.g. admission under domestic foreign investment law)  Breach of an investment contract with a host state: is the investment treaty applicable?  Arbitration clause in the contract  Umbrella clause 10 June 2016 | Page 34
  35. 35. TREATY PLANNING  Ensure there is a “qualifying investor“ with a “qualifying investment“ • Locate the investor/holding company in a country with a favorable BIT with the host country • Make sure there is an investment (capital contribution, if not incorporation of the business) • Ensure that the relevant BIT is in force at the time the investment is made • Check the precise wording of the BIT on which you wish to rely (e.g. BITs may require the “investor“ to have legal personality – exclude certain kinds of trusts or foundations)  Anticipate consequences of investment failure by including, for example, a liquidated damages clause  Document the host State is aware of your anticipated revenues and profits from the investment  Keep records of State’s communications relating to investment  Keep detailed records of all project-related expenditures and costs, as well as funds invested  Check whether BIT contains “fork-in-the-road“ or waiver clauses and avoid triggering them by participating in local proceedings dealing with the same dispute 10 June 2016 | Page 35
  36. 36. TREATY PLANNING IN SWITZERLAND  Legitimate to organize investments in order to maximize protection under existing treaties  Limits of nationality planning  Limits provided for in the BIT (e.g. “denial of benefits clauses”)  Prospective planning vs retroactive planning  Fraud or malfeasance (misuse of corporate personality)  Investment planning via Swiss BITs  Swiss investor must be organized or incorporated under the laws of Switzerland  A “real economic activity” in Switzerland is required by the Swiss investor  Company administration and management of the foreign investment are effectuated by directors, employees or representatives in Switzerland  If a Swiss company makes an investment via another company in the target country, and is also controlled by a non-Swiss parent company, the Swiss BIT-protection is usually available  When a Swiss holding company controls a non-Swiss subsidiary which, in turn, invests in a target country, it is entitled to Swiss BIT-protection 10 June 2016 | Page 36
  37. 37. STANDARDS OF PROTECTION  Does the adverse measure violate any standard of treatment under the treaty?  No expropriation without just compensation  Fair and equitable treatment (FET)  Non-impairment (arbitrary, unreasonable or discriminatory measures)  Full protection and security  National treatment  Umbrella clause  Most favored nation treatment (MFN) • Possibility to pick from more favorable treatment provisions in other BITs concluded by the host State  BIT/MFN-driven organization of assets 10 June 2016 | Page 37
  38. 38. DURATION, COSTS AND FINANCING  Duration  Jurisdiction phase (approx. 12 months)  Merits phase (approx. 10-14 months)  Costs  The biggest part of the costs are attorney fees  Interest can sought (Pre- and post-award interest; compound interest possible)  Financing  Arbitration costs are often awarded to prevailing party  Third-party funding as powerful finance option (arbitral award is considered by financing firms a tradable asset with value) 10 June 2016 | Page 38
  39. 39. ENFORCEMENT  ICSID Convention  Recognition of award as binding; enforcement of “pecuniary” obligations as if the award were a final municipal judgment among all 153 Contracting States  New York Convention  Very limited grounds for resisting recognition and enforcement (Art. V)  Few party defences against recognition and enforcement (Art. V(1))  Little discretion of court refuse recognition and enforcement (Art. V(2))  State immunity still applies:  States assets used for sovereign purposes vs. State assets used for commercial purposes 10 June 2016 | Page 39
  40. 40. DR. FRANZ STIRNIMANN FUENTES  Fellow of the Chartered Institute of Arbitrators (CIArb)  More than 15 years’ experience in complex international dispute resolution, judicial assistance, and Swiss, US and Spanish commercial legal transactions  Acted as counsel and arbitrator in over 70 international arbitration and court proceedings in Switzerland and other countries  Since many years recognized arbitration specialist by Chambers Global and Chambers Europe, Who’s Who Legal International and Who’s Who Siwtzerland, Euromoney’s Expert Guides  Admitted to practise in Geneva as well as in England & Wales and New York. Holds a Doctor of Laws from the University of Zurich, a Master of Laws from Georgetown University and has a License in Law from the University of Fribourg and Durham University in the UK  Bilingual in German, Spanish and English, fluent in French 10 June 2016 | Page 40 Franz specializes in international arbitration, litigation and Swiss commercial law. fstirnimann@froriep.ch | Geneva Office | +41 22 839 63 00

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