Investment structuring and re-structuring: the Italian perspective

Abstract

The multiplication of international investment treaties provides foreign investors with a valuable network to obtain and/or maximize investment protection through investment structuring and/or re-structuring (also known as nationality planning). When selecting the most appropriate treaty for structuring and/or re-structuring its investment, an investor should carry out a case-by-case assessment including on the basis of the following factors: (i) the requirements to access investment protection; (ii) the degree of the substantive and procedural protections; (iii) the timing of the re-structuring; and (iv) the overall language of the chosen treaty. Against this background, the article analyses each of the foregoing factors through the lens of the bilateral investment treaties concluded by Italy, as well as the case law involving Italian investors as claimants and/or Italy as respondent. The analysis shows that foreign investors should take into consideration the Italian network of bilateral investment treaties for investment structuring and/or re-structuring purposes since most of these treaties provide for advantageous jurisdictional requirements, as well as effective substantive and procedural protections.

INTRODUCTION

In international investment law, the protection standards set forth in investment treaties apply to investors that are nationals of a contracting State (the so-called home State) other than the State in which the investment is made (the so-called host State).¹ Nationality is therefore crucial to establish whether an investor is entitled to investment protection under a specific treaty.

The multiplication of bilateral and multilateral investment treaties provides corporations with a valuable network to develop legal strategies regarding their nationality.² In this respect, it is generally accepted that an investor should not be prevented from organizing its investment so as to afford it maximum protection under the existing treaties. This practice is known as nationality planning or investment structuring (and re-structuring).

Despite the scarcity of empirical research addressing the impact of investment treaties on the investment decisions of foreign investors,³ at least one study indicates that several corporate investors (i) regard investment treaties as an important legal instrument;⁴ and (ii) consider the existence of an investment treaty when deciding where to invest.⁵ Although this study also suggests that a number of investors do not research whether an investment treaty is ‘in force with a given country before making an investment there’,⁶ one should consider that the underlying data were gathered in late 2014 (i.e., more than ten years ago).⁷ Given the steady increase in the public awareness of investment treaties, the current situation may well be very different. In this context, and to use the words of a renowned legal scholar, nationality planning may be deemed as much a standard feature of diligent management as tax planning.⁸

Investors that engage (or plan to engage) in nationality planning should take into account a number of factors.

First, an investor should ensure that it meets the jurisdictional requirements of the chosen investment treaty to access the substantive and procedural protections set out therein.⁹ This assessment concerns, among other things, the requirements for ratione personae jurisdiction, including: (i) the definition of protected investor; and (ii) the existence (and wording) of any denial of benefits clause.

Second, an investor should ensure that the protection offered by the chosen treaty is effective. This assessment concerns both substantive protections (eg protection against unlawful expropriation, fair and equitable treatment standard and full protection and security standard) and procedural protections (eg investor-State dispute settlement clauses).

Third, with regard to investment re-structuring, an investor should ensure that the re-structuring of its investment will be effective for the purpose of accessing the substantive and procedural protections set forth in the chosen treaty. This assessment involves an analysis of whether the re-structuring, including its timing, (i) meets the requirements for ratione temporis jurisdiction set out in the chosen treaty; and (ii) does not amount to an abuse of process.¹⁰ Additionally, an investor should ensure that the chosen treaty has a broad scope of application, particularly with regard to the definition of investor, and does not contain denial of benefits clauses and/or provisions limiting investment re-structuring.

Although investment structuring (and re-structuring) has already been covered by various legal scholars, to the authors’ knowledge, no scholarly article has hitherto dealt with this topic through the lens of the investment treaties concluded by a specific State. In an effort to fill this gap, this article analyses the bilateral investment treaties (‘BITs’) concluded by Italy (‘Italian BITs’), as well as the case law involving Italian investors as claimants and/or Italy as respondent, to assess whether the Italian BITs favour nationality planning. The article also offers insights for investors considering Italy for nationality planning purposes, particularly in light of the broad definitions of corporate investor and the substantive and procedural protections offered by the Italian BITs.

The foregoing insights may be of particular interest to corporate investors established in States that have a limited network of BITs and/or have been terminating or renegotiating their existing BITs. Several developed economies have a limited network of BITs, including major recipients of foreign direct investments such as Brazil, Canada, and Japan.¹¹ Moreover, in the past few years, various States have unilaterally terminated (or are in the process of terminating) their BITs, including Australia, Ecuador, Pakistan, and South Africa.¹² Additionally, States like India, Indonesia, and the Netherlands have been renegotiating their BITs with the aim of curtailing investment protection.¹³

The analysis in this article shows that the network of the Italian BITs provides foreign investors with a viable option for investment structuring and/or re-structuring.¹⁴ Section 2 of this article is an overview of investment structuring and re-structuring. Section 3 outlines the factors that an investor should consider when structuring and/or re-structuring its investment. Section 4 provides an in-depth analysis of the factors outlined in Section 3 with specific regard to the provisions contained in the Italian BITs and the relevant case law. Section 5 concludes.

INVESTMENT STRUCTURING AND RE-STRUCTURING: AN OVERVIEW

Investment structuring (or nationality planning) can be defined as the conduct by which an investor investing in a foreign country (the host State) acquires a nationality of convenience to obtain (i) the protection set forth in an international investment treaty where one did not previously exist, or (ii) more favourable investment protection.¹⁵ Thus, investment structuring aims to secure and/or maximize the substantive and procedural protections offered by investment treaties for future investments.¹⁶ When investment structuring is performed after the original investment was made, it is typically referred to as investment re-structuring.

The following scenario gives an example of how investment structuring works.¹⁷ A national of State A wants to invest in State C through a locally incorporated company. There is no investment treaty in force between State A and State C. In order to secure investment protection, the investor decides to structure its investment through a subsidiary constituted in State B, which has an investment treaty in force with State C. In this way, the above-mentioned subsidiary (as a national of State B) may be considered as a protected investor under the investment treaty between State B and State C.

This example shows that investment structuring is particularly relevant where there is no investment treaty in force between the home State of the investor and the host State of the investment. Moreover, investment structuring may be relevant where there is an investment treaty in force between the investor’s home State and the host State but that treaty: (i) does not protect the investor or its investment (eg because the investor does not qualify as such under a narrowly worded treaty); (ii) accords inadequate substantive protections; and/or (iii) provides for no or limited access to investor-State arbitration.

Investment structuring can be carried out through either physical persons or legal persons. However, due to the stringent requirements set out by domestic laws for conferring citizenship, investment structuring through physical persons is uncommon and is therefore not addressed in this article.¹⁸ Conversely, since most investment treaties define corporate investors only by reference to the place of incorporation (a requirement that is relatively easy to meet), investment structuring is usually carried out through legal persons.¹⁹ Common approaches include constituting a holding company in the home State or inserting one or more companies that qualify as protected investors under the chosen investment treaty in the ownership chain of an investment.

International arbitral practice generally accepts that investment structuring is lawful and consistent with the purpose of investment treaties (as well as the Convention on the Settlement of Investment Disputes between States and Nationals of Other States; ‘ICSID Convention’).²⁰

The foregoing considerations also apply to investment re-structuring.²¹ However, as illustrated below, investment re-structuring entails additional considerations regarding its permissibility and lawfulness. Specifically, the permissibility and lawfulness of a re-structuring depend, among other things, on: (i) the wording of the applicable investment treaty; (ii) the timing of the re-structuring; and (iii) whether the re-structuring involve a contribution of resources or the performance of a genuine economic activity.²² These circumstances are typically assessed by investment tribunals at the jurisdictional stage of a case.

INVESTMENT STRUCTURING AND RE-STRUCTURING: WHAT TO CONSIDER?

Investment structuring and re-structuring require a careful analysis to select the most appropriate investment treaty. This analysis should be conducted on a case-by-case basis, taking into consideration the characteristics of each investment and the circumstances of the contemplated structuring or re-structuring.

In general, an investor should review the international investment treaties concluded by the State where the investment will be made in order to select the most suitable treaty based on: (i) the requirements to access investment protection; (ii) the substantive and procedural protections offered to investors; and (iii) the existence of potential obstacles to investment re-structuring.²³

With regard to the requirements for accessing investment treaty protection, it is particularly important to analyse the requirements that an investor has to meet to qualify as a protected investor under the chosen treaty.²⁴ This analysis is key to ensure that the foregoing requirements: (i) suit the planned structuring scheme; and (ii) are complied with, including to discourage possible jurisdictional objections from the host State.

Treaty obligations only apply to the investment of an ‘investor’, as defined in the applicable treaty.²⁵ As a result, the first step is to assess the definition of investor set forth in the chosen treaty.²⁶ In this respect, the investor’s nationality is the paramount requirement that curtails the ratione personae scope of application of investment treaties. An investor should therefore choose investment treaties setting out broad nationality requirements, as these treaties provide for the greatest potential for nationality planning.²⁷ The second step is to consider whether the chosen investment treaty contains a denial of benefits clause. Clauses of this kind allow the host State, under certain circumstances, to deny the investment protections set out in the treaty. Thus, investment treaties that contain a denial of benefits clause should normally be avoided for nationality planning purposes.

With regard to substantive and procedural protections, an investor should select investment treaties that, among other things, provide for: (i) protection against unlawful expropriation, including indirect expropriation; (ii) an obligation by the host State to guarantee to the investor’s investment fair and equitable treatment; (iii) an obligation by the host State to guarantee to the investor’s investment full protection and security; and (iv) an effective investor-State dispute settlement system.

With regard to investment re-structuring, in addition to the foregoing, an investor should opt for investment treaties that have a broad scope of application ratione personae and do not limit re-structuring. Moreover, an investor should take into consideration the timing of the proposed re-structuring.²⁸

Additional considerations include the tax treatment and the corporate laws applicable to the investment structuring (and re-structuring). These considerations, however, fall outside the scope of the present article.²⁹

INVESTMENT STRUCTURING AND RE-STRUCTURING: THE ITALIAN PERSPECTIVE

Each of the issues outlined above is examined in the following paragraphs with specific regard to the BITs concluded by Italy.

Italy has in place a considerable network of investment treaties comprising 102 BITs, out of which (i) 51 BITs are in force, (ii) 37 BITs have been terminated, and (iii) 14 BITs have been signed but are not in force yet.³⁰

The below analysis shows that, in general, the Italian BITs favour nationality planning.

The definition of investor

As illustrated above, the first step to investment structuring is to assess the definition of investor under the chosen investment treaty. Investment treaties provide for various definitions of investor and distinguish between individual investors (i.e., physical persons) and corporate investors (i.e., companies).

With regard to the definition of corporate investor,³¹ investment treaties adopt a number of different approaches. In general, these approaches are based on three criteria (which can also be used in combination): (i) the place of incorporation or constitution; (ii) the place of the corporate seat (siège social); and (iii) the place of the real business activity.³²

First, several treaties use the so-called pure incorporation test for nationality purposes. According to this test, in order to qualify as a protected corporate investor, a company must be incorporated or constituted in the home State and in accordance with its laws.³³ For example, pursuant to Articles 1(2) and (4) of the Pakistan-Italy BIT:

The term “investor” shall be construed to mean any natural or legal person being a national of a Contracting Party who effected, is effecting or intending to effect, investments in the territory of the other Contracting Party.

[…]

The term “legal person”, in reference to either Contracting Party, shall be construed to mean any entity established in the territory of one of the Contracting Parties, and recognized as legal person in accordance with the respective national legislation such as public establishments, joint-stock corporations or partnerships, foundations, or associations, regardless of whether their liability is limited or otherwise.³⁴

Likewise, Article 1(4) of the Bangladesh-Italy BIT provides that:

The term “legal person”, in reference to either Contracting Party, shall be construed to mean any entity established in the territory of one of the Contracting Party in accordance with the respective national legislation such as public establishments, joint-stock corporations or partnerships, foundations or associations regardless of whether their liability is limited or otherwise.³⁵

The law on diplomatic protection too, uses the place of incorporation to determine the nationality of legal persons. Pursuant to Article 9 of the International Law Commission (‘ILC’)’s Draft Articles on Diplomatic Protection, ‘[f]or the purposes of the diplomatic protection of a corporation, the State of nationality means the State under whose law the corporation was incorporated’.³⁶ Moreover, in the Barcelona Traction Case, the International Court of Justice (‘ICJ’) confirmed that international law ‘attributes the right of diplomatic protection of a corporate entity to the State under the laws of which it is incorporated’.³⁷

Where the applicable investment treaty adopts the pure incorporation test, arbitral tribunals are satisfied that a company is incorporated in the home State to qualify that company as a protected investor.³⁸ This test, therefore, allows mailbox companies constituted in the home State and controlled by nationals of the host State and/or third States to take advantage of the protections set out in the investment treaty between the home State and the host State.

For instance, in Tokios Tokelés v Ukraine, a Lithuania-incorporated company, 99% of which was owned by Ukrainian nationals, brought an investment claim against Ukraine under the Lithuania-Ukraine BIT.³⁹ Faced with Ukraine’s jurisdictional objection that the Claimant was not a ‘genuine entity’ of Lithuania, the Tribunal held that the only relevant consideration under Article 1(2) of the Ukraine-Lithuania BIT was whether the Claimant was established under the laws of Lithuania (as it was in that case).⁴⁰

Thus, under the pure incorporation test, the sole factor to consider in assessing whether a company qualifies as a protected investor is the place of incorporation of that company. In Impregilo v Pakistan II, the Tribunal confirmed that if the Claimant, which was one of the partners in a joint venture that had made an investment in Pakistan, characterized as an investor pursuant to Articles 1(2) and (4) of the Italy-Pakistan BIT, that Claimant could not be prevented from bringing an investment claim against the host State on other grounds, including that the other partners in the joint venture were not pursuing the same claim.⁴¹

Second, certain investment treaties require that, in addition to incorporation, a corporate investor has its seat (siège social) or place of administration in the home State.⁴² For instance, Article (1)(1)(b) of the Italy-Lebanon BIT states that:

The term “legal person”, in reference to either Contracting Party means any public institution, foundation, association or any entity registered in either Contracting Party and having its head office in its territory which are constituted or otherwise duly organized under the law of that Contracting Party.⁴³

In the same vein, Article 1(2) of the Argentina-Italy BIT states that:

Per “persona giuridica” si intende, con riferimento a ciascuna Parte Contraente, qualsiasi entità costituita conformemente alla normativa di una Parte Contraente, con sede nel territorio di tale Parte e da questa ultima riconosciuta, come Enti pubblici che esercitino attività economiche, società di persone o di capitali, fondazioni, associazioni e, questo, indipendentemente dal fatto che la loro responsabilità sia limitata o meno.⁴⁴

When the applicable investment treaty provides that, in order to characterize as a protected investor, a legal person has to be incorporated and have its seat in the home State, each of these requirements needs to be satisfied. In Abaclat v Argentina,⁴⁵ a dispute arising out of the measures enacted by Argentina to re-structure its sovereign debt in connection with the 2001 financial crisis, the Tribunal held that:

[I]n order to benefit from the protection of the [Argentina-Italy] BIT and be a party to the present arbitration, these entities must fulfil the criteria of “Italian nationality”. According to general international law, applied to corporate entities and other forms of organizations, the nationality requirement means that such entities and organizations must be duly constituted and organized under Italian law and/or have their “siège social” in Italy.⁴⁶

In this context, several investment treaties appear to take a less stringent approach, as they only require corporate investors to have their seat in the home State without making any reference to the place of incorporation. These treaties extend their substantive and procedural protections to companies that choose to transfer their seat to one of the contracting parties without giving up the original form of incorporation.⁴⁷ However, unlike the pure incorporation test, the seat requirement allows the host State to defend itself against claims brought by corporate investors which have only a nominal connection with it.⁴⁸ An example of investment treaty adopting the seat requirement is the United Republic of Tanzania-Italy BIT, whose Article 1(4) states that:

The term “legal person”, in reference to either Contracting Party, shall mean any entity having its head office in the territory of one of the Contracting Parties and recognised by it, such as public institutions, corporations, partnerships, foundations and associations, regardless of whether their liability is limited or otherwise.⁴⁹

Third, several investment treaties combine the place of incorporation and the seat requirements with the additional requirement that a corporate investor carries out real business activity in the territory of the home State.⁵⁰ The purpose of this additional requirement is to guarantee the existence of a genuine link between the investor and its home State. Among the Italian BITs, the only example of this kind is the Algeria-Italy BIT which, however, refers to the main centre of economic interest of the investor rather than the place of real business activity. Article 1(3) of the Algeria-Italy BIT states that:

Il termine “persona giuridica” indica ogni Ente od Istituzione ed ogni società di persone o di capitali, costituiti sul territorio di uno degli Stati Contraenti in conformità alla sua legislazione e che vi abbiano la loro sede nonché il centro principale dei loro interessi economici, quali definiti dalla legislazione e dalla regolamentazione di ciascun Stato Contraente.⁵¹

Sometimes investment treaties are less stringent and require that a corporate investor be incorporated and have its seat in the home State or be incorporated and carry out real business activity in the home State. For instance, Article 1(2) of the Islamic Republic of Iran-Italy BIT provides that:

The term “investors” refers to the following persons who invest in the territory of the other Contracting Party within the framework of this Agreement:

[…]

(b) legal persons of either Contracting Party which are established under the laws of that Contracting Party and their headquarters or their real economic activities are located in the territory of that Contracting Party.⁵²

Additionally, various investment treaties use the control test to define a corporate investor thereby extending their substantive and procedural protections to companies incorporated in a third State and/or to locally incorporated companies, which are owned and/or controlled by nationals of one of the contracting States.⁵³ For example, Article 1(2) of the Italy-Mozambique BIT extends its protections to foreign companies incorporated in a third State by stating that:

The term “investor” shall mean any natural or legal person of a Contracting Party investing in the territory of the other Contracting Party as well as the foreign subsidiaries, affiliates and branches controlled by the above natural and legal persons.⁵⁴

Thus, depending on the wording of the applicable investment treaty, foreign companies and/or locally incorporated companies that are owned and/or controlled by nationals of one of the contracting States can be deemed to be protected investors. For example, in Sunlodges v Tanzania, the Tribunal concluded that Sunlodges BVI, a company incorporated under the laws of the British Virgin Islands, and Sunlodges Tanzania, a locally incorporated company, were foreign investors pursuant to Article 1(2) of the United Republic of Tanzania-Italy BIT because each of these companies was controlled by the Italian national Mr. Paglieri.⁵⁵ Specifically, the Tribunal held that, under the Tanzania-Italy BIT, the term ‘foreign’:

must be interpreted to refer to any subsidiary, affiliate or branch, controlled by a natural or legal person of a Contracting Party, that has invested in the territory of the other Contracting Party and that is “foreign” to such natural person or legal person in the sense that it is a subsidiary, affiliate or branch that is not incorporated or organized under the laws of the Contracting Party of which the natural or legal person in question is a national. Consequently, in the circumstances of this case, Sunlodges BVI, a legal person incorporated under the laws of the British Virgin Islands, must be considered to be a “foreign” entity within the meaning of Article 1(2) of the Treaty in the sense that it is not a company organized under the laws of Italy, the home State of Mr Paglieri. Similarly, Sunlodges Tanzania, a legal person incorporated under the laws of Tanzania, must be considered to be a “foreign” entity within the meaning of Article 1(2) of the Treaty in the sense that it is not a company organized under laws of Italy, the home State of Mr. Paglieri.⁵⁶

In Burimi v Albania, the Tribunal held that the locally incorporated company Eagle Games, which was owned and controlled by the Italian national Mr. Burimi, could, in principle, be characterized as an investor pursuant to Article 8(2) of the Albania-Italy BIT.⁵⁷ However, since Mr. Burimi was a dual national of Italy and Albania and the Albania-Italy BIT was silent regarding the treatment of dual nationals, the Tribunal stated that Eagle Games could not take advantage of Mr. Burimi’s Italian nationality for the purpose of Article 8(2) of the Albania-Italy BIT.⁵⁸

Investment treaties that use the control test for jurisdictional purposes may also contain a definition of control. Setting the boundaries of the notion of control increases legal certainty while limiting the leeway granted to arbitral tribunals.

In Eskosol v Italy, a case arising out of Italy’s amendments to its incentive schemes for investments in the photovoltaic sector, the Tribunal construed the notion of control by relying on the Understanding adopted by the Parties with respect to Article 1(6) of the Energy Charter Treaty (‘ECT’) (‘Understanding to Article 1(6) of the ECT’), which provides that the following (non-exhaustive) criteria should be considered: (i) the investor’s financial interest, including equity interest, in the investment; (ii) the investor’s ability to exercise substantial influence over the management and operation of the investment; and (iii) the investor’s ability to exercise substantial influence over the selection of members of the board of directors or any other managing body.⁵⁹ Even though the Claimant in that case (i.e., the Italian company Eskosol) had gone into liquidation, it was undisputed that the Belgian company Blusun still owned 80% of the shares in Eskosol. Thus, the Tribunal held that Eskosol was entitled to bring an investment an investment claim against Italy:

The Tribunal accepts that “control in fact” is not to be decided exclusively by reference to equity shareholding, although “equity interest” is included within the first of three “relevant factors” identified in the Understanding’s non-exhaustive list of items to consider in determining control (“financial interest, including equity interest”). With respect to this factor, there has been no allegation of any intervening transaction that altered Eskosol’s shareholding structure, after the date of the challenged measures and before ICSID’s registration of its claim.⁶⁰

Virtually none of the Italian BITs contain a definition of control with the sole exception of the Bosnia and Herzegovina-Italy BIT, which sets out three non-exhaustive criteria for control that mirror the criteria provided by the Understanding to Article 1(6) of the ECT.⁶¹

Where the applicable investment treaty fails to define control, arbitral tribunals are left with the task of determining their own notion of control, which, in general, takes into account the three criteria illustrated above, namely: (i) equity interest; (ii) influence over the management and operation of the company; and (iii) influence over the selection of members of the board of directors or any other managing body.⁶²

Finally, various investment treaties clarify that a corporate investor can own its investment in the host State through intermediate companies located in the home State and/or in third States. For example, Article 1(2) of the Armenia-Italy BIT states that: ‘The term “investor” shall mean any natural or legal person of a Contracting Party investing, directly or through its own subsidiaries, in the territory of the other Contracting Party’.⁶³

The advantages of this wording appear to be negligible since investment tribunals generally accept that, absent language to the contrary, investment treaties protect both direct and indirect investments.⁶⁴ In Hydro v Albania, a dispute relating to the alleged expropriation and unfair and inequitable treatment of the Claimants’ investment in a hydroelectric power plant, a waste management facility, and a TV station, the investment was made through a number of corporate layers involving ‘(at times) minority shareholdings, meaning that the purported “investor” does not control the chain of companies’.⁶⁵ The Tribunal held that, since the Albania-Italy BIT did not expressly exclude indirect investment, the Claimants’ investment could be characterized as a protected investment under that treaty.⁶⁶

The foregoing analysis shows that investment treaties which define a corporate investor based on its place of incorporation (i.e., the pure incorporation test) are particularly advantageous for investment structuring purposes. A suitable alternative to the pure incorporation test, especially in a re-structuring context, are investment treaties requiring that a corporate investor has its seat in the home State. As illustrated above, these treaties extend their substantive and procedural protections to investors who transfer their seat to the home State without giving up the original form of incorporation. Moreover, treaties extending investment protection to foreign and/or locally incorporated companies that are owned and/or controlled by nationals of the home State should also be considered by investors who want to structure and/or re-structure their investment.

Out of the 51 BITs that Italy has in force with other States, 15 BITs (i.e., 29%) rely on the pure incorporation test to define a corporate investor,⁶⁷ whereas 21 BITs (i.e., 41%) require that a corporate investor have its seat in the home State.⁶⁸ Furthermore, 18 BITs (i.e., 35%) extend their substantive and procedural protections to foreign and/or locally incorporated companies.⁶⁹ On the other hand, only 14 BITs (i.e., 27%) combine the place of incorporation with either the seat or the existence of real business activity requirements.⁷⁰ The Guinea-Italy BIT does not contain a definition of corporate investor.⁷¹

Hence, with regard to the definition of corporate investor, the network of BITs that Italy has in force with other countries provides foreign investors with ample flexibility for nationality planning. Against this background, it appears that the 2020 Italy Model BIT aims to reduce such flexibility in the future. Article 1(4)(b) of the 2020 Italy Model BIT defines corporate investor as ‘an undertaking constituted on the territory of a Contracting Party in accordance with the laws of that Party, and having its head office, as well as real business activities, on the territory of that Party’. However, despite combining the requirements of the place of incorporation, seat and real business activity, the 2020 Italy Model BIT extends its protection to: (i) foreign and/or locally incorporated companies ‘controlled directly or indirectly’ by nationals of one of the contracting parties;⁷² and (ii) companies incorporated in a Member State of the EU, which are accorded freedom of establishment pursuant to Articles 49 and 54 of the Treaty on the Functioning of the European Union.⁷³

Denial of benefits clauses

As illustrated above, the second step to investment structuring is to assess whether the chosen investment treaty contains a denial of benefits clause. In general, denial of benefits clauses are designed to deny investment protection to companies that, albeit falling within the treaty definition of investor, lack any real economic connection with the home State.⁷⁴

Denial of benefits clauses function in a similar way to restricting the definition of investor.⁷⁵ However, the effects resulting from a denial of benefits clause can vary significantly depending on its wording and the locus of that clause in the applicable treaty. While a restriction on the definition of investor only affects the jurisdiction ratione personae of the arbitral tribunal, a denial of benefits clause can affect either the jurisdiction of the tribunal or the admissibility of the claim, depending on the circumstances.⁷⁶

Arbitral tribunals have interpreted denial of benefits clauses in different ways. Although there is no single denial of benefits clause, most of these clauses apply to companies incorporated in the home State, which: (i) are owned and/or controlled by nationals of the host State and/or a third State; and (ii) have no substantial business activity in the home State.⁷⁷

The two foregoing requirements are accepted in international arbitral practice.⁷⁸ Yet, when it comes to the definitions of ‘control’ and ‘substantial business activity’, traditional investment treaties are usually silent. With regard to control, it has been suggested that ‘effective control as opposed to legal control is a more probing test’ since it enables arbitral tribunals to identify the real controller of the investment.⁷⁹ Similarly, with regard to substantial business activity, arbitral tribunals have stated that substantial means ‘of substance, and not merely of form’.⁸⁰ In other words, substantial business activity requires engaging in activities beyond the routines connected with the mere existence of a company.⁸¹

Unlike traditional investment treaties, the new generation of investment treaties generally contain definitions of control and substantial business activity. For example, Article 14.17 of the Australia-Japan Economic Partnership Agreement (‘EPA’) states that a company is: (i) ‘owned’ by an investor ‘if more than 50 per cent of the equity interest in it is beneficially owned by the investor’; and (ii) ‘controlled’ by an investor ‘if the investor has the power to name a majority of its directors or otherwise to legally direct its actions’. As to the existence of substantial business activity, Article 1(c) of the Netherlands Model BIT provides for various indicators, including: (i) the location of ‘the undertaking’s registered office and/or administration’; (ii) the location of ‘the undertaking’s headquarters and/or management’; (iii) ‘the number of employees’ based in the home State; (iv) ‘the turnover generated’ in the home State; and (v) the presence of ‘an office, production facility and/or research laboratory’ in the home State.⁸²

Some investment treaties require prior notification and/or consultation for the host State to exercise its denial of benefits right,⁸³ whereas other treaties: (i) contain no such requirement;⁸⁴ or (ii) are ambiguous, as they appear to suggest that prior notification and/or consultation is necessary without expressly requiring it (this is the case of Article 17(1) of the ECT, which states that ‘[e]ach Contracting Party reserves the right to deny the advantages of this Part to […]’).⁸⁵

International arbitral practice is mindful of these differences.

In Plama v Bulgaria, the Claimant Plama Consortium Ltd, which owned shares in the locally incorporated company Nova Plama AD, commenced investment arbitration proceedings against Bulgaria after Nova Plama had been put into liquidation.⁸⁶ A few months after the commencement of those proceedings, Bulgaria exercised its right to deny the protections set forth in Part III of the ECT pursuant to Article 17(1). In deciding whether the denial of benefits clause set out in Article 17(1) of the ECT operated automatically or required any prior action on the part of the State, the Tribunal held that:

Article 17(1) ECT is at best only half a notice; without further reasonable notice of its exercise by the host state, its terms tell the investor little; and for all practical purposes, something more is needed.⁸⁷

In Ulysseas v Ecuador, a dispute arising out of the amendments to the regulatory framework governing the Ecuadorian power sector, Ecuador exercised its denial of benefits right approximately nine months after the institution of the arbitration proceedings.⁸⁸ Although Article 1(2) of the applicable Ecuador-USA BIT contained a similar wording to Article 17(1) of the ECT,⁸⁹ the Tribunal adopted a different approach than that in Plama v Bulgaria and held that the Ecuador-USA BIT did not exclude ‘the right to deny the BIT’s advantages be exercised by the State at the time when such advantages are sought by the investor’.⁹⁰

In addition, arbitral tribunals have frequently been asked to decide whether denial of benefits clauses are only prospective in their effect or apply retrospectively.⁹¹ Absent a precise wording in the majority of investment treaties, international arbitral practice is broadly inconsistent in this respect.

In Guaracachi v Bolivia, a dispute arising from the nationalization of Guaracachi América Inc’s shareholding in Empresa Electrica Guaracachi SA, the Tribunal dismissed the Claimants’ claims on the ground that the denial of benefits clause contained in Article 12 of the Plurinational State of Bolivia-USA BIT applied retrospectively.⁹²

By contrast, the Tribunal in Plama v Bulgaria stated that the denial of benefits clause set out in Article 17(1) of the ECT did not have retrospective effect, including because a contrary approach would not allow an investor to plan in the ‘long term’.⁹³

The foregoing analysis shows that foreign investors, which plan on structuring their investment, should opt for investment treaties that do not contain a denial of benefits clause. International arbitral practice demonstrates that denial of benefits clauses may significantly hamper the successful structuring of an investment, including because the majority of investment treaties do not contain clear indications as to the: (i) definition of control and substantial business activity; (ii) need for prior notification and/or consultation in order to exercise denial of benefits rights; and (iii) prospective or retrospective application of denial of benefits clauses.

None of the 51 BITs that Italy has in force with other States contains a denial of benefits clause. Thus, in this respect, the network of BITs that Italy has in force is particularly advantageous for the purpose of investment structuring.

In this context, Article 18 of the 2020 Italy Model BIT introduces a sophisticated denial of benefits clause, which reads as follows:

Each contracting Party reserves the right to deny to an enterprise of the other Contracting party the benefits of this Agreement if nationals of a third Country own or control the enterprise and:

1. The denying Contracting Party does not maintain normal economic relations and adopts or maintains measures with respect to the third country that are related to the maintenance of international peace and security; or

2. The denying Contracting Party reacts proportionately in light of the serious deterioration of the political situation in the other country with respect to the rule of law, democracy and human rights.

As the above case law demonstrated, international arbitral practice is inconsistent as to whether the phrase ‘reserves the right to deny’ means that prior notification and/or consultation is required for the host State to exercise its denial of benefits right. Pursuant to Article 18(1), the denial of benefits clause shall be activated when the following requirements are met: (i) the absence of normal economic relations between the host State and the third State whose nationals own and/or control the corporate investor;⁹⁴ and (ii) the existence of measures to maintain international peace and security adopted by the home State against that third State.⁹⁵ The first requirement has been associated with unilateral economic sanctions,⁹⁶ even though it is unclear whether it also covers mandatory measures of the United Nations (‘UN’) Security Council aimed at altering ‘normal economic relations’.⁹⁷ The second requirement recalls the powers of the UN Security Council under Chapter VII of the UN Charter and should be read together with Article 103 of the UN Charter. Yet, this requirement could also encompass unilateral security measures adopted outside the collective security system. Article 18(2) raises more concerns, as it makes the protection of foreign investors conditional upon potential reactions, on the host State’s part, to the conduct of the third State with respect to ‘the rule of law, democracy and human rights’. The conduct that may trigger such a reaction is difficult to foresee and the 2020 Italy Model BIT does not envisage any procedural guarantee in favour of investors.⁹⁸

Substantive and procedural protections

Provided that the chosen investment treaty contains favourable requirements for accessing its standards of protection, an investor engaging in investment structuring should then assess the substantive and procedural protections offered by that treaty. As to substantive protections, this section analyses the following main standards of protection: (i) protection against unlawful expropriation; (ii) fair and equitable treatment standard; and (iii) full protection and security standard. As to procedural protections, this section focuses on investor-State dispute settlement (‘ISDS’) clauses with specific regard to cooling-off period.

First, historically, direct expropriation of an investment was the most significant risk for foreign investors.⁹⁹ Investment treaties that protect investors against unlawful expropriation usually state that expropriation shall be deemed to be unlawful when, among other things, it is not: (i) provided by law; (ii) in the public interest; (iii) carried out on a non-discriminatory basis and pursuant to a proper legal procedure; and (iv) accompanied by the payment of prompt, adequate and effective compensation.¹⁰⁰

Yet, another form of expropriation—namely, indirect expropriation—has become increasingly important.¹⁰¹ Indirect expropriation may arise from a variety of measures by which the host State substantially deprives an investor of the economic benefit, use, enjoyment or value of its investment, while leaving the legal title of that investment formally untouched.¹⁰² According to the Tribunal in Metalclad v Mexico,¹⁰³ expropriation:

[I]ncludes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State.¹⁰⁴

In light of the foregoing, investment treaties that protect investors against both direct and indirect expropriation are the best option for investment structuring purposes. All the 51 BITs that Italy has in force with other States expressly refer to indirect expropriation thereby providing for additional protection. Indirect expropriation is also referenced in Article 8 of the 2020 Italy Model BIT.

Second, the fair and equitable treatment (‘FET’) standard is by far the most commonly invoked investment protection standard in investor-State arbitration.¹⁰⁵ Although international arbitral practice has recognized that the FET standard is inherently flexible and its violation has to be assessed in light of the circumstances of each case,¹⁰⁶ it is generally accepted that this standard includes: (i) the duty to act in good faith; (ii) the duty not to act in an arbitrary, grossly unfair, unjust or discriminatory manner; (iii) the duty to respect due process; (iv) the duty to act transparently; (v) freedom from coercion and harassment; and (vi) the protection of an investor’s legitimate expectations.¹⁰⁷

Whereas some investment treaties provide for unqualified FET standard provisions, other treaties link the FET standard to the minimum standard of treatment under customary international law. According to a traditional approach, the level of protection granted by the minimum standard of treatment is lower than the FET standard, as it only includes the duty of the host State not to: (i) act in bad faith; (ii) act arbitrarily; (iii) deliberately neglect the investor’s interests; and (iv) treat the investor unreasonably.¹⁰⁸ Some arbitral tribunals, however, have supported the view that the minimum standard of treatment has evolved so as to match the FET standard.¹⁰⁹

The above analysis shows that investment treaties providing for an unqualified definition of fair and equitable treatment are preferable for investment structuring purposes. Out of the 51 BITs that Italy has in force with other States, only the Italy-Qatar BIT and the Bahrain-Italy BIT (i.e., 4%) qualify the FET standard by reference to the principles of international law,¹¹⁰ whereas 46 BITs (i.e., 90%) contain an unqualified definition of this standard.¹¹¹ Three BITs (i.e., 5%) do not provide for the FET standard.¹¹²

The 2020 Italy Model BIT does not link the FET standard to the minimum standard of treatment; rather it curtails the scope of the FET standard to the core duties that have been elaborated by international arbitral practice.¹¹³ Pursuant to Article 3(2) of the 2020 Italy Model BIT, a contracting State breaches the obligation to grant fair and equitable treatment to an investor’s investment if a measure or series of measures constitutes:

(a) denial of justice in criminal, civil or administrative proceedings; (b) fundamental breach of due process, including a fundamental breach of transparency, in judicial and administrative proceedings; (c) manifest arbitrariness; (d) targeted discrimination on manifestly wrongful grounds, such as gender, race, nationality, sexual orientation or religious belief; (e) abusive treatment of investors, such as coercion, duress and harassment.¹¹⁴

Moreover, Article 3(4) of the 2020 Italy Model BIT protects an investor’s legitimate expectations arising from specific representations made by the host State.¹¹⁵

Third, the full protection and security (‘FPS’) standard, too, is often invoked by investors in investment arbitration. Despite its various formulations, it is commonly accepted that the FPS standard guarantees the physical protection of the assets owned and/or controlled by an investor.¹¹⁶ In this respect, the FPS standard imposes two obligations upon the host State: (i) a negative obligation not to jeopardize the security of foreign investments; and (ii) a positive obligation to protect foreign investments from harmful activities of third parties.¹¹⁷

In addition to physical protection and security, a number of arbitral tribunals have extended the FPS standard to legal protection and security, especially where the applicable investment treaty qualifies protection and security by the word ‘full’.¹¹⁸ Legal protection and security require that the host State refrains from enacting measures that could damage the investor’s investment or contravene the investor’s rights.¹¹⁹

Out of the 51 BITs that Italy has in force with other States, 20 BITs (i.e., 39%) contain the FPS standard.¹²⁰ The 2020 Italy Model BIT too, contains the FPS standard but curtails its scope of application to physical protection and security by stating that ‘[f]or greater certainty, “full protection and security” refers to the Party’s obligations relating to the physical security of investors and covered investments’.¹²¹

In the context of investment structuring, an investor should also consider the procedural protections offered by the chosen treaty, as these protections may affect the actual enforcement of an investor’s substantive rights. Specifically, an investor should look for ISDS clauses providing that any investment disputes shall be decided by an international arbitral tribunal rather than by the domestic courts of the host State.¹²² ISDS clauses are a powerful tool and send a positive signal to investors that the host State is committed to offering a predictable and secure investment protection regime.¹²³

The wording of ISDS clauses varies from treaty to treaty and several factors should be assessed for investment structuring purposes. Among other things, an investor should choose investment treaties setting forth a reasonable cooling-off period (i.e., the period during which the parties compel to refrain from commencing arbitration proceedings to pursue an amicable settlement of the dispute).¹²⁴ The average length of cooling-off periods ranges from three to six months,¹²⁵ which is a reasonable time frame to engage in good faith negotiations.

Out of the 51 BITs that Italy has in force with other States, only the Guinea-Italy BIT does not contain an ISDS clause.¹²⁶ As to the remaining BITs: (i) the Chad-Italy BIT and the Tunisia-Italy BIT (i.e., 4%) do not provide for a cooling-off period;¹²⁷ (ii) the Jamaica-Italy BIT (i.e., 2%) provides for a cooling-off period of three months;¹²⁸ (iii) 46 BITs (i.e., 90%) provide for a cooling-off period of six months;¹²⁹ and (iv) the Argentina-Italy BIT (i.e., 2%) provides for a cooling-off period of 18 months within the commencement of domestic proceedings before the courts of the host State.¹³⁰ Consistent with the prevailing practice, the cooling-off period set forth in Article 14(2) of the 2020 Italy Model BIT is six months.

The foregoing analysis shows that, with regard to substantive and procedural protections, the network of Italian BITs is particularly advantageous for nationality planning. Specifically, the vast majority of the BITs that Italy has in force with other States provide for broad substantive protections and ISDS clauses setting out a reasonable cooling-off period.

Investment re-structuring

Each of the factors illustrated above with respect to investment structuring also pertains to investment re-structuring. Moreover, as set out below, investment re-structuring entails additional considerations regarding the timing of the re-structuring and the overall language of the chosen investment treaty.

First, an investor should ensure that the re-structuring of its investment meets the requirements for ratione temporis jurisdiction set forth in the chosen treaty. Absent a specific provision to the contrary,¹³¹ investment treaties only have prospective effects pursuant to the principle of non-retroactivity.¹³² Thus, if an investment treaty was not in force at the time the investment was made,¹³³ only violations occurring after the entry into force of that treaty would fall within the jurisdiction ratione temporis of an arbitral tribunal. International arbitral practice has consistently upheld the principle of non-retroactivity.

In Impregilo v Pakistan II, the Tribunal had to decide a dispute concerning the allegedly unlawful conduct of the Pakistani Water and Power Development Authority, which predated the entry into of force of the Italy-Pakistan BIT (i.e., 22 June 2001).¹³⁴ Pakistan raised a jurisdictional objection on grounds that the Italy-Pakistan BIT had no retroactive effect and, therefore, was not applicable to the conduct challenged by the Claimant.¹³⁵ The Tribunal held that:

Article 1(1) of the BIT does not give the substantive provisions of the Treaty any retrospective effect. Thus, the normal principle stated in Article 28 of the Vienna Convention on the Law of Treaties applies. […] The BIT entered into force on 22 June 2001. Accordingly, only the acts effected after that date had to conform to its provisions. […] Acts attributed to Pakistan […] occurred at a certain moment and their legality must be determined at that moment, and not by reference to a Treaty which entered into force at a later date. […] It follows that the provisions of the BIT do not bind Pakistan in relation to any act that took place, or any situation that ceased to exist, before 22 June 2001 and the jurisdiction of the Tribunal ratione temporis is limited accordingly.¹³⁶

Based on the principle of non-retroactivity, arbitral tribunals tend to decline jurisdiction over treaty claims concerning violations that occurred prior to the re-structuring of the investment. The critical juncture is when the investor changed its nationality to take advantage of the chosen investment treaty: only from this moment the provisions of that investment treaty apply to the investor’s investment.¹³⁷ The principle of non-retroactivity, however, does not exclude the application of treaty provisions where a series of acts commenced prior to the re-structuring but resulted in a treaty breach only after the re-structuring was completed.¹³⁸ This is confirmed by international arbitral practice.

In Hydro v Albania, for instance, the Albania’s jurisdictional objection was based on the fact that two of the Claimants in that case (i.e., the Italian nationals Mr. Becchetti and Mr. De Renzis) had acquired an ownership interest in the local company Agonset only after formal complaints against the conduct of Albania had already been lodged.¹³⁹ In dismissing this objection, the Tribunal stated that, while it was true that some events had occurred before Mr. Becchetti and Mr. De Renzis acquired their interest in Agonset, the alleged treaty breach crystalized at a later stage.¹⁴⁰ In the words of the Tribunal:

“the general principle of non-retroactivity” […] does not exclude the application of treaty obligations where the series of acts result in an aggregate breach after the claimant acquires its investment. This is because a composite act “crystallizes” or “takes place at a time when the last of these acts occurs and violates (in aggregate) the applicable rule.” A tribunal therefore “has jurisdiction ratione temporis in respect of Treaty breaches concerning acts and events having taken place after [the claimant acquired the relevant investment],” and also “may take into account prior acts and events resulting in such [t]reaty breaches.”¹⁴¹

Second, an investor should ensure that the re-structuring of its investment does not amount to an abuse of process.¹⁴² Abuse of process, which is a corollary of the general doctrine of abuse of right and the principle of good faith,¹⁴³ encompasses various conducts that are not prima facie unlawful but can nonetheless cause prejudice to the parties against whom they are aimed, as well as undermine the fair resolution of disputes.¹⁴⁴ Arbitral tribunals have adopted several approaches to assess the lawfulness of investment re-structuring under the doctrine of abuse of process.

In Pac Rim v El Salvador¹⁴⁵ and Philip Morris v Australia,¹⁴⁶ the Tribunals stated that for an abuse of process to occur the dispute—or the facts giving rise to the dispute—had to be highly probable and foreseeable at the time of the re-structuring. In the words of the Tribunal in Pac Rim v El Salvador:

[T]he dividing-line [between legitimate restructuring and abuse of process] occurs when the relevant party can see an actual dispute or can foresee a specific future dispute as a very high probability and not merely as a possible controversy. In the Tribunal’s view, before that dividing-line is reached, there will be ordinarily no abuse of process; but after that dividing-line is passed, there ordinarily will be. […] To this extent, the Tribunal accepts the Respondent’s general submission that: “... it is clearly an abuse for an investor to manipulate the nationality of a shell company subsidiary to gain jurisdiction under an international treaty at a time when the investor is aware that events have occurred that negatively affect its investment and may lead to arbitration.”¹⁴⁷

In Phoenix v Czech Republic, the Tribunal evaluated the lawfulness of the re-structuring at issue through the lens of the principle of good faith.¹⁴⁸ In declining jurisdiction, the Tribunal held that:

The Tribunal has to prevent an abuse of the system of international investment protection under the ICSID Convention, in ensuring that only investments that are made in compliance with the international principle of good faith and do not attempt to misuse the system are protected. […] The ICSID Convention/BIT system is not deemed to protect economic transactions undertaken and performed with the sole purpose of taking advantage of the rights contained in such instruments, without any significant economic activity, which is the fundamental prerequisite of any investor’s protection. Such transactions must be considered as an abuse of the system.¹⁴⁹

Similarly, in Hydro v Albania, the Tribunal focussed on the purpose of the investment re-structuring.¹⁵⁰ In that case, the Tribunal had to decide whether the acquisition of ownership interest in the local company Agonset by Mr. Becchetti and Mr. De Renzis at the time when the dispute was foreseeable amounted to an abuse of process.¹⁵¹ In dismissing Albania’s jurisdictional objection, the Tribunal relied on the fact that, prior to the re-structuring, Agonset was already owned and/or controlled by other Italian nationals, who had access to the protections set forth in the Albania-Italy BIT.¹⁵² The Tribunal held that:

Where a dispute has become reasonably foreseeable, a transfer for the sole or predominant purpose of obtaining treaty protection for an existing investor in relation to a domestic dispute will be an abuse of rights. […] Abusive transfers are those that “transform a pre-existing domestic dispute into an international dispute subject to ICSID arbitration”; or, as the Transglobal tribunal put it, “create artificial international jurisdiction over a pre-existing domestic dispute.” At all relevant times, the investors in Agonset were entitled to the protection of the BIT. There is therefore nothing “artificial” about the international jurisdiction that is being invoked.¹⁵³

International arbitral practice, including Abaclat and others v Argentina,¹⁵⁴  Ambiente Ufficio and others v Argentina¹⁵⁵ and Eskosol v Italy,¹⁵⁶ shows that other factors—such as the existence of third parties that may benefit from the investment proceedings and parallel proceedings brought by different shareholders—are not deemed to be material for determining whether a re-structuring amounts to an abuse of process.

Third, an investor should ensure that the provisions of the chosen treaty do not hinder the re-structuring of its investment. In this respect, investment treaties that expressly deny their protections to re-structured investments should be avoided.¹⁵⁷ For instance, Article 35 of the India Model BIT states that:

A Party may at any time, including after the institution of arbitration proceedings in accordance with Chapter IV of this Treaty, deny the benefits of this Treaty to: […] (ii) an investment or investor that has been established or restructured with the primary purpose of gaining access to the dispute resolution mechanisms provided in this Treaty.¹⁵⁸

Furthermore, the overall language of the chosen investment treaty should be carefully considered, as it often plays a role in the success of the re-structuring. Statistics show that, where the applicable investment treaty has a broad scope of application, objections based on re-structuring rarely succeed (16.5% of the cases).¹⁵⁹ Conversely, where the applicable investment treaty has a narrow scope of application, this kind of objections succeeds most of the times (56.5% of the cases).¹⁶⁰ In this context, the scope of application of an investment treaty is usually defined, among other things, by the definition of investor and the presence (or absence) of denial of benefits clauses.¹⁶¹

Most of the BITs that Italy has in force with other States have a broad scope of application including because, as seen above, these treaties: (i) set out comprehensive definitions of investor, particularly with regard to legal persons; (ii) do not contain denial of benefits clauses; and (iii) do not contain provisions expressly hampering investment re-structuring. Thus, the network of the Italian BITs provides foreign investors with a viable option to re-structuring their investment.

CONCLUSIONS

Foreign investors that seek to structure and/or re-structure their investment in order to access and/or maximize investment protection should review potential investment treaties including on the basis of the jurisdictional requirements to accede treaty protection and the substantive and procedural protections set forth in those treaties.

The foregoing analysis shows that, in the context of investment structuring, investors should select treaties that, among other things, (i) set out a broad definition of investor; (ii) do not contain a denial of benefits clause; and (iii) provide for adequate substantive and procedural protections, including protection against unlawful direct and indirect expropriation, unqualified FET, the FPS standard, and an effective ISDS mechanism. Additionally, investment re-structuring requires considering the timing of the proposed re-structuring, as well as the overall wording of the chosen investment treaty.

In this context, the article demonstrates that the network of the Italian BITs provides corporate investors with a viable option to structure and/or re-structure their investment. The majority of the BITs that Italy has in force with other States: (i) set out a broad definition of investor; (ii) do not contain a denial of benefits clause; (iii) provide for adequate substantive and procedural protections; and (iv) do not expressly prohibit and/or hinder investment re-structuring.

The extent to which the above findings may be impacted by the 2020 Italy Model BIT, which takes a more restrictive stance including with regard to the definition of corporate investor and denial of benefits, is still unclear and depends on how the future negotiations between Italy and other States will be conducted.

Conflicts of interest: The authors declare that (i) they have not received, used and/or benefitted from any funding in relation to this article; and (ii) they have no relevant or material financial interests that relate to the research described in this article. Additionally, the authors declare that, to the best of their knowledge and with the caveats in footnote No. 161, they, their law firm, office and/or employer were not involved in any case or development that forms the focus of this article.¹⁶²

Footnotes

Author notes