Definition of Investor

This report by the International Institute for Sustainable Development (IISD) analyzes how the definition of 'investor' in Bilateral Investment Treaties (BITs) can be exploited through 'treaty shopping' and recommends stricter nationality criteria to protect host States from unintended international arbitration claims.

• Treaty shopping is the practice where investors seek the most advantageous protection by acquiring the nationality of a State that has a BIT with the host State, even if the investor does not naturally hold that nationality. This is often achieved through 'mailbox' companies—entities with no independent business activity or staff, existing only as a postal address in the State of nationality.
• The 'place of incorporation' criterion is a common but weak method for determining nationality, as it only requires a company to be formally registered in a State. The Netherlands is cited as a primary example of a State used for treaty shopping because it uses incorporation as its sole criterion and has signed over 105 BITs, leading to approximately 20,000 'mailbox' companies being counted there in 2006.
• The 'control' criterion allows for 'piercing of the corporate veil' to identify the true nationality of company capital. However, in most BITs, this criterion is used only to favor the investor by allowing companies from third-party States or those constituted under local law to claim the nationality of a signatory State if they are controlled by its nationals.
• Host States face significant risks from broad investor definitions, including the erosion of reciprocity—where a State protects investors from a third country without receiving similar treatment for its own nationals—and the risk of multiple claims, where a single dispute leads to numerous arbitration procedures involving parent companies, subsidiaries, and shareholders.
• To combat treaty shopping, some recent BITs employ stricter, cumulative nationality criteria. These include requiring both incorporation and a head office in the State, or the most restrictive combination: incorporation, a head office, and 'real economic activities' within the territory of the State.
• A 'denial of benefits' clause allows a State to refuse treaty protection to an investor that holds the required nationality but lacks genuine business ties, such as those with no substantial business activities or those controlled by nationals of a non-party or the host State.
• Arbitration tribunals generally distinguish between pre-dispute and post-dispute treaty shopping. Pre-dispute restructuring is typically viewed as legitimate 'nationality planning,' whereas post-dispute restructuring—acquiring nationality after a dispute has arisen—is often rejected as an 'abuse of rights' or 'abuse of procedure.'
• Tribunals have frequently accepted jurisdiction for claims brought by companies with only indirect links to an investment through multiple intermediary companies, ruling that the nationality of intermediate holding companies is often irrelevant if the ultimate investor holds the required nationality.
• The report recommends that States adopt 'automatic' and 'comprehensive' denial of benefits clauses, use at least two combined nationality criteria (such as incorporation plus substantial business activities), and clearly define 'substantial business activities' using metrics like turnover or number of permanent employees.

APA

International Institute for Sustainable Development (n.d.). Definition of Investor. https://www.iisd.org/system/files/publications/best_practices_definition_of_investor.pdf

Chicago

International Institute for Sustainable Development. Definition of Investor. n.d. https://www.iisd.org/system/files/publications/best_practices_definition_of_investor.pdf.

Wikipedia

{{cite report |author=International Institute for Sustainable Development |title=Definition of Investor |url=https://www.iisd.org/system/files/publications/best_practices_definition_of_investor.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{internationalinstituteforsustainabledevelopmentnddefinition, author = {{International Institute for Sustainable Development}}, title = {{Definition of Investor}}, institution = {International Institute for Sustainable Development}, url = {https://www.iisd.org/system/files/publications/best_practices_definition_of_investor.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }