Venezuela alleges violation of Foreign Investment Treaty with Dutch Kingdom

November 01, 2010 7:21 AM

On April 22 2008, the Netherlands-Antilles national newspaper “Antilliaans Dagblad” carried an article regarding oil multinationals allegedly abusing a Netherlands-Venezuela bilateral investment treaty by conducting their Venezuelan operations trough Dutch subsidiaries.

The Venezuelan Minister of Energy and Oil Rafael Ramírez had stated that ExxonMobil, China National Petroleum Company and Eni Dacion favored from this investment treaty between the Kingdom of the Netherlands and Venezuela. According to Ramírez, it is illegal for oil companies to conduct their operations through Dutch subsidiaries solely for this purpose and therefore he has announced to go to court.

The Treaty
This bilateral investment treaty, which entered into force on November 1, 1993, relates to the encouragement and reciprocal protection of investments, between the Kingdom of the Netherlands and the Republic of Venezuela. The treaty is applicable not only to the Kingdom of the Netherlands in Europe, but also to the Dutch Caribbean, being the Netherlands Antilles and Aruba. Some other countries have also entered a similar treaty with Venezuela, such as Argentina, Chili, Ecuador, Portugal, Switzerland and the United Kingdom.

The treaty is meant to protect any form of investment. The treaty applies to all natural persons of the contracting parties, all legal persons constituted under the law of the contracting parties and all legal persons that are controlled directly or indirectly by (1) natural persons having the nationality of a contracting party or (2) any legal persons constituted under the laws of a contracting party. More information about this treaty can be found in our earlier news item on this website.

The alleged violation
Due to the scope of the treaty Ramírez’ statement about going to court seems rather premature, since the treaty does not prohibit companies to establish a subsidiary in a third country for the sole reason to benefit from the provisions of the treaty. Remarkably though, ExxonMobil recently felt the need to explain to the media what their motives were for deploying activities in the Netherlands. Apparently this was due to the favorable tax-regime in the Netherlands. Although this may indeed have been the incentive for establishment in the Netherlands, such tax justification, is not necessary given the fact that the treaty - without exception - applies to all legal persons constituted under the law of a contracting party (in this case the Netherlands) and it does not prohibit non-treaty protected parent companies to benefit from it through a treaty protected subsidiary. Similar matters have often been a point of discussion in the European Union, but in almost every case it was found acceptable for companies to establish themselves (or subsidiaries) in countries with laws that suit them best.

Nevertheless, as of May 1, 2008, Venezuela has announced to terminate the treaty. The termination will take effect on November 1, 2008, which is the date of expiry or notice of termination must be given at least six months in advance. However, it must be noted that the treaty has a survival clause in article 14 paragraph 3, from which follows that investments made before termination will be protected for another 15 years.

Given the facts and circumstances of this matter viewed against the provisions in the treaty there seems to be no violation or abuse by the aforementioned oil companies, so it is unlikely that Venezuela will have any success when in court. However, the fact that other foreign companies (subsidiaries) are benefitting from the treaty via the Netherlands appears to be more than Venezuela had intended. Though it is an unfortunate matter (for investors), it is to each parties own discretion to terminate the treaty. Fortunately the investments made before the termination of the treaty will be protected for another 15 years.

Curacao, May 8, 2008

For more information on this subject, please contact Randolph van Eps of VanEps Kunneman VanDoorne.

(Source: VanEps Kunneman VanDoorne)