Worldwide: Alternative Forms Of Protection For Indonesia's Foreign Investors

Indonesia announced in March 2014 that it will not renew its Bilateral Investment Treaty (BIT) with the Netherlands, which is due to expire on 1 July 2015. Indonesia also declared its intention to terminate its other existing BITs, currently at least 60, of which approximately 45 are in force. These announcements call for a renewed evaluation of available investment protection by Indonesia's foreign investors. This Legal alert outlines the several means by which investment protection can be reassured.

The Netherlands-Indonesia BIT

Investment treaties provide protection to qualifying foreign investors of the contracting states. The Netherlands-Indonesia BIT provides legal protection for investments in Indonesia by legal persons incorporated under the law of the Netherlands, and vice versa. The protection offered by the BIT comprises several substantive rights, such as the right to 'fair and equitable treatment' and protection against direct and indirect expropriation without adequate compensation. In case of a dispute with the investment's 'host state', investors can initiate investor-state arbitration pursuant to the BIT's dispute resolution provision.

Consequences of the BIT termination in short

  • Existing investments of Dutch entities are not immediately impacted by the termination of the BIT. Pursuant to the BIT, a 'sunset period' of 15 years after termination of the BIT applies, so that investors can continue relying on the full protection offered by the Netherlands-Indonesia BIT until 2030. If an existing investment is expanded during the 'sunset period' it will in principle still be covered by the protection of the BIT. This is as long as the expanded investment can be qualified as an 'investment' under the BIT.
  • Investments made or restructured prior to 1 July 2015 are also protected under the Netherlands-Indonesia BIT until 2030. A current investment in Indonesia that is not presently held by a Dutch company can still obtain protection if the investment is restructured prior to 1 July 2015. This can be achieved for example by setting up a Dutch holding company and transferring the investment so that it is held by the Dutch legal entity. The restructuring of an investment with the purpose of gaining protection is legitimate as long as protection is sought for the future. Restructuring, however, might in practice not result in protection when a dispute with Indonesia arises and is referred to arbitration during or prior to the restructuring.
  • Investments made or restructured after 1 July 2015 are not protected under the Netherlands-Indonesia BIT. This does not necessarily imply that the investment to be made cannot be adequately protected. The investment can still be protected by means of (i) another BIT with Indonesia, or (ii) a multilateral investment treaty to which Indonesia is a party. More details about these means of protection are described below.

Means of ensuring appropriate investment protection in the future

For future investments, protection can be sought under another BIT or multilateral investment treaty to which Indonesia is a party. In order to qualify as foreign investor under an investment treaty, it is often sufficient if the investing entity is merely constituted under the laws of that contracting state. Therefore, in order for Dutch companies to ensure investment protection for future investments, these could possibly be structured via a company incorporated under the laws of a state that still has an investment treaty with Indonesia. Investors should take into account strategic issues such as the time span of the investment and the capability of the company to structure its investment in order to qualify as a foreign investor under a relevant treaty.

  • Protection through other BITs

    Despite Indonesia's announcement to terminate all its BITs, some of Indonesia's BITs will remain applicable and binding for a considerable period of time. BITs can only be periodically terminated or renewed according to the fixed time periods as indicated in the BIT. These fixed time periods will usually be 10 or 15 years. Generally, the notification for termination has to be delivered a year prior to the date of termination. Without any notification, renewal is assured. After termination, a 'sunset period' applies. For instance, in 2013 the Australia-Indonesia BIT was renewed for a fixed time period of 15 years, after which a 'sunset period' of another 15 years will follow. The China-Indonesia and South Korea-Indonesia BITs have recently been renewed for fixed time periods of ten years after which a 'sunset period' of 10 years will follow. Consequently, some of Indonesia's BITs still offer investments protection for the upcoming 20-30 years.

    When planning to make a long-term investment, protection should be sought under one of Indonesia's BITs where the time span between making the investment and renewal and/or termination of the BIT is relatively long. When the time span of the investment is shorter, the location of the established entities of the investing companies might be the decisive factor. Pursuant to most BITs, an entity will qualify as an 'investor' whose investments are protected if it is merely incorporated under the law of the contracting state to the BIT. Whether or not an investing company should restructure to be able to be granted the protection of a certain BIT depends on the definition of a foreign investor in the relevant BIT and the location (e.g., place of incorporation, principal place of business, etc.) and legal structure of the entities of the company.
  • Protection through multilateral investment treaties

    Given that Indonesia has not announced that it will terminate any of the multilateral investment treaties to which it is a party, a multilateral investment treaty may be a particularly relevant protection instrument. Indonesia is a party to the ASEAN Comprehensive Investment Agreement (ACIA), to which Singapore and Malaysia are also parties. Indonesia is also party to multilateral investment treaties with Australia, Japan and Korea. Multilateral investment treaties often offer a level of protection similar to that offered by a BIT and provide for investor-state arbitration as dispute resolution method. For example, the ACIA contains similar substantive rights as a regular BIT, but also contains exceptions that permit a state to take necessary measures for the protection of certain public interests. Therefore, when taking certain actions necessary for the protection of public interest, the substantive protection of the treaty would not apply. However, the state may not discriminate between investors when taking such action.

    In order to qualify as an investor that is entitled to claim investment protection under a multilateral investment treaty, the threshold is generally higher than under a BIT. For example, in the case of the ACIA, the entity which makes the investment must have substantive business operations in the territory of a member state. This implies that the entity cannot merely be a holding company, but must have locally based employees and actually be involved in more transactions than those necessary for maintaining the local existence.

What this means

As a result of Indonesia's termination of the Netherlands-Indonesia BIT and its announced intentions regarding its other BITs, companies with existing or planned investments in Indonesia should evaluate the adequacy of any investment treaty protection that they are or may wish to be entitled to. Existing investments in Indonesia covered by the Netherlands-Indonesia BIT prior to its expiry on 1 July 2015 should continue to enjoy protection until 2030.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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