Tests for determining the nationality of investors.

INTRODUCTION

Foreign investments have been a significant source of economic development for host states as they provide access to capital, technology, and new markets. However, in many instances, it has become necessary for host states to identify the nationality of investors to ensure compliance with domestic laws and regulations[1]. Apart from ensuring compliance to domestic laws and regulations, countries need to ensure that they are dealing with people they know so as to avoid welcoming enemies in their country. Nationality test intends to prevent a number of other things such as terrorism financing, money laundering and trading with an enemy country. The Nationality of an investor is an important detail which enable host state to prepare an investment treaty which resembles to the needs of parties while complying to all legal requirement of a host state and investor’s state especially those relating to foreign investment[2]. By determining the nationality of investors, the host state can ensure that foreign investors meet the eligibility criteria for investment, such as minimum investment amounts, sector-specific regulations, and other requirements. This, in turn, ensures that foreign investment contributes to the host state's economic growth and development in a sustainable and responsible manner.

Also, determining the nationality of investors is important for the host state to safeguard its national security and sovereignty. Foreign investors may have vested interests that may conflict with the host state's interests, such as acquiring strategic assets, engaging in espionage or other activities that threaten national security. By determining the nationality of investors, the host state can assess the potential risks associated with foreign investment and take appropriate measures to mitigate them. Determining the nationality of investors is crucial for the protection of domestic investors. Domestic investors may face unfair competition from foreign investing companies which may receive preferential treatment or subsidies from their home state. By ensuring that foreign investors meet the same eligibility criteria as domestic investors, the host state can ensure a level playing field for all investors and protect the interests of domestic investors. States which allow foreign investments regardless of the competition that domestic businesses going to face, are likely to cause economic problems by allowing foreigners to control state economy.

Lastly, determining the nationality of investors is essential for the enforcement of investment treaties and dispute resolution mechanisms. Investment treaties typically require that investors be nationals of the state party to the treaty to benefit from its provisions, such as the protection of investments and the right to recourse to dispute resolution mechanisms. By knowing the nationality of investors, the host state can ensure that only eligible investors benefit from the provisions of the treaty and that the dispute resolution mechanism is used only by eligible investors. Basing on all the above benefits of conducting nationality test to investors by state, all states include Tanzania, have nationality tests which are set to determine all necessary details of an investor. This article aims to explore the various tests used to determine the nationality of investors as legal persons and the reasons why certain tests should be preferred from the host state's perspective.

NATIONALITY OF INVESTORS

The nationality of investors is an important aspect of foreign investment law as it determines the legal rights, duties and obligations of investors under domestic laws and international investment agreements[3]. The nationality of investors refers to the legal identity of the individuals, corporations, or other legal entities that invest in a particular country. It determines which country or state has jurisdiction over the investor and which laws and regulations govern their investment activities. Nationality of investors is an important concept in international investment law, as it determines the legal rights and obligations of investors and host states[4]. Nationality of investors is generally determined based on the legal form of the investor and the place of its incorporation. For example, a corporation incorporated in Kenya is considered a Kenyan investor when invests in Tanzania. However, in some cases, determining the nationality of investors may be more complex, especially when investors are incorporated in one state but controlled by individuals or entities in another state. In such cases, additional tests, such as the control test or substantial business activity test, may be used to determine the investor's nationality[5].

There are two main types of nationalities of investors: natural persons and legal persons. Natural persons are individuals who invest in a foreign country. Their nationality is determined based on their citizenship, i.e., the country of which they hold a passport or are a national. Natural persons can invest directly in foreign countries, or they can do so through intermediaries such as investment funds, pension funds, or other financial institutions. In some cases, determining the nationality of natural persons may be complicated, especially if they hold dual citizenship or are permanent residents of another country. Another type is legal persons[6]. Legal persons refer to corporations or other legal entities that invest in foreign countries. Their nationality is determined based on the country in which they are incorporated or registered. For example, if a corporation is incorporated in South Africa, its nationality is considered to be SA. Legal persons can invest in foreign countries in various ways, including through subsidiaries, joint ventures, or partnerships.

In addition to these two main types, some investors may be considered as "mixed" nationality, i.e., they are owned by both natural persons and legal persons from different countries. In such cases, determining the nationality of the investor may require additional tests, such as the control test, to determine the nationality of the investor's ultimate beneficial owner or controller. Determining the nationality of investors is crucial for host states to ensure compliance with their laws and regulations, protect national security and sovereignty, and promote economic development. It is also essential for investors to benefit from legal protections and investment incentives offered by host states and to access dispute resolution mechanisms provided under investment treaties. Therefore, accurate and fair determination of investors' nationality is crucial for promoting foreign investment and ensuring its contribution to sustainable and responsible economic growth.

TESTS FOR DETERMINING THE NATIONALITY OF INVESTORS

There are various tests used to determine the nationality of investors, and these tests can be classified into two broad categories: formal tests and substantial tests.

Formal tests.

Formal tests are based on the legal form or papers of investors and the place of their incorporation. The most common formal test is the place of incorporation test, which considers the legal form of investors and their place of incorporation to determine their nationality. Under this test, an investor is considered to be a national of the state in which it is incorporated. This test is widely used in investment treaties and domestic laws as it provides a clear and objective basis for determining the nationality of investors. This is why in most countries include Tanzania, a foreign company cannot be incorporated twice, if it opens a branch in another country, it only gets certificate of compliance and not certificate of incorporation. This is to be accurate that, a company barely acquires dual nationality for the sake of international issues.

Another formal test is the control test, which considers the nationality of the individuals or entities that have control over the investor. This test is based on the principle that investors are considered to be nationals of the state where their controlling individuals or entities are nationals. The control test is widely used in domestic laws to prevent investors from circumventing the nationality requirements by structuring themselves as shell companies. The purpose of the control test in determining the nationality of a company is to identify the ultimate beneficial owner or controller of the company. In some cases, a company may be incorporated in one country but may be ultimately controlled by individuals or entities from another country. In such cases, the control test helps to determine the nationality of the company based on the nationality of its ultimate beneficial owner or controller. The control test is important because it ensures that the true nationality of the company is determined accurately. This is because the nationality of the ultimate beneficial owner or controller is likely to have a significant impact on the company's investment activities, and the company may be subject to different laws and regulations depending on its nationality[7].

The control test can be applied in different ways, depending on the specific circumstances of the company and its ownership structure. One common method is to look at the percentage of ownership of the company held by individuals or entities from different countries. If a majority of the ownership is held by individuals or entities from a particular country, the company may be considered to have the nationality of that country. Another approach is to look at the extent of control exercised by individuals or entities from different countries over the company's decision-making processes. If the ultimate decision-making power lies with individuals or entities from a particular country, the company may be considered to have the nationality of that country[8]. The control test is an important tool for host states to ensure that the nationality of companies is determined accurately, and that foreign investment is subject to the appropriate laws, rules and regulations.

Substantial tests

Substantial tests are based on the activities, operations, and ownership structure of investors. The most common substantial test is the substantial business activity test, which considers the location and extent of an investor's business activities to determine its nationality. Under this test, an investor is considered to be a national of the state in which it conducts a substantial part of its business activities. This test is used to prevent investors from claiming the nationality of a state where they have no real business activities. Another substantial test is the ownership and control test, which considers the ownership structure and control of investors to determine their nationality. This test is based on the principle that investors are considered to be nationals of the state where their ownership and control are located. The ownership and control test is commonly used in domestic laws to prevent foreign investors from acquiring domestic companies to circumvent the nationality requirements.

REASONS FOR CHOOSING A TEST

From the host state's perspective, the choice of a test for determining the nationality of investors depends on several factors, including the level of protection desired for domestic investors, the level of economic development, and the level of foreign investment. The following are some of the reasons why a particular test should be preferred from the host state's perspective.

Legal Certainty

The choice of a test should provide legal certainty for both domestic and foreign investors. A test that is clear, objective, and widely recognized provides legal certainty and predictability for investors and other foreign business entities, which encourages foreign investment[9]. The place of incorporation test is a widely recognized test that provides legal certainty for investors and host states. Nation where a company was incorporation, is a place where all details of owners of the company, liabilities and foreign investment policies can be easily retrieved. The place of incorporation is a major test which is easily used by host states to determine the nationality of a particular corporate or business which intends to expand its business in another country.

Protection of Domestic Investors

The choice of a test should protect domestic investors from unfair competition and ensure that they are not disadvantaged by foreign investors. A test that considers the location and extent of an investor's business activities ensures that foreign investors do not enjoy the benefits of the host state's market without making a substantial contribution to the host state.

CONCLUSION

In conclusion, determining the nationality of investors is an essential concept in international investment law. It helps host states ensure compliance with their laws and regulations, protect national security and sovereignty, and promote economic development. Accurate determination of the nationality of investors is also critical for investors to benefit from legal protections and investment incentives offered by host states and to access dispute resolution mechanisms provided under investment treaties. Various tests are used to determine the nationality of investors, depending on the legal form of the investor and the place of its incorporation. These tests include the incorporation test, the control test, and the substantial business activity test. While the incorporation test is the most common method for determining the nationality of legal persons, the control test is often used in cases where the ownership structure of the investor is complex or where the investor is controlled by individuals or entities from another country. The substantial business activity test, on the other hand, is used to determine whether a company has a significant business presence in a particular country and is therefore subject to its laws and regulations.

From the host state's perspective, the control test is likely the most preferable test as it ensures that the ultimate beneficial owner or controller of the investor is identified, and the nationality of the investor is determined accurately. This approach helps host states to promote transparency in investment activities, protect national security and sovereignty, and ensure a level playing field for all investors

REFERENCE

BOOKS

Bath, V., & Sinclair, A. (2017). Nationality of investors: a comparative analysis of investment treaty practice. Journal of International Economic Law, 20(4), 835-858.

Broude, T. (2014). The test of corporate nationality in investment treaty arbitration. The Journal of World Investment & Trade, 15(3-4), 226-250.

González García, M. (2019). The control test in determining the nationality of companies. Revista de Derecho del Mercado Financiero, 1(1), 77-99.

JOURNAL

UNCTAD. (2021). Investment Policy Framework for Sustainable Development. United Nations Conference on Trade and Development.

OTHER SOURCES

Andrew, w “Nationality of an investor”, https://jusmundi.com/en/document/publication/en-nationality-of-investor (Accessed April 15, 2023).

Ankia, G “Nationality of investment”, https://jusmundi.com/en/document/publication/en-nationality-of-investment (Accessed April 15, 2023).

Mondaq, “Nationality of The Investor in International Investment Arbitration”, https://rb.gy/add77 (Accessed April 15, 2023).

Springer Link, “The Nationality of Natural and Juridical Persons in International Investment Law”, https://rb.gy/iao69 (Accessed April 15, 2023).

Jones, G, “The Rise of Corporate Nationality”, Published October, 2006. https://hbr.org/2006/10/the-rise-of-corporate-nationality (Accessed April 15, 2023).

Batasnatn, “Tests in Determining the Nationality of Corporations”, https://batasnatin.com/law-library/mercantile-law/corporation-law/2237-tests-in-determining-the-nationality-of-corporations.html (Accessed April 15, 2023)

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[1] Andrew, w “Nationality of an investor”, https://jusmundi.com/en/document/publication/en-nationality-of-investor (Accessed April 15, 2023).

[2] Ankia, G “Nationality of investment”, https://jusmundi.com/en/document/publication/en-nationality-of-investment (Accessed April 15, 2023).

[3] Mondaq, “Nationality of The Investor in International Investment Arbitration”, https://rb.gy/add77 (Accessed April 15, 2023).

[4] Springer Link, “The Nationality of Natural and Juridical Persons in International Investment Law”, https://rb.gy/iao69 (Accessed April 15, 2023).

[5] ibid

[6] Jones, G, “The Rise of Corporate Nationality”, Published October, 2006. https://hbr.org/2006/10/the-rise-of-corporate-nationality (Accessed April 15, 2023).

[7] Batasnatn, “Tests in Determining the Nationality of Corporations”, https://batasnatin.com/law-library/mercantile-law/corporation-law/2237-tests-in-determining-the-nationality-of-corporations.html (Accessed April 15, 2023)

[8] Broude, T. (2014). The test of corporate nationality in investment treaty arbitration. The Journal of World Investment & Trade, 15(3-4), 226-250.

[9] Bath, V., & Sinclair, A. (2017). Nationality of investors: a comparative analysis of investment treaty practice. Journal of International Economic Law, 20(4), 835-858.