Governments frequently create regulatory frameworks designed to incentivize foreign investment. But sometimes those frameworks can change after investments have been made—whether through changes to subsidy regimes, financial-sector regulations, tax treatment, or other policy shifts.
Investment treaties—agreements between two or more countries that offer protections to each other’s investors under international law—offer a potentially valuable but often overlooked mechanism for addressing these risks. The most common substantive protections include guarantees against expropriation without compensation, requirements for fair and equitable treatment, prohibitions on discriminatory measures, and protections for the transfer of investment-related funds.
When a host State breaches a treaty protection, the affected investor can initiate arbitration before a neutral investment tribunal. Treaties therefore offer valuable additional protection beyond proceedings under local law in the host State’s own courts.
Regulatory Risks Faced by Private Capital
Regulatory and policy risks are not confined to emerging markets or investments in physical assets. They arise wherever private capital depends on a regulatory framework, government approval or other forms of State action that the State can modify after the investment is made, as well as when the State or State entities are themselves the counterparty.
Recent examples of regulatory changes affecting private capital provide useful lessons about the protections that may be available under international investment treaties and the practical considerations investors should address when structuring cross-border investments.
Regulatory Rollbacks. The Spanish renewable energy sector provides a good example. Spain encouraged substantial private investment through long-term subsidy regimes and other regulatory incentives. Private equity funds, infrastructure investors and project finance lenders, relying on these incentives, deployed significant capital for various projects. Spain subsequently made material changes to its renewable energy regime, including retroactive modifications to the remuneration available for existing projects. These actions led to dozens of investment treaty claims. In many of these cases, arbitration tribunals found Spain in breach of its international obligations to foreign investors, resulting in awards of approximately €1.5 billion in damages.
These disputes against Spain illustrate the range of financial investments that can qualify for treaty protection when regulatory measures affect a financed project or enterprise. For example, in Eiser v. Spain, the protected investments made by British and Luxembourg investors included not only shareholdings but also shareholder loans and capital contributions. In Portigon v. Spain, a German bank brought claims in relation to project financing arrangements for renewable energy projects; the tribunal concluded that the relevant financing could qualify for treaty protection and found a treaty breach, although it ultimately awarded no damages. Pending proceedings in Landesbank v. Spain involve project finance lending by German banks of approximately €1.76 billion.
Spain’s renewable energy sector is only one area in which investment treaty claims have been brought by investors adversely affected by regulatory or policy changes. In OKO Pankki and others v. Estonia, claims by Finnish and German banks arose out of Estonia’s invalidation of arrangements for repayment of financing provided by the claimant banks to an Estonian joint venture. And in British Caribbean Bank v. Belize, a Turks and Caicos bank protected under the UK-Belize bilateral investment treaty brought claims arising from Belize’s nationalization of a telecommunications enterprise to which the bank had extended financing.
Banking and Financial Sector Regulation. State interventions in the banking and finance sector—including resolution frameworks, restructuring measures and prudential regulations—have also generated claims. Treaty claims have arisen, for example, from the resolution and forced sale of Banco Popular in Spain; the resolution of Banco Espírito Santo in Portugal; the allegedly forced administration of Bahraini banks; the restructuring and privatization of the Czech banking sector; the write-down of Credit Suisse AT1 bonds in Switzerland; the court-ordered transfer of PrivatBank’s Crimean assets to a trust; Estonia’s revocation of a banking license; and bail-in measures affecting deposits and bonds in two Cypriot banks.
Sovereign Debt Measures. State measures affecting sovereign debt, including restructurings, have also prompted treaty claims. In Gramercy v. Peru, a U.S. emerging markets fund brought claims relating to Peruvian land reform bonds, ultimately prevailing on the merits. In a trio of cases against Argentina (Abaclat, Ambiente Ufficio, and Alemanni), over 60,000 private bondholders pursued claims arising from Argentina’s sovereign debt default. In Poštová Banka v. Greece, a Slovak bank holding Greek government bonds challenged Greece’s enactment of legislation in the context of the 2012 sovereign debt restructuring. In Cyprus Popular Bank v. Greece, a Cypriot bank also brought claims arising from Greece’s sovereign debt restructuring, alongside separate claims concerning Greece’s emergency liquidity and bank-resolution measures.
Defaults on State or State-Entity Financial Obligations. Protection has also extended to financial instruments involving a State or State-owned entity as a counterparty. In Fedax v. Venezuela, a Dutch investor brought claims relating to Venezuela’s failure to honor its promissory notes. In Deutsche Bank v. Sri Lanka, a hedging arrangement was found to constitute a protected investment after the State-owned oil company defaulted on its hedging obligations and the government intervened in the dispute.
Eligibility for Treaty Protection
Whether investment treaty protection is available depends on the particular treaty and the way in which the investment is structured. Even when treaty protection appears available, investors should be aware of issues that can complicate or defeat a claim. Key considerations include whether the investor qualifies for protection, whether the relevant interest constitutes a protected investment, and when treaty protection is put in place.
Protected investors. Investment treaties generally protect investors that have the nationality of the signatory countries, and the criteria for determining nationality vary between treaties. The jurisdiction through which an investment is made can therefore affect whether treaty protection is available.
Many treaties look to the claimant’s place of incorporation. Others, however, determine investor nationality by the “corporate seat” or “siège social”—typically the place of effective management or central administration. This approach can create some risk for holding vehicles with limited operational activity. Investors using holding structures in jurisdictions with siège social treaties should consider whether the vehicle has sufficient presence and decision-making activity in the jurisdiction to satisfy the applicable nationality test.
Some treaties also include “denial of benefits” clauses, which permit a host State to deny treaty protection to entities that lack substantial business activities in the host State or are controlled by nationals of third countries or of the host State itself.
Protected investments. Most investment treaties define covered investments with a non-exhaustive list of categories of protected assets. Whether a financial instrument qualifies for protection may also depend on its connection to the host State. Some treaties require the asset in question to have certain characteristics relating to contribution, risk, duration or other factors.
Arbitration tribunals have recognized treaty protection for a range of financial instruments under various treaties. Examples include long-term promissory notes issued by governments; bonds secured by mortgages; sovereign bonds, including bonds acquired on secondary markets; land reform bonds; bank bonds and deposits; loans integrated into an investment operation; interrelated arrangements comprising loans, guarantees, repayment agreements and mortgage rights; loans secured by interests in an underlying enterprise; standalone hedging arrangements; and project finance arrangements comprising long-term debt and associated interest-rate swaps.
Whether the claimant controls the specific asset in question may also be relevant under some treaties. For structures involving management agreements, fund administrators and multiple partners, tribunals may examine whether the claimant can demonstrate sufficient powers of direction and supervision over the investment, as was the case, for example, in Gramercy v. Peru, Mason Capital v. Korea and, more recently, Contrarian Capital v. Mexico. This analysis can involve not just the corporate ownership structure, but also factual issues relating to the corporate governance and functioning of the investment vehicles in play.
Timing of protection. Treaty protection should be considered alongside tax, regulatory and other commercial considerations when structuring a cross-border investment, ideally before problems arise. Tribunals may decline jurisdiction on the grounds of abuse of process where an investment has been restructured after a dispute has arisen or become reasonably foreseeable and the primary purpose of the restructuring was to gain access to treaty protection that would not otherwise exist. Legitimate tax and investment planning can be distinguished from illegitimate abuse of the treaty mechanism, but this can be a fact-intensive inquiry.
Conclusion
Investment treaties can provide an important additional layer of protection against regulatory, sovereign and other State-related risks affecting cross-border investments. For private capital investors, the key is to consider treaty protection at the outset—when decisions about investment structure, holding jurisdictions and ownership arrangements are still being made—rather than after a dispute has emerged. Careful planning at that stage can help preserve access to treaty protections if government action later impairs the investment.
Private Equity Report Fall 2026, Vol 26, No 3