How to Use Offshore Entities in Investor-State Dispute Settlements

What ISDS Is—and Why Entity Structure Matters

Treaty-based investor-state arbitration lets a foreign investor bring claims directly against a host state for breaching protections promised in bilateral investment treaties (BITs), multilateral treaties like the Energy Charter Treaty (ECT), or free trade agreements (FTAs) with investment chapters. Those protections typically include:

Fair and equitable treatment (FET) and protection against arbitrary conduct

Protection against unlawful expropriation (direct and indirect)

Full protection and security

National treatment and most-favored-nation (MFN) treatment

“Umbrella” clauses elevating certain state commitments to treaty obligations

Consent to arbitration at ICSID or under UNCITRAL rules

The catch: only covered “investors” with covered “investments” can bring these claims. The treaty defines who counts as an investor—usually by nationality. If your project vehicle is incorporated in State X, and there’s a State X–Host State BIT with decent protections and consent to arbitration, you may have standing. If not, you may be out of luck.

That’s where offshore entities come in. By routing investment through a jurisdiction with a strong treaty network, you can secure standing, diversify political risk, and increase settlement leverage.

When Offshore Structuring Makes Sense

Not every project needs an offshore holdco. I typically advise clients to consider it when:

The host state has a checkered history with regulatory stability, FX restrictions, or contract sanctity.

The project is capital-intensive (energy, mining, telecom, infrastructure) and relies on long-term regulatory frameworks.

There’s a realistic risk of legal measures that harm value but are difficult to challenge locally.

Financing parties (banks, DFIs) expect international arbitration backstopping.

There are two time horizons:

Ex ante (best practice): Setting up the holding structure at, or before, initial investment. Tribunals routinely accept this as legitimate risk management.

Pre-dispute restructuring (high risk): Restructuring after trouble starts. Sometimes defensible if the dispute wasn’t reasonably foreseeable and there are genuine business reasons. If a dispute is already on the horizon, restructuring can be treated as an abuse of process.

The jurisprudence lines are fairly clear: Philip Morris Asia v. Australia and Pac Rim v. El Salvador show that opportunistic restructuring once a dispute is foreseeable will likely be knocked out. By contrast, Mobil v. Venezuela accepted pre-dispute restructuring for measures occurring after the restructuring.

The Legal Mechanics: Nationality, Control, and Consent

How treaties define “investor”

Treaties vary, but you’ll see three common nationality tests for companies:

Place of incorporation (most common and simplest)

Seat of management (real seat)

Control/ownership (direct or indirect)

Many tribunals look to the treaty text, not ultimate beneficial ownership (UBO). In Tokios Tokelés v. Ukraine, a company incorporated in Lithuania but owned by Ukrainians qualified as a Lithuanian investor because the treaty used incorporation as the test. That said, several modern treaties add “denial of benefits” clauses to screen out shells.

Denial of benefits and “substantial business activities”

Denial-of-benefits (DoB) provisions allow a host state to deny treaty benefits to a company that is owned or controlled by investors from a non-party (or the host itself) and that lacks “substantial business activities” in its place of incorporation. ECT Article 17 and many U.S.-style BITs have this.

Practically, you need demonstrable substance in the holdco’s jurisdiction. A brass-plate company with no employees, no office, and no accounts is vulnerable. “Substantial” isn’t defined precisely, but tribunals look at:

Office space and operational presence

Employees or at least senior directors actively directing the investment

Audited financials and tax filings

Local bank accounts and decision-making documented locally

Real services (treasury, risk management, IP holding, regional HQ functions)

ICSID versus UNCITRAL and jurisdictional nuances

ICSID Convention cases benefit from self-contained enforcement (Article 54) and no supervisory seat court. Jurisdiction requires a “national of another Contracting State” and a qualifying “investment.” A locally incorporated company can sometimes qualify if there’s foreign control and the parties consent to treat it as foreign per Article 25(2)(b).

UNCITRAL (or other rules) arbitration relies on the New York Convention for enforcement, which means potential court challenges at the seat and at enforcement.

If you can qualify for ICSID, you usually want it. But ICSID requires both the host state and claimant’s state of nationality to be ICSID Contracting States. That’s another reason jurisdiction choice for your holdco matters.

Choosing a Jurisdiction: What Actually Matters

I don’t deal in checklists for the sake of checklists, but this is the one to keep close:

Treaty network: Does the jurisdiction have a deep bench of modern BITs or ECT coverage with robust standards and ICSID consent?

Quality of treaty text: Are FET and protection against indirect expropriation clearly drafted? Any DoB trapdoors? Umbrella clause? MFN?

ICSID membership: Essential if you aim for ICSID arbitration.

Political alignment and enforcement climate: Awards enforced smoothly? Any sanctions or geopolitics risk?

Substance feasibility and cost: Can you meet DoB and economic substance laws without bloated overhead?

Tax neutrality: You’re not structuring to avoid tax in this context, but tax drag matters. Think participation exemptions, withholding on dividends, and CFC rules at the parent level.

EU complications: Intra-EU investor–state arbitration is in limbo after Achmea and Komstroy. If your parent is EU-based and you plan to sue an EU state, an EU holdco won’t help; you may need a non-EU holdco.

Commonly used jurisdictions (pros and cautions)

Netherlands: Deep treaty network with Latin America, Africa, and Asia; business-friendly courts; ICSID member. Some modern Dutch BITs have tighter language and DoB clauses. Substance expectations rising.

Switzerland: Strong rule of law, ICSID Additional Facility access; excellent reliability. Treaties vary; analyze text carefully.

Luxembourg: Solid network, EU-based (watch intra-EU issues); excellent governance and finance ecosystem.

Singapore: ICSID member since 2016, strong judiciary, efficient set-up, good treaty network in Asia.

Hong Kong: Good BITs with several states, but geopolitical shifts and DoB drafting must be checked; for Australia, Philip Morris Asia is a cautionary tale on timing.

UAE (including ADGM/DIFC): Growing treaty network, business-friendly; substance and KYC manageable.

Mauritius: Popular for Africa and India-facing investments; good treaties and predictable courts; substance needed.

Cyprus: Useful for Eastern Europe and Central Asia, but treaty quality varies; ensure ICSID coverage if needed.

BVI/Cayman: Great for corporate flexibility, but limited treaty networks; typically used as intermediate vehicles, not as the treaty-protected investor. Also subject to economic substance laws since 2019.

No single jurisdiction is “best.” You match the host state(s) and project footprint against the treaty map and operational realities.

Timing and Restructuring Without Abuse

Tribunals accept proactive structuring. They punish late, opportunistic maneuvers. The working test is foreseeability.

Foreseeability: If a specific dispute is reasonably foreseeable—because the government has announced the measure, sent enforcement notices, or you’ve started formal negotiations over a conflict—restructuring to gain treaty protection can be deemed an abuse. Philip Morris Asia v. Australia is the textbook example.

Safe window: Restructure when the risk profile changes but before a dispute crystallizes (no demand letters, no explicit announced measures targeting your asset, no formal enforcement actions).

Mobil v. Venezuela: The tribunal accepted a move to a Dutch holdco before key measures, but it limited claims to post-restructuring measures.

What you need in practice:

A record of non-litigation business rationales: tax neutral treasury functions, regional management consolidation, financing comfort, or a joint venture requirement.

Board minutes and internal memoranda that don’t read like litigation planning. Avoid phrases like “create jurisdiction.”

Lead time. Closing a restructuring 12–18 months before any dispute arises is far safer than three months.

Building Treaty Coverage Through a Holding Chain

Single holdco or multi-tier?

You can route investment through a single treaty-backed holdco or use a chain to achieve multiple goals (financing flexibility, tax neutrality, governance). What you can’t do is stack BITs to cherry-pick dispute resolution—consent to arbitration must come from the treaty under which you bring the claim, and MFN doesn’t usually import dispute settlement consent across treaties anymore (many tribunals have tightened this).

A typical structure:

ParentCo (home jurisdiction) | Treaty Holdco (offshore jurisdiction with strong BIT with Host State) | Project Holding/Operating Companies (in Host State)

Document the chain thoroughly: share certificates, capitalization tables, intercompany loans, board authorizations, and bank records. When a dispute hits, you must prove ownership or control at the relevant time.

Round-tripping and local companies as claimants

Using a local project company to bring a claim is possible under ICSID Article 25(2)(b) if the state and the company consented in writing to treat it as foreign-controlled. This often appears in investment contracts with state entities. Absent that, a locally incorporated company is not a foreign investor for treaty purposes, even if foreign-owned.

Round-tripping—where host-state nationals invest via an offshore vehicle and then sue their own state—can work if the treaty uses incorporation as the sole test and there’s no DoB barrier. But it carries higher optics and political risk.

Meeting “Substantial Business Activities” and Substance Laws

Several jurisdictions now have economic substance requirements (e.g., BVI, Cayman, Jersey, Guernsey) and many BITs have DoB clauses. Satisfy both with real activity.

What I look for—practical thresholds I’ve implemented:

Governance: At least two local resident directors with demonstrable decision-making authority. Routine board meetings held in the jurisdiction with minutes reflecting genuine oversight of the investment.

Presence: A dedicated serviced office (not just a registered agent address). Keep lease agreements, utility bills, and visitor logs.

People: One to three staff or outsourced management services under clear agreements (finance, compliance, treasury). The higher the claim’s value, the more weight you should put here.

Banking and treasury: Local bank account used for dividends, shareholder loans, or intercompany cash management. Board approvals made locally.

Records: Local accounting, audited financials if appropriate, tax filings, and a tax residency certificate.

Budget: For a mid-market holdco, substance can run $75,000–$300,000 per year, depending on jurisdiction and staffing. It’s an insurance premium against DoB objections.

I’ve seen claims worth hundreds of millions falter because the holdco was a ghost. The cost of building substance is trivial compared to the value at risk.

Legality of the Investment and Clean Hands

Even the best structure won’t save a tainted investment. Tribunals have refused jurisdiction or dismissed claims where corruption or illegality was baked into the project (World Duty Free v. Kenya; Metal-Tech v. Uzbekistan). You’ll want:

Anti-corruption due diligence on government interactions and counterparties

Robust compliance programs and audit trails

Sanctions screening (particularly for projects in higher-risk jurisdictions)

Clear permitting history and environmental compliance

Many treaties require investments to be made “in accordance with” host-state law to be protected. Fix defects early; don’t assume a tribunal will paper over regulatory non-compliance.

Drafting Project Documents to Support Treaty Claims

You can’t write a treaty into your contract, but you can avoid waiving treaty rights unintentionally.

Governing law and dispute resolution: Use international arbitration for contracts with state entities, but avoid exclusive forum selection clauses that could be argued to preclude treaty arbitration (fork-in-the-road). Many tribunals require identity of parties, cause of action, and object to trigger a fork. Keep them distinct.

Stabilization clauses and change-in-law provisions: Useful on the contract side and can support legitimate expectations under FET.

Umbrella clauses: A treaty feature, not a contract term. Still, drafting state undertakings carefully helps frame breaches under an umbrella clause when the treaty has one.

MFN clauses: Don’t rely on MFN to import consent from another treaty. Some tribunals allow MFN for substantive standards, fewer for dispute settlement, and states draft around it.

Funding the Fight: Insurance and Capital

ISDS is expensive. A realistic claimant-side budget in a medium-to-large case runs $8–15 million in legal and expert fees over three to five years, with adverse costs exposure in the low-to-mid seven figures if you lose. Two tools mitigate this:

Political risk insurance (PRI): Offered by MIGA, national DFIs (e.g., U.S. DFC), and private insurers. Coverage for expropriation, currency inconvertibility, political violence, and sometimes breach of contract. Insurers often have subrogation rights to pursue the state; coordinate policy terms with your structuring to avoid conflicts.

Third-party funding (TPF): Non-recourse financing of legal fees in exchange for a share of proceeds. ICSID’s 2022 rules require disclosure of funding and allow security for costs applications where appropriate. Funders scrutinize structure and merits; a clean, well-substantiated corporate chain helps secure funding on better terms.

After-the-event (ATE) insurance can cover adverse costs, balancing the security-for-costs risk in some tribunals.

Bringing the Claim: From Notice to Award

Cooling-off: Most treaties require a 3–6 month negotiation period after notice of dispute. Use it to establish the record, not to show weakness.

Choice of rules: If available, ICSID is often preferable for enforcement and finality. Otherwise, UNCITRAL with a sensible seat (e.g., London, Singapore, Geneva) works.

Provisional measures: Tribunals can order states to refrain from aggravating the dispute, but compliance varies. Seek targeted measures tied to preventing irreparable harm.

Damages: Quantify with experts early—DCF for going concerns, cost-based approaches for early-stage projects, and comparables where credible. The tribunal will scrutinize causation and valuation assumptions closely.

Success rates are mixed. Public data suggests that roughly 40–50% of decided cases result in some investor success on liability; many cases settle. Awards vary widely; enforcement is a separate battle.

Common Mistakes—and How to Avoid Them

Restructuring too late: If the measure is announced or enforcement is underway, expect an abuse-of-rights objection. Act while risks are general, not specific.

Ignoring DoB clauses: A shell with no substance is low-hanging fruit for jurisdictional objections. Build meaningful activity in the holdco jurisdiction.

Sloppy corporate records: Missing share certificates, inconsistent cap tables, and unsigned board minutes make for painful hearings. Maintain meticulous records from day one.

Overreliance on MFN: It won’t conjure consent to arbitration when your base treaty doesn’t provide it.

Waiving rights in contracts: Boilerplate submission to national courts can clash with treaty claims. Draft dispute clauses with the treaty layer in mind.

Tax-driven tunnel vision: Lighter tax isn’t helpful if it undermines treaty protections or triggers CFC headaches. ISDS coverage and enforceability are senior objectives when planning risk.

Illegality: Permitting short-cuts, side payments, or regulatory non-compliance will surface in disclosure and can kill jurisdiction.

EU seat for EU disputes: If you plan to sue an EU state, avoid an EU holdco and be realistic about intra-EU enforcement headwinds.

Case Snapshots and Practical Lessons

Philip Morris Asia v. Australia: PMI shifted ownership to a Hong Kong entity after Australia announced plain packaging. Tribunal dismissed for abuse of rights. Lesson: Don’t restructure when a specific dispute is underway or imminent.

Pac Rim v. El Salvador: The claimant re-domiciled to the U.S. to access CAFTA-DR after permitting conflict escalated. Tribunal rejected jurisdiction under CAFTA due to abuse; the investor couldn’t use the treaty. Lesson: Timing and foreseeability decide jurisdiction.

Mobil v. Venezuela: Corporate restructuring to a Dutch holdco before key state measures occurred. Tribunal accepted jurisdiction for post-restructuring measures. Lesson: Pre-dispute positioning can work if it isn’t retroactive.

Tokios Tokelés v. Ukraine: Lithuanian incorporation sufficed despite Ukrainian ownership. Lesson: The treaty’s text rules. If it says incorporation, the tribunal will rarely pierce to UBO absent abuse or DoB.

I’ve seen private settlements move quickly once a state understands the investor can stand up a credible treaty claim with ICSID jurisdiction. The presence of a robust holdco and clean documentary trail often shifts negotiations more than any demand letter.

Enforcement and Recovery Strategy

Winning on the merits is half the job. Collecting is the rest.

ICSID awards: Enforceable as if they were final judgments of local courts in every ICSID Contracting State. There’s no annulment by national courts, only ICSID’s internal annulment mechanism.

Non-ICSID awards: Enforced under the New York Convention, subject to limited defenses and potential set-aside at the seat.

Sovereign immunity from execution remains a major hurdle. You generally target:

Commercial assets of state-owned enterprises (SOEs) not performing governmental functions

Receivables from commercial counterparties (e.g., airlines, commodity traders)

Real estate used for commercial purposes (not embassies or central bank reserves)

Arbitration awards or judgments the state is owed by others

Jurisdictions like the U.S., UK, France, and the Netherlands have well-developed immunity doctrines with nuances. Map assets early; use discovery tools where available (e.g., U.S. 28 U.S.C. §1782 pre- or post-award in some contexts). Many cases settle during enforcement when pressure points emerge.

Ethical and Reputational Considerations

States increasingly frame treaty claims as attacks on public policy. Optics matter:

Community and ESG record: A good local footprint helps legitimacy, especially in FET/legitimate expectations arguments.

Public communication: Expect filings to become public. Draft notices and memorials with an eye toward press and political stakeholders.

Settlement dynamics: Creative settlements—new permits, tariff adjustments, tax holidays—often beat chasing attachable assets for years.

Using an offshore entity isn’t about secrecy; it’s about a neutral jurisdiction, predictable law, and a credible forum. Be ready to explain that narrative.

Step-by-Step: How to Build ISDS Protection with Offshore Entities

Pre-investment phase

Map treaty coverage:

Identify host states and potential counterparty states (including state-owned entities).

Build a matrix of candidate holdco jurisdictions with applicable BITs/ECT, focusing on FET language, expropriation standards, umbrella clauses, MFN scope, DoB, and ISDS consent (ICSID preferred).

Choose the jurisdiction:

Weigh treaty strength, ICSID membership, enforcement climate, and substance feasibility. Shortlist two options to hedge political risk.

Design the chain:

Set up a clean chain from ParentCo to Holdco to ProjectCo(s). Draft shareholder loans and capital injections with clear documentation.

Build substance:

Appoint local directors, arrange office space, open bank accounts, adopt governance policies, and implement accounting/tax compliance.

Contract drafting:

Include stabilization/change-in-law and international arbitration in state contracts. Avoid exclusive forum clauses that could trigger fork-in-the-road issues.

Compliance:

Complete anti-corruption due diligence and establish permit tracking. Keep a clean regulatory record.

Mid-project (operations and monitoring)

Maintain substance:

Hold quarterly board meetings in the holdco’s jurisdiction; document decisions on dividends, major contracts, and financing.

Track regulatory risks:

Keep a dashboard of pending laws, tariff changes, and license renewals. Early warning lets you act before foreseeability crystallizes.

Consider PRI:

Evaluate political risk insurance or blended coverage with funders as the project scales.

Pre-dispute (tensions rising)

Legal risk assessment:

Commission counsel to assess foreseeability, treaty standing, and potential claims. If restructuring is needed, act decisively and early, with non-litigation rationales contemporaneously documented.

Preserve evidence:

Archive permits, correspondence, board minutes, financial models, and investment flows.

Engage quietly:

Open a dialogue with the state. Propose pragmatic solutions while documenting attempts to settle.

Funding plan:

Line up TPF or ATE insurance if needed. Disclose funding per ICSID/tribunal rules.

Dispute phase

Notice and cooling-off:

Send a measured, fact-based notice that lays out the treaty breaches and invites negotiation. Avoid inflammatory language.

Choose rules and seat:

ICSID if available. For UNCITRAL, pick a neutral, enforcement-friendly seat.

Quantify damages:

Retain valuation experts early; align legal narrative with economic causation.

Provisional measures:

Consider targeted applications if the state threatens aggravation (e.g., asset seizure, cancellation steps).

Keep corporate hygiene:

Don’t change the chain mid-arbitration without advice. Maintain the status quo to avoid jurisdictional complications.

Practical Examples of Structuring Paths

Latin American renewables:

A Dutch or Spanish holdco used to invest in a series of PPAs in the Andean region. The Netherlands–Host BIT provides FET and ICSID consent. Board meets in Amsterdam, with a treasury team of two. DoB met; tax-neutral dividends under participation exemption. Watch for updated Dutch model BIT terms.

West African mining:

Mauritius holdco with employees overseeing regional procurement and compliance. Mauritius–Host BIT includes fair treatment and expropriation protection; ICSID jurisdiction secured. PRI layered from MIGA; tribunal seat would be outside Africa if UNCITRAL is needed.

Southeast Asian telecom:

Singapore holdco acts as regional HQ. Singapore–Host BIT plus ICSID coverage; robust local substance (finance and legal). Contracts with the state-owned operator have international arbitration with a carve-out clarifying that treaty rights remain intact.

Data Points to Ground Expectations

Cost: Claimant-side legal and expert fees commonly run $8–15 million in medium-to-large ISDS cases; mega-cases can exceed $30 million.

Duration: From notice to award, three to five years is a reasonable planning horizon. Add time for annulment (ICSID) or set-aside (UNCITRAL) and enforcement.

Outcomes: Publicly reported outcomes suggest around 40–50% of decided cases result in some investor success; many disputes settle pre-award.

Security for costs: More frequent where the claimant is funded and appears impecunious; mitigated by ATE insurance and transparent funding disclosures.

DoB scrutiny: Increasingly common; tribunals look past mere registration to actual activity.

Frequently Asked Questions

Can a holding company with no employees qualify as having “substantial business activities”?

Possibly, but it’s risky. A portfolio of real functions (treasury, management, compliance), local directors, and financial operations is stronger. If the treaty has a DoB clause, plan to exceed minimal thresholds.

Will MFN let me import a better dispute clause from another BIT?

Often no. Many tribunals and treaties either restrict MFN for dispute settlement or require clear language. Rely on your base treaty.

What if my project company is local to the host state?

You can still be protected if you own it through a qualifying foreign holdco. Alternatively, under ICSID Article 25(2)(b) a locally incorporated company can sometimes be treated as foreign if there’s foreign control and the parties consented in writing.

Can I restructure after the government sends a warning letter?

Very risky. Tribunals examine foreseeability closely. If a specific dispute is forming, restructuring can be an abuse of process.

Do I need to publish my corporate structure?

You don’t need to publicize it, but be ready to disclose it in arbitration. Transparency beats surprises in the hearing room.

What I Tell Clients Who Want a Two-Sentence Answer

If you might need treaty protection, build it before you need it. Pick a jurisdiction with a strong BIT to your host, set up real substance, keep immaculate records, and don’t try to retrofit a structure after a dispute lights up your inbox.

A Short Checklist You Can Use Tomorrow

Host state(s) identified; treaty map prepared

Holdco jurisdiction selected with ICSID coverage where possible

DoB risk assessed; substance plan budgeted and implemented

Corporate chain documented end-to-end

Contracts drafted to preserve treaty claims; no exclusive forum waivers

Compliance file clean; permits in order; ESG narrative credible

PRI/TPF strategy considered and aligned with structure

Early-warning triggers defined; board educated on foreseeability risk

Evidence preservation plan in place

Offshore entities aren’t magic. They’re a legal address for your rights. When aligned with real business activity and clear documentation, they give you leverage where it matters: a credible path to neutral arbitration, and a better negotiating position with a state that knows you can bring a claim that sticks.