In case you missed it, the RG Hotels Bankruptcy case has caused shock waves throughout the Panama financial community. A Coclé judge backdated the bankruptcy of RG Hotels to July 31, 2012.
RG Hotels is a large developer of condominium properties in the beach area including Ibiza Playa Coronado, Ibiza Playa Corona, Las Perlas (formerly Wyndham and Nikki Beach) and others. The judge held that RG hotels had concealed its insolvency for three years. However by backdating the bankruptcy by three years, hundreds of apartment owners and bondholders have been deprived of their homes and investments. One of my friends who bought and fully paid for a new Playa Blanca apartment will lose it because of this judge’s decision. How can any new apartment owner be safe from their developer’s insolvency?
What is Expropriation?
One of the biggest fears any foreign investor has is that the government (or a judge) will seize their investment. This is called expropriation. For example, Venezuela and Argentina both expropriated oil fields from foreign investors. Bolivia recently expropriated power companies from Spanish and British investors. Mexico used numerous regulations to deprive an American company of using its land.
Investment Treaty Protection
To allay these fears and to attract foreign direct investment, governments enter into investment treaties with other countries. These treaties give foreign investors significant guarantees that they will receive fair and equitable treatment. One important guarantee is that if an investment is expropriated without full compensation, the investor can sue the country in the International Court for the Settlement of Investment Disputes (ICSID) in Washington DC. This is very unique, that a company can drag a foreign country in to court.
Investors usually win
The vast majority of cases are settled out of court because it’s easy to prove the governments expropriated. In cases decided by the court, investors win 70% of the time. The stakes for governments are much higher than the specific case. Governments fear a backlash if future foreign investors stop investing in their country. This is particularly true in Panama which has a very high amount for foreign direct investment.
Protect Yourself
Treaty protections aren’t just for big companies. If any of the investors in the bankruptcy case are appropriately registered foreign investors, then they have recourse beyond the Panamanian judicial system. They can take the entire country into International Court and likely win. New and existing homeowners can protect themselves against expropriation in case of changes in the political and judicial climate in Panama. It is surprisingly affordable.
The author is Clinton J. Donnelly is an Enrolled Agent and has a law degree specializing in international banking and taxation. He specializes in tax preparation for U.S. taxpayers abroad or internationals with U.S. filing obligations. He has authored the book: Foreign Earned Income Exclusion: Avoiding IRS Audits of Form 2555.
2 comments on “How Treaties Can Protect Your Home”
Interesting point, but not as easy as it seems. Expropriation generally holds “Neither Contracting Party shall take any measures depriving, directly or indirectly,investors of the other Contracting Party of their investments” So you would have to successfully have to argue that Panama did take measures (i.e. you would have to equate the judge with the state of Panama). Then you would need to have deep insights in the working of the Panamanian legal system to successfully argue that the retro-activity is a ‘measure’ that the Panama state took. It is a way easier case if indeed the State expropriates.
But if you would want to structure your investment in order to secure yourself from access to a Bilateral Investment Treaty, you may want to consider structuring through the Netherlands. They have 91 BITs and 64 with countries that the USA does not have a BIT with (although this structure will likely be to onerous for an investment in an apartment).
Mark, thank you for your thoughtful reply. You raise a crucial point. Investment treaty planning involves knowing which countries you’re going to be doing business in. In the example in this article, the country in which business is being done was Panama. Panama does not have an extensive investment treaty network but it does have agreements with key European countries. Not surprising. These are the countries that are generally wealthier than Panama and would want to invest.
The thrust of the point in my article was that so often, people come to a country, want to do business in that country, so they create a company in that country’s laws. Why do they do this? Because they’ve hired local lawyers. This is first mistake. They have failed to retain the investment treaty power of their own nationality, or the nationality of a foreign company they would introduce.
The Dutch do have an extensive treaty network. They even have a bilateral investment treaty with Panama.
I would be interested in your experience. You would have to prove that the judge acted on behalf of the country of Panama. Although not true for all countries, in Panama judges are appointed by the government. Such an easier link to achieve. However, you have to give allowance for the natural judicial system and review by the Supreme Court. This allowance should be within a reasonable amount of time.
One option is to inform the foreign trade representative that there is an issue. Typically, the foreign trade representative has a close connection to the president of a country. And can inform them when an issue has become too severe for local political resolution.
This is fascinating area. The concept that an individual or a company could bring an entire country into the International Court for Settlement of Investment Disputes (ICSID) and hold them accountable for their unruly behavior is still amazing.
They Mark for your contribution.
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