THE AUTHOR:
Judge Dr Sameh Salem, Senior Judge at the Egyptian Courts of Appeal & Manager of the General Department for Arbitration and International Disputes at the Egyptian Ministry of Justice
The question of jurisdiction under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965) (“ICSID Convention”) remains one of the most debated and structurally significant issues in international investment arbitration. At the heart of this debate lies the interpretation of Article 25 of the Convention, which establishes the jurisdiction of the ICSID along two fundamental axes: jurisdiction ratione personae and jurisdiction ratione materiae.
Among these, the determination of jurisdiction ratione personae — particularly the definition of a “national of another Contracting State” — has generated considerable jurisprudential divergence. This divergence becomes especiallypronounced in cases where a juridical person is formally incorporated in a foreign State, while being effectively controlled by nationals of the host State.
Article 25 provides that:
- “‘National of another Contracting State’ means:
- any natural person who had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration; and
- any juridical person which had the nationality of a Contracting State other than the State party to the disputeon the date of consent, as well as any juridical person which had the nationality of the Contracting State party tothe dispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of the Convention.”
In this respect, two approaches must be considered. One of which adopts the economic test, focusing on the criterion of effective control, whereas the other favors the legal test, relying on the formal nationality of the company as determined by its place of incorporation.
Proponents of the economic test submit that the decisive criterion lies in effective control over the capital, rather than the formal nationality of the corporate vehicle.
They base this position on the nature of the ICSID system, which was established under the ICSID Convention on the Settlement of Investment Disputes between States and Nationals of Other States. In their view, both the object and purposeof the Convention are clearly articulated in the Report of the Executive Directors, which explains that the Centre was“designed to facilitate the settlement of disputes between States and foreign investors, with a view to stimulating a larger flow of private international capital into countries which wish to attract it.”
The Preamble to the Convention further recognizes that “disputes may arise from time to time in connection with investment between Contracting States and nationals of other Contracting States,” and that, although such disputes areordinarily subject to national legal processes, they may, in certain circumstances, require recourse to an international method of settlement. It is for this purpose that an “international facility for conciliation and arbitration” was established, to which Contracting States and nationals of other Contracting States may submit such disputes, should they so agree.
Accordingly, Article 25(1) of the Convention provides that the jurisdiction of the Centre extends to legal disputes “between a Contracting State and a national of another Contracting State”. Beyond such disputes, the Centre has no jurisdiction.
It follows that the arbitral mechanism established under the ICSID was conceived, in principle, for cross-border investment disputes, namely those arising between a State and a foreign investor. In light of the international character of such relationships, and with a view to promoting the flow of international investment, the Convention permits, subjectto the parties’ consent, recourse to an international adjudicatory forum.
By contrast, disputes between a State and its own nationals do not, as a general rule, fall within the scope of theConvention, save for the exceptional circumstance contemplated in the second limb of Article 25(2)(b).
On this basis, any interpretation to the contrary would be inconsistent with the object and purpose of the ICSID Convention and would disregard the substantive limits it establishes on the Centre’s jurisdiction. Though, regarding thespecific object of the Convention — namely, the protection and promotion of international investment — the Convention imposes a strict framework of rights and obligations upon both Contracting States and investors qualifying as nationals of other Contracting States.
In particular, the Convention excludes recourse to diplomatic protection and removes the jurisdiction of domestic courts, substituting instead a self-contained international arbitral mechanism of a distinct character. Accordingly, tribunals constituted under the ICSID must exercise caution when determining their jurisdiction, as any unwarranted expansion thereof may, in effect, result in the adjudication of purely domestic disputes channeled through a formally foreign corporate vehicle.
In this context, the well-known statement of Aron Broches, General Counsel of the World Bank during the drafting of the Convention, assumes particular significance. He affirmed that the ICSID Convention defines the outer limits of theCentre’s jurisdiction, and that bilateral treaties cannot extend that jurisdiction beyond what is permitted under the Convention itself.
It follows that, while Contracting States may, through bilateral arrangements, restrict the scope of ICSID jurisdiction ascompared to that provided under the Convention, they may not expand it beyond the limits established therein.Accordingly, recourse to the provisions of a bilateral investment treaty arises only once the jurisdiction of the Centre has been established under the Convention.
On this basis, a fundamental question arises: whether a foreign company -despite being subject to complete and undisputed domestic control – may properly be regarded as possessing a foreign nationality within the meaning of the Convention, or whether such effective domestic control requires that it be treated, in substance, as a domestic company, thereby defeating the jurisdictional requirement.
While the Convention leaves the determination of corporate nationality, to a certain extent, to the appreciation of the Contracting States, such discretion is not without limits. It may not be exercised in a manner that expands the jurisdiction of the ICSID beyond what is expressly provided for in the Convention. The Centre’s jurisdiction is confined to the boundaries set by the Convention, and the parties may not, through a bilateral treaty, introduce additional categories of disputes or persons falling within its scope.
These provisions must be interpreted in accordance with Article 31 of the Vienna Convention on the Law of Treaties (1969), which reflects customary international law and requires that a treaty be interpreted in good faith in accordance withthe ordinary meaning of its terms, in their context, and in light of its object and purpose.
There can be no dispute that the object and purpose of the ICSID Convention is not to provide a forum for the resolution of purely domestic disputes between a State and its own nationals, but rather to address disputes arising out of cross-border investments involving the flow of international capital. As noted by Christoph Schreuer, “the basic idea of the Convention, as indicated by its title, is to provide for the settlement of disputes between States and foreign investors; disputes between a State and its own nationals are to be settled before its domestic courts.”
Accordingly, the ICSID mechanism is not intended to cover domestic investments channeled through a formally foreign entity, whether established for that purpose or pre-existing. It follows that the proposition that the origin of capital is irrelevant, and that the sole criterion is incorporation under the law of another Contracting State, is manifestly inconsistent with the object and purpose underlying the ICSID system as a whole.
This position is further supported by the approach adopted by Prosper Weil, President of the Tribunal, in his dissentingopinion in Tokios Tokelés v. Ukraine, where he took issue with the majority’s decision, considering that its “underlying philosophy” was inconsistent with the object and purpose of the ICSID Convention.
In his view, the ICSID system was not established to resolve disputes between a State and its own nationals, but rather to address disputes of an international character. He therefore considered that the majority’s conclusion -that the origin ofcapital is irrelevant- was “entirely inconsistent” with the object and purpose of the Convention.
According to Professor Weil, the core issue was whether the claimant could genuinely be regarded as a national of Lithuania within the meaning of the Convention. Contrary to the majority’s findings, he considered that the origin of theclaimant’s capital was a decisive factor.
Given that the claimant was wholly controlled by Ukrainian nationals, he concluded that the dispute was not international in nature, but rather a dispute between Ukraine and its own nationals.
Professor Weil further acknowledged that it may not always be appropriate for arbitral tribunals to look beyond the corporate structure to ascertain the origin of capital. However, he emphasized the need for a degree of flexibility, cautioning that allowing an overly facile circumvention of domestic judicial mechanisms -through the use of formally foreign entities- could ultimately undermine the integrity of the ICSID system.
A similar approach was followed by the tribunal in Venoklim v. Venezuela, where it found that Venoklim lacked any“genuine link” to the scale of the alleged investment in Venezuela beyond the mere holding of shares in local companies.The tribunal further observed that there was no evidence demonstrating that the company had been established in the Netherlands for the purpose of attracting foreign capital, contrary to the claimant’s assertions.
In this regard, the tribunal noted that Venoklim had exercised control over the relevant companies for approximately four years prior to the alleged expropriation, rendering the absence of any supporting documentation evidencing foreign funding difficult to justify. On that basis, the tribunal concluded that the sole purpose of incorporating Venoklim was to “internationalize” what was, in reality, an investment owned by Venezuelan nationals, in order to benefit from the protection afforded under the ICSID framework.
As stated by the tribunal in its reasoning:
“To consider that the investment made by Venoklim should qualify as a foreign investment solely on the basis that it is a company incorporated in the Netherlands, notwithstanding that the disputed investment is ultimately owned by Venezuelanentities, would amount to allowing form to prevail over substance.”
On that basis, the tribunal upheld Venezuela’s objection and concluded that Venoklim did not qualify as a protected investor under the applicable bilateral investment treaty, nor under the ICSID Additional Facility Rules.
Conversely, proponents of the legal test maintain that the decisive criterion, when applying the provisions of the ICSIDConvention, together with the relevant investment protection treaty, is that the investment was made by a company possessing the nationality of Contracting State other than the host state, irrespective of the origin of capital or thenationality of management.
They further reject any requirement relating to the origin of capital, on the basis that such a condition finds no support inthe text and would run counter to the object of the treaty, namely to afford broad protection to investors and their investments within the territories of the Contracting Parties.
In light of this tension, it is submitted that the current framework of Article 25 leaves excessive discretion to arbitral tribunals and Contracting States, thereby may contribute to inconsistent jurisprudence and potential jurisdictional abuse aswell as the forum and nationality shopping, especially nowadays, where the regime of restructuring corporations isbeing commonly implemented. To address this lacuna, a targeted amendment to the Convention is both justified and necessary. that could be in the form of an additional paragraph to Article 25, expressly clarifying the criteria for determining the nationality of juridical persons. It is proposed that:
“For the purposes of this Article, a juridical person incorporated in a Contracting State other than the host State shall not qualify as a national of another Contracting State where it is established that such entity is directly or indirectlycontrolled by nationals of the host State, unless it demonstrates a substantial and genuine connection with the State ofincorporation, including, inter alia, the origin of capital, effective management, or real economic activity.”
This formulation seeks to strike a balanced approach. It does not wholly discard the formal criterion of incorporation but subjects it to a substantive test aimed at preventing abuse and forum shopping. At the same time, it preserves flexibility by allowing tribunals to assess the existence of a “genuine connection” based on objective indicators.
ABOUT THE AUTHOR
Judge Dr Sameh Salem is a senior Judge at the Egyptian Courts of Appeal. Throughout his career, he has participated in the negotiation and drafting of numerous settlement agreements involving international investment disputes and foreign investors. He currently serves as Manager of the General Department for Arbitration and International Disputes at the Egyptian Ministry of Justice and is a Member of the Technical Secretariats of both the Ministerial Committee for Settlement of Investment Contracts Disputes and the Supreme Authority for Arbitration and International Disputes at the Cabinet of Ministers. He also serves as Legal Counsel for Arbitration and International Disputes at CEDARE (Center for Environment and Development of the Arab Region and Europe).
He has also served as an arbitrator in several arbitration cases. However, his academic and professional interests focus on international law, mainly international investment arbitration, ISDS reform, and dispute resolution. Sameh is the author of International Investment Arbitration – legal framework and the challenges of implementations and the role of precedents in ISDS (published by Dar Nahdet Misr- Jan 2026), which is considered the only book published in Arabic that comprehensively discusses the ISDS regime.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
