South Africa terminates its Investment Protection Agreement with Switzerland

in Tax, 05.11.2013

South Africa had informed Switzerland in advance of its plan to terminate the bilateral investment promotion and protection treaty and to establish a national legislation instead.

The current agreement on the promotion and the reciprocal protection of investments (in place since1997) will be terminated on 31 October 2014. Until then, investments will be protected under the current agreement and there will be a grandfathering period of twenty years for companies with existing investments in South Africa.

According to the Swiss Embassy in Pretoria, Switzerland regrets this unilateral step taken by South Africa and stresses the importance of a solid legal framework to protect foreign direct investments. Currently, Switzerland is ranked seventh in its foreign direct investments in South Africa with a value of ZAR 27,4 bn (around CHF 2,4 bn).

Comments

Investment protection agreements are geared mainly towards protection against expropriation and discrimination. Switzerland has one of the largest investment protection treaty networks in the world. Also foreign-owned companies with a substantial presence in Switzerland and holdings of entities with treaty partners under the Swiss company can benefit from the Swiss treaty network. They are an important instrument to reduce risks related to investments in foreign jurisdictions.

South Africa, like other countries from emerging markets such as India, Ecuador or Bolivia are currently reviewing or cancelling bilateral investment protection agreements because they believe that these treaties limit national legislation too much. South Africa has already cancelled the agreements with Germany, Austria, Belgium, Luxembourg, the Netherlands and Denmark and will soon cancel the remaining ones with other European countries. The USA never had an investment protection agreement with South Africa in the first place.

With the exception of one case, no Swiss company has so far called on the arbitration court in New York based on the Swiss-South African bilateral Investment agreement, so the impact on Swiss companies seems to be rather limited. However, the announcement by the South African government that Foreign Direct Investments will be protected by a national investment protection agreement raises questions: it is for instance unclear how expropriation will be compensated. According to insiders, not Market Value but Fair Value will be applied.

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