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Nationality of Corporations and Assets

(p. 527) 24  Nationality of Corporations and Assets

1.  General Aspects

The assignment of persons (including corporations) and property to states, in particular for the purposes of diplomatic protection, is normally approached through the concept of nationality. Yet the problem must be solved in a variety of contexts, including jurisdiction. It is suggested that problems of jurisdiction can be solved on a satisfactory basis by the use of the principle of genuine connection affirmed in Nottebohm.1 The need for international law to have its own rules of nationality rather than simply leaving nationality to be defined entirely by municipal law is apparent when issues of nationality on the plane of international law are related to corporations, ships, aircraft , and other assets, not to mention the assets of international organizations.2

2.  Nationality of Corporations3

The borrowing of a concept developed in relation to individuals is awkward in some respects but is now well established. A major point of distinction is the absence of domestic legislative provisions which assign nationality to corporations: domestic nationality laws do not concern themselves with corporations, and corporations laws(p. 528) rarely deal with nationality. Nationality must be derived either from the fact of incorporation, that is, creation as a legal person, within a given system of domestic law, or from links to a particular state such as the centre of administration (siège social) or the nationality of the natural or legal persons that own or control the company.

Rules of municipal law may make use of the concept of nationality of legal persons even without explicit treatment of the subject. Areas of domestic law referring to the nationality of corporations include private international law (conflict of laws), the law relating to trading with the enemy, sanctions, and (in some jurisdictions) taxation.

In international law, many treaty provisions define ‘nationals’ to include corporations for specified purposes. Treaty provisions may explicitly or implicitly adopt the conflict of laws rule that the law of the place of creation determines whether an association has legal personality. For the purposes of a particular treaty, unincorporated associations—including partnerships—may be assimilated to corporations. Public corporations may also be included.4

In Barcelona Traction the Court affirmed that:

In allocating corporate entities to States for the purposes of diplomatic protection, international law is based, but only to a limited extent, on an analogy with the rules governing the nationality of individuals. The traditional rule attributes the right of diplomatic protection of a corporate entity to the State under the laws of which it is incorporated and in whose territory it has its registered office. These two criteria have been confirmed by long practice and by numerous international instruments.5

Thus the Canadian nationality of the corporation was confirmed notwithstanding its 75 per cent Belgian shareholding.6 In Diallo, the Court relied on Barcelona Traction to conclude that despite the Guinean nationality of Diallo as the sole shareholder in the two companies in question, ‘the normal rule of nationality’ applied and that having regard to their place of incorporation, ‘[t]he companies in question have Congolese nationality’.7Thus under customary international law the nationality of a corporation will normally be determined by its place of incorporation. In Diallo the Court acknowledged that,

in contemporary international law, the protection of the rights of companies and the rights of their shareholders, and the settlement of the associated disputes, are essentially governed by bilateral or multilateral agreements for the protection of foreign investments, such as the(p. 529) treaties for the promotion and protection of foreign investments…and also by contracts between States and foreign investors.8

Free trade agreements also create standards of treatment in relation to ‘nationals’, ‘companies’ or ‘enterprises’ of the contracting parties. The North American Free Trade Agreement (NAFTA) contains the following definitions:

enterprise means any entity constituted or organized under applicable law, whether or not for profit, and whether privately-owned or governmentally-owned, including any corporation, trust, partnership, sole proprietorship, joint venture or other association;

enterprise of a Party means an enterprise constituted or organized under the law of a Party;…

person means a natural person or an enterprise;

person of a Party means a national, or an enterprise of a Party…9

NAFTA allows investors to bring claims ‘on behalf of an enterprise of another Party that is a juridical person that the investor owns or controls directly or indirectly’.10 This permits derivative claims without deeming corporations to have a nationality that they do not have.

Certain treaties concerned with the protection of investments employ more complex formulations.11 Pursuant to Article 25(2)(b) of the Convention on the Settlement of Investment Disputes, ‘national of another Contracting State’ means:

any juridical person which had the nationality of a Contracting State other than the State party to the dispute…and any juridical person which had the nationality of the Contracting State party to the 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 this Convention.12

The Treaty on the Functioning of the European Union provides in Article 54 that corporations under the law of a member state and having their ‘registered office’, ‘central administration’, or ‘principal place of business’ within the Union are assimilated, for the purposes of the chapter on the right of establishment, to ‘natural persons who are nationals of Member States’.13 For this purpose corporations include all legal persons whether of public or private law other than non-profit-making bodies.

Bilateral treaties concerned with double taxation contain rules of assignment which may invoke the concepts of nationality, residence or fiscal domicile, while defining the(p. 530) crucial points of contact. These are commonly management and control.14 Air transport agreements may require that airlines acquiring a foreign carrier permit satisfy a condition of substantial ownership and effective control by nationals of the other contracting party.15 Important provisions ascribing a national character to corporations and other associations appear in peace treaties, agreements on reparation for war losses, SC resolutions imposing sanctions,16 treaties of cession, and agreements for compensation in case of nationalization and other events causing loss to foreign interests on state territory. In Peter Pázmány University the Permanent Court found that the University, as a legal person under Hungarian law, was a Hungarian national for the purpose of submitting a claim to restitution of property under Article 250 of the Treaty of Trianon.17 Treaty provisions employ a variety of criteria including place of creation, sometimes accompanied by a requirement to have substantial business activities in that place, siège social,18 the national source of actual control or effective management,19 and immediate or ultimate ownership.

3.  Nationality of Ships20

In maintaining a viable regime for common use of the high seas, the law of the flag and the necessity for a ship to have a flag are paramount. Historical opinion was strongly in favour of the unqualified freedom of each state to determine for itself the conditions under which its nationality could be conferred on vessels.21 This view of state competence suffers from the faults considered in a wider setting in chapter 23. The act of conferment of nationality (registration) is within the competence of states, but(p. 531) registration is only evidence of nationality, and valid registration under the law of the flag state does not preclude an assessment of nationality under international law. The Nottebohm principle applies equally here. The UN Convention on the Law of the Sea of 1982 provides in Article 91(1):

Every State shall fix the conditions for the grant of its nationality to ships, for the registration of ships in its territory, and for the right to fly its flag. Ships have the nationality of the State whose flag they are entitled to fly. There must exist a genuine link between the State and the ship.22

Jennings has remarked that ‘the assumption that the “genuine link” formula, invented for dealing with people, is capable of immediate application to ships and aircraft , smacks of a disappointing naiveté’ and, further, that ‘a provision which might seem to encourage governments to make subjective decisions whether or not to recognize the nationality of this aircraft or that vessel is clearly open to abuse and for that reason to grave criticism’.23

Article 91(1) has met with criticism from partisans of the exclusive competence of states to ascribe national character to vessels.24 The US Department of State has argued that the requirement of a genuine link is not a condition for recognition of the nationality of the ship but an independent obligation to exercise effective jurisdiction and control over ships once registered.25

Article 91(1) repeats most of Article 5 of the High Seas Convention of 1958.26 However, the duties of the flag state are enumerated separately in Article 94. The general opinion is that the position remains the same, with the opponents of the ‘genuine link’ un-appeased. The UN Convention on Conditions for Registration of Ships adopted by a diplomatic conference in 1986 seeks to impose precise modalities for the effective exercise of jurisdiction and control by the flag state.27 The convention has not yet entered into force as it lacks the requisite 40 ratifications.

In relation to ships’ crews, the ILC has affirmed the right of the state of nationality of a ship’s crew to exercise diplomatic protection on their behalf, while at the same time(p. 532) acknowledging that the state of nationality of the ship also has a right to seek redress on behalf of its crew.28

In M/V Saiga (No 2) the International Tribunal for the Law of the Sea rejected an objection to admissibility based upon the absence of a genuine link:

  1. 83.  The conclusion of the Tribunal is that the purpose of the provisions of the Convention on the need for a genuine link between a ship and its flag State is to secure more effective implementation of the duties of the flag State, and not to establish criteria by reference to which the validity of the registration of ships in a flag State may be challenged by other States.

  2. 84.  This conclusion is not put into question by the United Nations Convention on Conditions for Registration of Ships of 7 February 1986 invoked by Guinea. This Convention…sets out as one of its principal objectives the strengthening of ‘the genuine link between a State and ships flying its flag’. In any case, the Tribunal observes that Guinea has not cited any provision in that Convention which lends support to its contention that ‘a basic condition for the registration of a ship is that also the owner or operator of the ship is under the jurisdiction of the flag State’.29

In The Juno Trader30 the Tribunal found on the facts that there had been no change in the flag state and that accordingly it had jurisdiction. However, in a Joint Separate Opinion, Judges Mensah and Wolfrum rejected the view that a change in the ownership of a ship resulted in the automatic change of the flag of a ship:

The term ‘nationality’, when used in connection with ships, is merely shorthand for the jurisdictional connection between a ship and a State. The State of nationality of the ship is the flag State or the State whose flag the ship is entitled to fly; and the law of the flag State is the law that governs the ship. The jurisdictional connection between a State and a ship that is entitled to fly its flag results in a network of mutual rights and obligations, as indicated in part in article 94 of the Convention. For example, granting the right to a ship to fly its flag imposes on the flag State the obligation to effectively exercise its jurisdiction and control in administrative, technical and social matters. In turn, the ship is obliged to fully implement the relevant national laws of the State whose flag it is entitled to fly. All States which have established ships’ registers provide for specific procedural and factual requirements to be met before a ship is entered on their registers or is granted the right to fly the flag of the particular State. Ships receive respective documents to prove that they are entitled to fly a particular flag. Similarly, the laws of these States establish clear procedures to be followed for ships to leave the register, including the conditions under which a ship may lose the right to remain on the register.31

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