Alternative Forms Of Protection For Indonesia's Foreign Investors

Indonesia announced in March 2014 that it will not renew its Bilateral Investment Treaty (BIT) with the Netherlands, which is due to expire on 1 July 2015. Indonesia also declared its intention to terminate its other existing BITs, currently at least 60, of which approximately 45 are in force. These announcements call for a renewed evaluation of available investment protection by Indonesia's foreign investors. This Legal alert outlines the several means by which investment protection can be reassured.

The Netherlands-Indonesia BIT

Investment treaties provide protection to qualifying foreign investors of the contracting states. The Netherlands-Indonesia BIT provides legal protection for investments in Indonesia by legal persons incorporated under the law of the Netherlands, and vice versa. The protection offered by the BIT comprises several substantive rights, such as the right to 'fair and equitable treatment' and protection against direct and indirect expropriation without adequate compensation. In case of a dispute with the investment's 'host state', investors can initiate investor-state arbitration pursuant to the BIT's dispute resolution provision.

Consequences of the BIT termination in short

Existing investments of Dutch entities are not immediately impacted by the termination of the BIT. Pursuant to the BIT, a 'sunset period' of 15 years after termination of the BIT applies, so that investors can continue relying on the full protection offered by the Netherlands-Indonesia BIT until 2030. If an existing investment is expanded during the 'sunset period' it will in principle still be covered by the protection of the BIT. This is as long as the expanded investment can be qualified as an 'investment' under the BIT. Investments made or restructured prior to 1 July 2015 are also protected under the Netherlands-Indonesia BIT until 2030. A current investment in Indonesia that is not presently held by a Dutch company can still obtain protection if the investment is restructured prior to 1 July 2015. This can be achieved for example by setting up a Dutch holding company and transferring the investment so that it is held by the Dutch legal entity. The restructuring of an investment with the purpose of gaining protection is legitimate as long as protection is sought for the future. Restructuring, however, might in practice not result in protection when a dispute with Indonesia arises and is referred to arbitration during or prior to the...