Introduction
Treaty shopping, the practice of structuring corporate or financial arrangements to route investments through a third jurisdiction so as to access more favourable bilateral investment treaty protections, has long been one of the most contested practices in international investment law. For capital-importing developing states, it represents the frustrating experience of being bound by treaty obligations they never intended to extend to particular investors. For multinational corporations, it has historically been a legitimate and sophisticated form of corporate planning, no different in principle from any other form of regulatory arbitrage. The tension between these perspectives has driven one of the most significant transformations in international tax and investment law over the past decade: the OECD’s Base Erosion and Profit Shifting project, the Multilateral Instrument (MLI) to implement anti-avoidance measures in thousands of bilateral tax treaties simultaneously, and India’s own radical renegotiation of its bilateral investment treaty programme.
India’s experience is particularly instructive because it moved from being one of the world’s most sued states in investment arbitration to adopting the most restrictive Model BIT template among major economies, and its subsequent diplomatic and legal journey reveals both the strength and the costs of that approach. This article examines the doctrinal landscape of treaty shopping, the MLI’s principal purpose test, India’s 2016 Model BIT, and the ongoing renegotiation process with major partners, set against the backdrop of transformative arbitral proceedings such as the Vodafone case.
Legal Framework
Treaty shopping in the investment context occurs when an investor from State A, which has no BIT with the host state, establishes an entity in State B, which does have a BIT with the host state, and then routes its investment through that entity. The investor thereby acquires access to investor-state dispute settlement (ISDS), most-favoured-nation treatment, fair and equitable treatment standards, and protection against expropriation without compensation that it would otherwise lack. The practice relies on the fact that most BITs define “investor” broadly to include companies incorporated in the treaty partner, regardless of the nationality of the company’s actual owners.
The ICSID Convention and the UNCITRAL Arbitration Rules, the two dominant procedural frameworks for investment arbitration, have both grappled with the consequences of treaty shopping. Jurisdictional challenges based on abuse of process have been raised in numerous cases. Arbitral tribunals have generally been reluctant to deny jurisdiction based on treaty shopping alone, holding in cases like Salini v. Morocco and Tokios Tokeles v. Ukraine that the definition of investor in the BIT must be applied as written. A more restrictive approach has emerged in some later decisions, particularly where the corporate restructuring occurred after the dispute crystallised, which is characterised as “treaty shopping for a claim” rather than legitimate pre-investment planning.
In the tax context, the MLI, formally the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (opened for signature in June 2017), addresses treaty shopping through two main mechanisms: the Principal Purpose Test and the Simplified Limitation on Benefits clause. The PPT, adopted as the minimum standard under BEPS Action 6, denies treaty benefits if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of the arrangement, unless granting the benefit is consistent with the object and purpose of the relevant treaty provision. This is a purposive, anti-avoidance standard that introduces interpretive flexibility but also generates uncertainty for business planning.
Judicial and Arbitral Developments
The Vodafone arbitration stands as the defining case in India’s BIT history. Vodafone Group acquired Hutchison Telecom’s Indian mobile operations through a transaction structured in the Cayman Islands. The Indian tax authority asserted that the transaction was a taxable transfer of Indian assets and imposed a capital gains tax liability. When India’s Supreme Court held in 2012 that the transaction was not taxable under existing law, the Indian government responded by retrospectively amending the Income Tax Act to validate the tax demand, a move widely condemned as violating the principle of legal certainty.
Vodafone initiated arbitration under the India-Netherlands BIT, invoking the fair and equitable treatment and expropriation provisions. The arbitral tribunal (constituted under UNCITRAL Rules, with the seat of arbitration in The Hague) issued its final award in September 2020, holding that India’s retrospective tax amendment and continued pursuit of the tax demand violated the FET standard under the BIT. The tribunal ordered India to desist from the tax recovery proceedings. India challenged the award in Dutch courts, while also exploring the possibility of negotiating a settlement. In 2021, the Indian government announced withdrawal of the retrospective tax amendment and offered refunds to companies that had faced demands under it, effectively conceding the arbitral outcome. Vodafone filed for recognition of the award in various jurisdictions.
The case illustrates the practical consequences of aggressive state conduct that violates investment treaty standards. India’s retrospective amendment was not merely legally problematic; it significantly damaged investor confidence precisely when India was attempting to position itself as a destination for foreign direct investment.
The OECD’s 2015 Final Reports on the BEPS Project, including the Action 6 report specifically targeting treaty shopping, have reshuffled the analytical framework. India signed the MLI on 7 June 2017 and completed ratification on 25 June 2019. India chose to implement the PPT as its preferred mechanism (rather than the Simplified Limitation on Benefits provision), which India’s competent authorities and courts must now apply when determining whether treaty benefits are available.
Contemporary Issues and Analysis
India’s 2016 Model BIT represented a fundamental departure from the approach of its predecessor treaties. The old BITs, concluded in the 1990s and 2000s, contained broad FET clauses (sometimes interpreted as guaranteeing a stable legal environment), MFN clauses (invoked to import more favourable ISDS provisions from third-country treaties), and expansive definitions of investment and investor. The 2016 Model BIT eliminates FET and MFN clauses entirely, narrowing the basis for claims dramatically. It introduces an exhaustion of local remedies requirement (investors must exhaust domestic court remedies for at least five years before accessing international arbitration) and adopts a more restrictive definition of investment requiring a “significant contribution” to the host state’s development.
The 2016 Model’s approach to treaty shopping is addressed through the definition of investor, which requires not merely incorporation in the treaty partner but also that the investor be engaged in substantive business operations there. This reflects the PPT philosophy: an investor that exists only on paper in a treaty partner state to access treaty benefits is not a genuine investor of that state.
The practical consequence of India’s restrictive 2016 Model has been a standstill in BIT renegotiations. Most European Union member states, whose BITs with India were terminated by India from 2016 onwards, have been unable to agree to the new terms. The EU-India BIT negotiation has stalled partly because the EU is seeking to negotiate a single framework agreement for all member states simultaneously (following the CJEU’s Achmea judgment in 2018, which held that intra-EU BIT arbitration clauses were incompatible with EU law) and partly because the EU’s standard template includes FET provisions that India refuses to accept. As of 2026, India has concluded new BITs under the 2016 Model with only a handful of states, including Brazil, Kyrgyzstan, and Belarus, none of which are major capital exporters.
Comparative and International Perspective
The Netherlands, historically one of the most popular treaty shopping hubs because of its extensive BIT network and favourable corporate tax regime, published a revised 2019 BIT template that incorporated significant changes including an explicit PPT clause, a qualification of FET to the minimum standard of treatment under customary international law, and provisions on sustainable development and corporate social responsibility. The Netherlands’ shift reflects broader EU policy following the Achmea judgment and the Energy Charter Treaty crisis triggered by Bilateral Investment Court proposals.
The EU has been experimenting with a Multilateral Investment Court, a permanent appellate body to replace ad hoc investment arbitration. India has not engaged enthusiastically with this proposal, viewing it as an institution dominated by developed-country perspectives. The comparison with the Netherlands illustrates that even treaty-shopping havens have concluded that the old BIT model was unsustainable, but the alternative frameworks remain contested.
The US approach through its 2012 Model BIT has also moved toward a Limitation on Benefits approach, similar to that in US tax treaties, requiring investors to satisfy substantive connection tests. The Australia-US FTA, the USMCA, and more recent US trade agreements reflect this approach. Canada’s CUSMA (successor to NAFTA) removed investment arbitration provisions for US-Canada disputes entirely, acknowledging that robust domestic legal systems may be adequate substitutes.
India’s Position in BIT Negotiations
India’s negotiating position has moved through two distinct phases. In the initial aftermath of multiple adverse arbitral awards (in cases involving Vodafone, Cairn Energy, Sistema, and others), India responded with a defensive retrenchment: terminating BITs, adopting the restrictive 2016 Model, and asserting its right to regulate in the public interest as a sovereign state. This phase reflected legitimate frustration with a system that had allowed foreign investors to challenge routine regulatory measures.
The second phase, emerging from approximately 2022 onwards, has seen India adopt a more nuanced posture: actively seeking to conclude investment chapters in its Free Trade Agreements (most notably the India-UAE CEPA signed in February 2022 and the India-Australia ECTA), and exploring BIT renegotiations with the UK following Brexit. These agreements reflect a recognition that India’s development objectives require foreign investment, which in turn requires credible investment protection commitments. The India-UAE CEPA investment chapter, for instance, includes provisions on fair and equitable treatment qualified by reference to the minimum standard of treatment, representing a middle ground between the old broad FET clauses and India’s 2016 Model’s elimination of FET.
Practical and Policy Implications
For multinational investors, India’s BIT renegotiation has created a period of genuine uncertainty. The termination of old BITs without replacement has left investments made during the old regime in a legal grey zone. The retrospective nature of India’s tax disputes, though largely resolved by the 2021 legislative amendment, remains a cautionary tale about the risks of regulatory unpredictability.
For the international investment law system, India’s experience highlights the structural imbalance in a regime originally designed by capital-exporting states to protect their investors in capital-importing states. As India simultaneously becomes a significant outward investor (Indian companies are investing substantially in Africa, Southeast Asia, and beyond), India’s interests as a capital-exporting state are beginning to align more with the investor protection objectives that it resisted domestically. This dual-role dynamic is gradually moderating India’s position.
Suggestions and Reforms
The most constructive reform agenda for the investment treaty regime would involve several elements. First, a multilateral treaty shopping discipline, built on the PPT model but tailored specifically to investment treaties (rather than tax treaties), would create a consistent standard across the thousands of existing BITs. The ILC could be tasked with developing model treaty shopping provisions analogous to the OECD’s MLI work for tax treaties.
Second, the exhaustion of local remedies requirement in India’s 2016 Model, while principally aimed at encouraging use of domestic courts, should be accompanied by genuine reforms to the domestic judicial system’s capacity to handle complex investment disputes. The creation of specialised commercial courts and the National Company Law Tribunal has been a step in this direction, but appeals processes remain slow.
Third, India should engage more constructively with the multilateral investment court proposal, at minimum as an observer and commentator, since its absence from the design process means that developing-country interests will be underrepresented in the institution’s architecture.
Conclusion
Treaty shopping has moved from a largely unregulated practice to a heavily scrutinised one over the past decade, driven by the OECD’s BEPS project, the adoption of the MLI’s PPT, and host states’ increasingly assertive resistance to expansive BIT interpretations. India’s trajectory from one of the world’s most litigated BIT states to the author of one of the world’s most restrictive Model BITs illustrates both the power of investment arbitration to discipline state conduct and the political limits of a regime perceived as biased against regulatory sovereignty. The challenge for India and for the international community is to build an investment law framework that genuinely balances investor protection (necessary to attract the capital that funds development) with regulatory space (necessary to pursue legitimate public interest objectives), without allowing that framework to become either a tool for corporate impunity or a pretext for arbitrary state conduct.
