US-Poland Bilateral Investment Treaty
Paul B. Fogo is a senior attorney with Miller, Canfield, W. Babicki and Partners.
"Poland needs to renegotiate or renounce all international agreements and treaties concluded with third countries, including the Bilateral Investment Treaty with the United States..."
- Commission Report,
October 9, 2002
And Poland is not alone. Five other countries slated to join the EU on May 1, 2004, including the Czech Republic, Estonia, Lithuania, Latvia and Slovakia, in addition to future aspirants, Bulgaria and Romania, will need to revise their respective bilateral investment treaties prior to accession.
The US-Poland Bilateral Investment Treaty (the "Treaty") took effect on August 6, 1994, marking the first agreement of its kind between the US and a former communist bloc country. The basic principle of the Treaty, as stated in Article II (8), calls upon each country to "accord nondiscriminatory treatment to nationals and companies of the other Party in the conduct of their investment and associated activities..." However, as experience has shown us during the past decade, each country reserved certain exceptions in different sectors, including air transportation, mining, telecommunications, energy, brokerage activities and real property ownership.
The Treaty, according to the EU Commission, violates a fundamental principle of the EU: namely, to establish a common commercial policy, as set forth in Article 3 of the Treaty Establishing the European Union. As such, Poland is required to renegotiate the offending provisions of the Treaty, or else renounce it by May 1, 2004, which is the expected date of accession. In order to avoid a showdown, the EU Commission announced on September 2, 2003 its intention to sign an "understanding" with the US, Poland and the other affected countries and to negotiate certain amendments to their respective bilateral investment treaties in order to comply with the terms of EU membership. The US, in turn, has responded positively to this announcement, stating it "supports EU enlargement... and the objective of assuring compatibility between the obligations of US bilateral investment treaties and the obligations of membership in the EU." (US State Department Press Release).
What are the offending provisions that will need to be renegotiated? The answer is not clear-cut, as some debate exists as to what provisions constitute a violation. For example, with respect to the privatization of state-owned enterprises, Article II (9) of the Treaty provides US investors with 'most favored nation treatment'. Under the terms of Poland's Treaty of Accession, 'most favored nation treatment' should be reserved for other member states - not non-EU states. Another provision subject to discussion relates to the free transfer of capital. Article V (1) of the Treaty requires each country to "permit all transfers related to an investment of commercial activity to be made freely and without delay into and out of its territory." Following accession, and in particular once Poland joins the Euro zone, monetary policy, including foreign exchange operations, will be subject to the control of the European System of Central Banks, not individual member states.
Another area that concerns the EU is agriculture. Although the Treaty does not specifically address US investment in Poland's agricultural sector, the EU is concerned that US companies could take advantage of funds administered by the Common Agriculture Program (CAP). The Treaty does permit Poland to impose restrictions on the purchase of real estate by US investors, including farmland; however, these restrictions do not apply to the private lease of farmland. As such, US investors would not be expressly excluded from participating in CAP, based on the general provisions of the Treaty that grant US investors equal treatment on a non-discriminatory basis. It is likely that the EU will want to draft an annex specifically designed to avoid the situation in which US investors could tap into funds granted by CAP.
Renegotiating the Treaty raises an additional issue with respect to US investors who have set up and incorporated businesses in Poland. According to Article 48 of the Treaty establishing the European Union: "Companies or firms formed in accordance with the law of a Member State and having its registered office, central administration or principal place of business within the Community shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States." In other words, a Polish company with US capital should be treated as a Polish entity, as long as it has its registered office in Poland. As such, US investors who have established companies in Poland, including companies with US shareholders, should not be adversely affected by these expected changes to the Treaty, as they should be treated as Polish nationals. But only time will tell if the negotiators share my opinion.
