WORLD TRADE
ORGANIZATIONWT/WGTI/W/108
21 March 2002
(02-1472)
Working Group on the Relationship
between Trade and Investment
SCOPE AND DEFINITIONS:  "INVESTMENT" AND "INVESTOR"
Note by the Secretariat
EXECUTIVE SUMMARY
The Scope of an international commercial treaty, such as the GATT, the GATS, and
international investment agreements (IIAs), is set by a combination of three things:  the definitions of
key terms in the treaty;  the treaty's substantive provisions (its rules and disciplines, development
provisions, and exceptions);  and the specific commitments made by individual member governments.
Together, these determine the treaty's coverage.
A treaty's definitions therefore need to be read in conjunction with its other provisions.  On
their own, they represent only a normative point of  reference for understanding and interpreting the
treaty's 0substantive obligations.
The GATT does not contain any definitions, as such.  To the extent there has been a need to
interpret the meaning of specific terms, such as "like product", this has been handled case-by-case,
typically by dispute settlement panels.  The GATS, on the other hand, does define many of the terms
it uses.
So do most IIAs, in particular the key terms "Investment" and "Investor".  These are the
subject of this Secretariat Note, which reviews how the terms have been defined in different IIAs, and
takes stock of the Working Group's discussion on this issue.
IIAs generally aim to serve one, or both, of two purposes:  to control and/or liberalize access
for foreign investment to a host country, and to protect it after it is established in a host country.
The Note suggests that most IIAs take as their starting point a broad, asset-based definition of
the term "Investment".  It covers both direct and indirect forms of foreign investment (i.e., FDI and
portfolio investment), and the whole range of assets that can be associated with a foreign investment,
from factories, to stocks and shares and loans to a company, to business contracts and concessions.
Breadth of coverage is particularly important in the context of guaranteeing a high level of
protection to foreign investment after it has been established in a host country.  Even so, a host
country government may wish to limit the protection it offers to certain types of investment.  There
has been frequent mention in the Working Group, for example, of the need for host countries to
maintain the right to regulate sp eculative, short-term capital flows, because of concerns about their
potentially destabilizing effects.  One way of dealing with this is through the definitions themselves.
Certain assets can be excluded from the definition of covered "Investment" – in this case, for example,
capital with a maturity of less than, say, six months.  More usually, however, IIAs limit their coverage
through their substantive provisions rather than through their definitions – in this case again, for
example, by allowing host governments to regula te investment for balance-of-payments purposes.WT/WGTI/W/108
Page 2
Introducing more significant limitations on the coverage of an IIA has been discussed in the
Working Group, especially in IIAs that aim to liberalize foreign investment since these are often more
sensitive from the point of view of a host country's economic, industrial, and development policies.
In this context, the possibility of limiting the co verage of an IIA to FDI only has been put forward.
This can be done by restricting the assets that are covered by the asset-based definition, although notwithout some methodological difficulty.  Some IIAs use alternative approaches to define the
investments that they cover, notably the enterp rise-based definition or the transactions-based
definition, so as to focus on FDI and treat it differently from other forms of investment.
Generally, the term "Investor" only needs to be defined in an IIA for one or other of two
reasons;  either to help restrict an IIA's covera ge to FDI, in which case the terms "control" and
"ownership" of an investment are important and need to be defined;  or to prevent third-countryinvestors from benefiting from an IIA's provisions, in which case it is the association with the
investor's home country that is important and that needs to be defined.  The relevance of this second
case diminishes as the number of countries that are members of an IIA increases.
_______________
I. INTRODUCTION
1. The definitions of an international commercial treaty frame the treaty's substantive obligations
and its specific commitments;  together, these three elements set a treaty's scope.  Read in conjunctionwith a treaty's other provisions, the definitions determine which specific commercial transactions the
treaty covers, which government policies are subject to its obligations, who enjoys rights under the
treaty, and in what respects those rights can be exercised.  They need, therefore, to be taken up at an
early stage in designing or understanding a treaty.
2. This Note focuses on the definitions used in international investment agreements (IIAs) for
the terms "investment" and "investor", and the nature of the relationship that exists between the two as
regards "ownership" or "control".  It takes stock of the Working Group's discussions on these issues
1,
and draws on other sources of analysis, particularly UNCTAD.2  Other terms used in IIAs can also be
unfamiliar from the point of view of WTO Agreements;  supplementary Notes on them will be
prepared at the request of the Working Group.
3. The discussion in the Working Group has centred predominantly on the definition of the term
"investment".  The main themes taken up have been:
• the merits of a broad, asset-based definition of investment that covers all types of  foreign
investment (direct investment (FDI) and indirect investment) and all forms of investment
assets, relative to other definitions that are narrower in scope, such as the enterprise-based
definition which is associated primarily with FDI, or the transactions-based  definition
which focuses on the cross-border movement of capital;
                                                     
1 Accounts of the Working Group's discussions on the topic of Scope and Definitions can be found in
the following meeting Reports:  WT/WGTI/M/5, paras. 52-62;  M/6, paras. 85-94;  M/7, paras. 47-52;  M/8,paras. 73-81;  M/9, paras. 74-75;  M/12, paras. 50 an d 56-57;  M/14, para. 80;  and M/15, para. 51.  References
to this topic in Members' submissions can be found in WT/WGTI/W/28, W/29, W/31, W/34, W/42, W/43,
W/49, W/51, W/60, W/69, W/71, W/80, W/92, and W/104.
2 See, in particular, UNCTAD, International Investment Instruments:  A Compendium, 5 volumes
(1996-2000);  UNCTAD, Bilateral Investment Treaties in the Mid-1990s (1998);  UNCTAD, Scope and
Definition, Series on Issues in International Investment Agreements (1999).WT/WGTI/W/108
Page 3
• the various ways in which a broad asset-based definition of investment can be shaped to
suit the objectives of the Parties to an IIA:  for example, by excluding certain assets fromthe definition, or by treating different assets in different ways under the substantive
obligations of an IIA, or on an ad hoc  basis through reservations and limitations agreed to
in the individual schedules of Parties to an IIA;
• the advantages and disadvantages of including portfolio investment in the definition of
investment, and, if it is included, ways of differentiating and treating separately
speculative, short-term capital flows that can be damaging to a host country's economy;
• the use of different definitions of investment at the post-establishment stage of an
investment on the one hand, where the primary consideration is the protection of
investment assets, and at the pre-establishment stage on the other hand, where the primary
consideration is market access and the liberalization of cross-border investment.
Generally speaking, the liberalization of investment flows is the more sensitive area ofpolicy-making for host countries, so there is a tendency to approach the definition of
investment in this context more conservatively.
II. DEFINITIONS OF "INVESTMENT" AND LIMITATIONS ON THEIR SCOPE OF
APPLICATION IN INTERNATIONAL INVESTMENT AGREEMENTS
4. The definition of "investment" in an IIA has important consequences for the extent and ways
in which host countries are subject to the IIA's policy disciplines when regulating foreign investment
and pursuing their economic and development objectives.  By the same token, it affects the value thathome countries will attach to an IIA in bringing about more transparent, stable and predictable
conditions for foreign investment to take place.
5. Several different approaches are used in IIAs to define the term "investment".  By far the
most widely used is the asset-based definition, which typically covers all types of foreign investment
and all forms of investment assets.  The enterprise-based definition is narrower, and is used typicallyin conjunction with conditions on ownership and cont rol of investment assets so as to focus on FDI.
The transactions-based definition focuses on investment as the cross-border flow of capital and related
assets.
6. In the past, the choice between these approaches has often been linked to the character and
objective of an IIA.  IIAs aimed at the protection an d guarantee of an investment after it has crossed
the border and been established in a host country have tended to use a broad definition, which allows
them to provide a high level of investment protection.  IIAs aimed at the regulation and/or
liberalization of cross-border investment have tende d to use a narrower definition, focused either on
FDI or on investment as a flow rather than a st ock concept, in part from an industrial policy
perspective, and in part because of host-country concerns about the balance-of-payments andmacroeconomic effects of removing restrictions on foreign portfolio investment, especially short-term
capital flows.
7. Recently, most IIAs, without distinction to thei r main purpose, are tending to take as their
starting-point a broad definition of investment.
3  Where there is a need to limit the  IIA's focus in
order to take into account a host country's domestic economic and development policy objectives, this
is achieved by narrowing down the range of assets that are covered through an IIA's definitions, or
varying the ways in which different assets are treated under the IIA's operational provisions.
                                                     
3 UNCTAD, Scope and Definition, (1999), p. 17.WT/WGTI/W/108
Page 4
A. T HE ASSET -BASED APPROACH TO DEFINING INVESTMENT
8. The majority of existing IIAs use as their starting point a broad, open-ended approach to
define what is covered by the term "investment".  This is referred to as the asset-based approach, since
it treats investment as a collection of assets.  It covers both the assets that an investor brings into the
host country, as well as those acquired locally.  This approach is particularly common in  IIAs dealingwith the protection of investment after it has been admitted to and established in a host country;  the
breadth of its coverage allows for a high level of protection to be provided to an investment through
the substantive obligations of an IIA.
1. The Standard Asset-Based Model
9. Typically, "investment" is defined to cover "every kind of asset".  It is not confined to
financial assets, nor is it linked only to the economic concept of "capital", in the sense of tangible or
intangible assets that lead to the creation of productive capacity.  Typically also, this broad referenceis accompanied by an illustrative (non-exhaustive) list of the categories of assets that are covered by
the IIA.  The list usually includes:  tangible and intangible property;  interests in companies (both
direct and portfolio investment);  other financial assets and contractual rights;  intellectual property
rights;  and business concessions.
10. Standard language on the asset-based definition of investment has been developed,
particularly for use in bilateral investment treaties (BITs).  An example is the following:
A Standard "Asset-Based" Definition of Investment
4
"Investment" means every kind of asset and in particular, though not exclusively, includes:
(a) movable and immovable property and other property rights such as mortgages, liens
and pledges;
(b) shares, stock and debentures and any other kind of participation in companies;
(c) claims to money or to any othe r performance having a financial value;
(d) intellectual property rights;
(e) concessions conferred by law or under contract, including concessions to search for
or exploit natural resources.
11. Since the standard, asset-based definition of investment typically covers "all assets", an asset
is covered by the terms of an IIA even if it does no t fall obviously into one of the categories in the
illustrative list (Annex 1).
                                                     
4 This language is the basis for the model bilateral investment treaties of Chile, China, Egypt, France,
Germany, Indonesia, Jamaica, Malaysia, the Netherlands, Sri Lanka, Switzerland, the United Kingdom, and theUnited States (UNCTAD, International Investment Instruments:  A Compendium, Volume III, pp. 115-206, and
Volume V, pp. 293-346), as well as Argentina (WT/WGTI/M/8, para. 78), Costa Rica (WT/WGTI/W/31), Japan
(WT/WGTI/W/92), Korea (WT/WGTI/W/49), and Turkey (WT/WGTI/W/51), India's Bilateral Investment
Promotion and Protection Agreements (WT/WGTI/W/71), Australia's model Investment Protection andPromotion Agreement (WT/WGTI/W/80), and regional treaties such as the ASEAN Agreement for thePromotion and Protection of Investment (UNCTAD, Ibid, Volume II, p. 293).WT/WGTI/W/108
Page 5
2. Limiting the Asset-Based Definition
12. While using this broad, asset-based approach as a starting-point to define what investment is
to be covered by an IIA, Parties may wish nonetheless to restrict the scope of the agreement in one
way or another.  They may not wish to cover all in vestment assets under the provisions of the IIA in
the same way, or to the same extent.
13. The most important and most usual way of limiting the scope of an IIA through its provisions
on definition is to exclude certain assets from coverage of the IIA.  This can be applied flexibly, to
exclude whole categories or sub-categories of assets .  Limitations reflect host-country concerns about
applying the substantive obligations of an IIA to the cross-border movement or subsequent legal
protection of certain kinds of investment assets.  Practice, in this regard, varies considerably among
IIAs.  Some that aim to encourage the long-term co mmitment of resources to the host country include
only capital flows with a particular maturity (e.g., three years or more) as falling within the definitionof "investment".  The investment chapter of the NAFTA does not include intellectual property rights
in its definition of an "investment", since this is covered elsewhere in the Agreement, and it excludes
explicitly various "claims to money", including trade financing (Annex 2).  An example which
addresses concerns about the potentially volatile nature and destabilizing effects of short-term capital
flows is the definition of "investment" contained in Costa Rica's free trade agreement with Mexico;  itspecifies that the agreement does not cover capital movements that are mere financial transactions for
speculative purposes, commercial contracts for the sale of goods or services, credits granted to a State,
or loans that are not directly related to an investment.
5
14. In this way, the asset-based approach can be used in principle as a starting-point for defining
investment in an IIA that aims to focus primarily on FDI.  Assets that are not considered to beassociated directly with FDI ac tivity can be excluded from the definition.  An approximation to FDI,
for example, could in principle be made by excluding from the standard asset-based definition of
investment everything except paragraph (b):  shares, stock and debentures and any other kind of
participation in companies .  In practice, however, this exclusion line is not easy to draw.  First, the
element of ownership or control is missing from the asset-based definition.  Second, FDI activity in ahost country often relies on assets contained in other parts of the standard definition, such as certain
kinds of international capital flows, including shor t-term capital, often between a parent company and
its subsidiary.
15. Alternatively, therefore, and more usually in IIAs that use the asset-based definition of
investment, the differentiation between FDI and othe r forms of foreign investment is made through
the ways in which different assets are treated under an IIA's substantive provisions (see paragraph 23
below).
16. The scope of an IIA can be limited through its definitions also by defining what
characteristics an "asset" must have if it is to be considered an "investment".  Typically, the aim of
IIAs is to capture the idea that an investment invo lves a commitment of resources that has an element
of risk and on which the investor expects a return, so that some IIAs define an investment as an asset
that is used in activities susceptible of "generating a profit".  This could exclude, for example, assets
such as real estate property that is owned by a foreign investor but is not used for productive purposes.
However, use of this approach would appear to be relatively minor in practice, and offers only very
limited scope to narrow down the coverage of an IIA.
B. O
THER APPROACHES TO DEFINING INVESTMENT
17. Some IIAs that are concerned primarily with FDI have taken a different approach to defining
their scope, by focusing on foreign investment in an enterprise rather than as a menu of various assets
                                                     
5 Cited in WT/WGTI/W/60, Communication by Costa Rica.WT/WGTI/W/108
Page 6
invested in a host country.  This is referred to as the enterprise-based definition of investment.
Typically, its point of departure is the investor's objective of taking a lasting, or long-term, controlling
interest in an enterprise through foreign ownership and/or management control.  One example was the
1988 Canada-United States Free-Trade Agreement (superceded in 1992 by the NAFTA), which
defined investment as follows:
(a) the establishment of a new business enterprise, or (b) the acquisition of a business
enterprise; and includes: (c) as carried on, the business enterprise so established or the
business enterprise so acquired, and controlled by the investor who has made the investment;
and (d) the share or other investment interest in such business enterprise owned by the
investor provided that such business enterprise continues to be controlled by such investor.
Another example is the bilateral investment treaty between Denmark and Poland, which defines
"investment" as:  all investments in companie s made for the purpose of establishing lasting economic
relations between the investor and the company and giving the investor the possibility of exercising
significant influence on the management of the company concerned .6
18. The notion of "foreign control" is the key to limiting the scope of application of  IIAs based
on an enterprise-based definition of investment, in particular to differentiating FDI from portfolio
foreign investment.  In the case of the Canada-U nited States Free Trade Agreement, for example,
"control" is defined in terms of the ownership of all or substantially all of the assets used in carrying
on the business enterprise.  This issue is described further in Section IV, below.
19. One point of reference in the Working Group for differentiating FDI from foreign portfolio
investment has been the IMF definition of direct investment.  This is based on a third approach to
defining investment, the transactions-based approach.7   It focuses on foreign investment as the cross-
border movement of capital and related assets – the cross-border transactions involved in establishing
or liquidating a foreign investment – and it is used primarily in IIAs that are concerned with a host
country's policies towards international capital movements rather than investment per se.  It is used by
the IMF for balance-of-payments statistics purposes, and also by the OECD as its Benchmark
Definition of FDI, to provide operational guidance to its member governments on the compilation ofFDI data.
20. The IMF definition of direct investment is:
Direct investment is the category of international investment that reflects the objective of a
resident entity in one economy obtaining a lasting interest in an enterprise resident in another
economy.  (The resident entity is the direct investor and the enterprise is the direct investment
enterprise).  The lasting interest implies the existence of a long-term relationship between the
direct investor and the enterprise and a significant degree of influence by the investor on themanagement of the enterprise.  Direct investment comprises not only the initial transaction
establishing the relationship between the investor and the enterprise but also all subsequent
transactions between them and among affiliated enterprises, both incorporated and
unincorporated.
Direct investment capital is capital provided by a direct investor to a direct investment
enterprise or received by a direct investor from a direct investment enterprise.  The
                                                     
6 Cited in UNCTAD, Scope and Definition, (1999), p. 26.
7 An early version of this approach is the definition of direct investment in the 1961 OECD Code of
Liberalization of Capital Movements:  "Investment for the purpose of establishing lasting economic relations
with an undertaking such as, in particular, investments which give the possibility of exercising an effectiveinfluence on the management thereof". (UNCTAD, International Investment Instruments:  A Compendium,
Volume II, p. 3).WT/WGTI/W/108
Page 7
components of direct investment capital transactions are equity capital, reinvested earnings,
and other capital associated with various inter-company debt transactions.8
21. In its presentation to the Working Group, the IMF noted that the concept of lasting interest
was not defined in terms of a specific time-frame, and that the more pertinent criterion was that of thedegree of ownership in an enterprise.  A share of 10 per cent or above was often deemed to reflect a
lasting interest, although countries could choose to allow for further qualifications that involved a
degree of subjective judgement.  Thus, if a direct investor owned less than 10 per cent of the ordinary
shares or voting power in an enterprise, but had an effective voice in the management of that
enterprise, a host country could decide to treat it as FDI.
C. G
ENERAL LIMITATIONS
22. Various ways exist of limiting the scope of application of an IIA other than through the
language used in the definitions themselves.
23. The most important one is to provide policy flexibility for host countries to use in particular
situations through the substantive provisions of an IIA.  An example that has been discussed in the
Working Group is to differentiate between categories of investment assets in terms of their post-
establishment treatment and their pre-establishment treatment;  many IIAs cover a broader range ofinvestment assets at the post-establishment stage,  in the context of providing investment protection,
than at the pre-establishment stage where the issue is market access and liberalization of cross-border
investment flows.  Another is that even if an IIA uses a broad, asset-based definition of investment
that covers all forms of portfolio investment, it may stipulate that its substantive provisions (such as
National Treatment) apply only to certain assets, fo r example those that remain for one year or more
in the host country.  A third is to use exceptions:  for example, controlling volatile short-term capital
flows can be addressed through provisions allowing restrictions to be imposed for balance-of-
payments purposes.  This feature of limiting the scope of application of an IIA through its substantive
provisions rather than through its definitions is common to many IIAs.
24. A second way is to limit the IIA's application only to certain sectors of the economy, or to
exclude specific sectors or industries from its coverage.  An example is the Canada-United States Free
Trade Agreement, which excluded government procurement, transportation services, and most
financial services.  Many BITs exclude government procurement activities from their scope of
application.  To the extent that it can be qualified as a form of IIA, the most familiar example from the
WTO's point of view is the GATS, which is limited to the services sector of the economy.  Limits on
the sectors or industries to which an IIA applies can also be achieved in a more ad hoc  way,
particularly at a disaggregated level through limitations or reservations placed by individual Parties onthe commitments they undertake in their respective Schedules.
25. Other ways of limiting an IIA's scope include applying it only to investments made in
accordance with the laws and regulations of the host country, or only to investments established on or
after its date of entry in force, or by applying minimum thresholds, in terms of capital requirements,
for the size of investments that an IIA covers.  Various reasons can lie behind limitations such asthese
9;  in many cases they are aimed at ensuring that foreign investment is consistent with a host
country's economic, industrial and development policy objectives.
                                                     
8 WT/WGTI/W/61.  In its contribution, the IMF indicates that, under the definitions and classifications
of international accounts presented in the Balance-of-Payments Manual, foreign investment is classified in thefollowing components:  (i) direct investment;  (ii) portfolio investment;  and (iii) other investment.
9 See UNCTAD, Scope and Definition, (1999), pp. 23-26 for an elaboration of these limitations.WT/WGTI/W/108
Page 8
III. DEFINITIONS OF "INVESTOR" IN INTERNATIONAL INVESTMENT
AGREEMENTS
26. IIAs generally apply only to investment by investors who are associated legally with one of
the Parties to the agreement.  The IIA's provisions define what that association must be.
27. Practice with regard to the definition of "investor" in  IIAs is more varied than in the case of
"investment".  Some IIAs avoid the term "investor" altogether, and instead define and use the term
"covered investments" to fix the scope of application of their substantive provisions.10  Others define
and use the term "investor", to the same end.  Whichever approach is taken, much the same
considerations come into play in determining whose investments are covered by an IIA.  These are
well illustrated by reference to the Model Swiss investment agreement, which defines the term
"investor" as follows:
Model Swiss Agreement on the Promotion and Reciprocal Protection of Investments
The term "investor" refers with regard to either Contracting Party to:
(a) natural persons who, according to the law of that Contracting Party, are considered
to be its nationals;
(b) legal entities, including companies, corporations, business associations and other
organizations, which are constituted or otherwise duly organized under the law of thatContracting Party and have their seat, together wi th real economic activities, in the territory
of that same Contracting Party;
(c) legal entities established under the law of any country which are, directly or
indirectly, controlled by nationals of that Contracting Party or by legal entities having their
seat, together with real economic activities, in the territory of that Contracting Party.
 11
28. Most IIAs distinguish two broad categories of investor:  "natural persons", and "legal
entities".
29. "Natural persons" are individuals who invest dire ctly in their own private business or through
the placement of their own portfolio capital in a host country.  Their association with a party to an IIA
is generally straightforward, and is defined in terms of "nationality", by reference to the domestic lawof the party concerned.  Thus, investments by an inve stor who is a national of one of the parties to an
IIA are covered by the provisions of the IIA.  In some IIAs, this is broadened to include individuals
who have permanent residence or domicile status in the party concerned (see the case of the GATS,
below), but this is not a common feature of IIAs.
12
30. "Legal entities" are sometimes referred to otherwise in IIAs as artificial or legal persons or
juridical entities.  Whatever the terminology used, it refers broadly speaking to companies.  Most
IIAs cover all forms of companies.  Paragraph (b) of the Model Swiss Agreement reproduced above,for example, contains a short illustrative (non-exhaustive) list of covered companies.  A more
complete, but still open-ended list is contained in the Model US investment treaty:  "company" means
any entity constituted or organized under applicable law, whether or not for profit, and whether
                                                     
10 This is the case, for example, of the Model US Treaty Concerning the Encouragement and
Reciprocal Protection of Investment, the Model UK Agreement on the Promotion and Protection of Investments,and the Model French Agreement on the Encouragement and Reciprocal Protection of Investment.  (UNCTAD,
International Investment Instruments:  A Compendium, Volume III, pp. 160, 186 and 196).
11 WT/WGTI/W/28, Communication from Switzerland.
12 E.g., Korea's standard Model investment treaty does not cover permanent residents
(WT/WGTI/W/42).WT/WGTI/W/108
Page 9
privately or governmentally owned or controlled, and includes a corporation, trust, partnership, sole
proprietorship, branch, joint venture, association, or other organization.
31. Some IIAs exclude certain forms of company from their coverage through the definition of
"investor" for a variety of reasons:  for example, the definition of a "company" may exclude
partnerships or joint ventures, or not-for-profit or ganizations, or state-owned corporations.  However,
exclusions of this kind do not appear to be a common feature of IIAs.13
32. The most common condition necessary for a company to be recognized as formally associated
with one or other of the parties to an IIA is reflected in Paragraph (b) of the Model Swiss Agreement:
it is that a company is incorporated (constituted or otherwise duly organized) under the laws of its
home country, which is itself a party to the IIA.  This establishes a direct association between a
company and one of the parties to an IIA.
33. In some IIAs this is a sufficient condition.14  In the Model Swiss Agreement and in other
IIAs15, it is not;  the company must also have its headquarters (seat) there, and engage in real
economic activities there, conditions that are aimed at least in part at preventing companies from
setting up simple "mail-box" operations in one of the parties to an IIA in order to benefit from its
provisions.  However, it has been suggested in the Working Group that this problem can be
approached in a different way, by including a "denial of benefits" provision in the IIA.  An example ofsuch a provision is contained in the Model US investment treaty:
Each Party reserves the right to deny to a company of the other Party the benefits of this
Treaty if nationals of a third country own or control the company and (a) the denying Party
does not maintain normal economic relations w ith the third country; or (b) the company has
no substantial business activities in the territory of the Party under whose laws it isconstituted or organized.
16
34. Paragraph (c) of the Model Swiss Agreement widens the definition of "investor" to include
companies incorporated in a third country (non-party to the IIA) on condition that they are controlled,
directly or indirectly, by individuals or companies in one of the parties to the IIA.  This extends the
coverage of an IIA to subsidiary companies incorpor ated in third countries:  for example, in the case
of a bilateral IIA between Country A and Country B,  the provisions of the IIA would apply also to
subsidiaries in Countries X, Y and Z of a parent company in Country A.  However, this is not a
standard feature of IIAs.17
IV. "OWNERSHIP" AND "CONTROL"
35. The issue of "ownership" and "control" of an investment by a company does not arise in all
IIAs – many leave the issue to be decided on the basis of domestic company law in the parties to the
IIA – but it is used in some IIAs to narrow dow n the definition of which "home-country investors"
and which "investments in the host country" are covered by the IIA's provisions.
36. As was noted in the previous section, the definition of which companies are recognized as
being home-country investors associated with one or other of the parties to an IIA is handled in most
IIAs by reference to a company's place of incorporation, and/or the location of its headquarters (seat)
                                                     
13 See UNCTAD, Scope and Definition, (1999), p. 33.
14 E.g., the Model US and UK agreements cited in footnote 10, and the majority of Costa Rica's
investment treaties (WT/WGTI/W/60).
15 E.g., the Model French agreement cited in f ootnote 10, as well as Chile's Model Investment
agreement.
16 UNCTAD, International Investment Instruments:  A Compendium, Volume III, p. 203.
17 E.g., Chile's Model investment agreement and Korea's standard Model investment treaty do not cover
investments by companies located in a third country (WT/WGTI/W/42).WT/WGTI/W/108
Page 10
and main place of business.  Some IIAs combine this with a requirement that nationals of the party
concerned own a majority of the company's shares , which can narrow down the coverage of an IIA
considerably.18  In practice, however, this can be difficult to ascertain in the case of companies whose
stock is traded widely on international stock-markets, and even where it can be ascertained it may lead
to companies moving in and out of the coverage of an IIA over time.  Generally, this is not desirablewhen the aim of the IIA is to increase the stability and predictability of investment conditions.
Furthermore, the need to define which investors belong to one or other of the parties to an IIA
becomes far less relevant in the context of a multilateral IIA as opposed to a bilateral or regional IIA.
37. Most IIAs, particularly those that use the asset-based definition of investment, go no further
than specifying the characteristics a company must have as a home-country investor in order to be
covered by the IIA.  Some, however, define also the relationship in terms of "ownership" and
"control" that must exist between the investor and an investment in the host country if the investment
is to fall under the coverage of an IIA.  This crops up most obviously in the context of IIAs that use
the "enterprise-based" and the "transactions-based" definitions of investment.  For example, in the
case of the Canada-United States Free Trade Agreement:19
control or controlled , with respect to:
(a) a business enterprise carried on by an entity, means
(i) the ownership of all or substantially all of the assets used in carrying on the
business enterprise, and
(ii) includes, with respect to an entity that controls a business enterprise in the
manner described in subparagraph (i), the ultimate direct or indirect control of such
entity through the ownership of voting interests; and
(b) a business enterprise other than a business enterprise carried on by an entity, means
the ownership of all or substantially all of the assets used in carrying on the business
enterprise.
38. A few IIAs go further still and define "ownership" and "control" in quantitative terms;  for
example, in terms of a specific equity share or of voting rights.  This, it was noted earlier, is astandard feature of the "transactions-based" approach to defining investment where it is necessary to
create a clear line differentiating direct from indirect foreign investment, for example for statistical
purposes;  according to the IMF, the threshold for defining FDI is fixed typically at 10 per cent.  It is
also used in some IIAs based on the enterprise-based definition of investment, where according to
UNCTAD it is typical to require 50 per cent ownership or majority control.
20
V. THE CASE OF THE GATS
39. There has been reference and some discussion in the Working Group to the provisions on
scope and definitions contained in the GATS (Articles I and XXVIII), in particular the definition of
"trade in services" through commercial presence (or Mode 3) as:
the supply of a service … by a service supplier of one Member, through commercial presence
in the territory of any other Member (Article I:2(c))
                                                     
18 UNCTAD, Scope and Definition, (1999), pp. 39-40.
19 UNCTAD, International Investment Instruments:  A Compendium, Volume V, pp. 8-9.
20 UNCTAD, Scope and Definition, (1999) gives some examples, see pp. 41-43.WT/WGTI/W/108
Page 11
40. The GATS is not an investment agreement in the same sense as most IIAs.  Its focus is on the
ability to supply a service rather than on investment per se , and one of its essential features is that the
establishment of a commercial presence in a host c ountry is to be "for the purpose of supplying a
service";  the two cannot be separated.  Nonetheless, it has been noted that "commercial presence" in
the GATS approximates to the notion of "investmen t" in an IIA, and in that context "service supplier"
approximates to the notion of "investor".  Attention has been called, therefore, to the comparison of
the definitions used in the GATS with standard features of the definitions used in IIAs.
41. "Commercial presence" is defined in the GATS as follows:
"commercial presence" means any type of business or professional establishment, including
through (i) the constitution, acquisition or maintenance of a juridical person, or (ii) the
creation or maintenance of a branch or a representative office, within the territory of a
Member for the purpose of supplying a service.   (Article XVIII(d))
42. Clearly, this is narrower than the asset-based definition of investment used in most IIAs, but it
is very similar to the enterprise-based definition (see paragraph 17 above).  It covers both the
establishment and the acquisition of a business enterprise in the host country, and the activities of the
enterprise after its establishment in supplying a service.
43. Continuing from that basis, the scope of the "investments" that are covered by the GATS is
limited in two ways.
44. First, and most obviously, its scope is limited to the service sectors of an economy, and as
noted above the concept of "commercial presence" in the GATS is inseparable from its purpose,
which is "supplying a service".  The "supply of a service" is defined in the GATS to include the
production, distribution, marketing, sale and delivery of a service.
45. Second, the scope of the GATS is limited by the ways in which "investments" are treated
under its substantive provisions.  Some of these limitations are general:  for example, government
procurement activities are exempted from having to meet the MFN provisions of the GATS
(Article XIII).  Some are specific to particular si tuations:  for example, restrictions on payments and
transfers associated with an investment can be imposed to safeguard the balance-of-payments(Article XI and XII).  Others are ad hoc:  for example, the National Treatment obligations of the
GATS apply only in the service sectors inscribed in a Member's Schedule, and subject to any
conditions and qualifications set out in that Schedule (Article XVII).  In this respect, the GATS
follows the model of IIAs that restrict the scope of  their application through substantive obligations of
the treaty rather than through the definitions that they use.
46. As regards the concept of "investor", the GATS  follows the model of many IIAs that cover
both individual investors and companies.  "Service supplier" is defined in the GATS as any person
that supplies a service  (Article XXVIII(g)), and can include foreign individuals ( natural persons ) and
foreign companies ( juridical persons ).
47. With respect to individuals, the GATS defines them in the same way as IIAs in terms of being
nationals of the home country, but it covers also permanent residents, subject to certain conditions
(Article XXVIII:(k)).
48. With respect to companies, the GATS defines "juridical person" as follows:
"juridical person" means any legal entity duly constituted or otherwise organized
under applicable law, whether for profit or otherwise, and whether privately-owned
or governmentally-owned, including any corporation, trust, partnership, joint
venture, sole proprietorship or association (Article XVIII:(l))WT/WGTI/W/108
Page 12
This language is very similar to the standard language used in IIAs to define legal entities (see
paragraph 30, above).  The GATS covers not-for-pr ofit organizations and state-owned corporations,
as well as an open-ended list of different forms of private commercial companies.
49. However, the GATS limits the scope of the companies that it covers by defining not only
conditions of their association to their home country, but also conditions of "ownership" and "control"
over their subsidiaries in host countries (see paragraphs 36 and 37, above).
"juridical person of another Member" means a juridicial person which is either:
(i) constituted or otherwise organized under the law of that other Member, and
is engaged in substantive business operations in the territory of that Member or any
other Member; or(ii) in the case of the supply of a service through commercial presence, owned
or controlled by: 1. natural persons of that Member; or 2. juridical persons of that
other Member identified under subparagraph (i) (Article XVIII:(m))
a juridical person is:
(i) "owned" by persons of a Member if more than 50 per cent of the equity
interest in it is beneficially owned by persons of that Member;
(ii) "controlled" by persons of a Member if such persons have the power to
name a majority of its directors or otherwise to legally direct its actions;
(iii) "affiliated" with another person when it controls, or is controlled by, that
other person;  or when it and the other person are both controlled by the
same person. (Article XVIII:(n))
According to this definition, the origin of juridica l persons of other Members can be determined not
simply on the basis of quantitative criteria for ownership, but also on the basis of control.  Thus, forexample, in order to qualify as a service supplier of another Member, a parent company supplying
services through commercial presence in a host country must be constituted under domestic law and
engaged in substantive business operations in its home county, and its subsidiary in the host country
must be either 50 per cent owned, or otherwise controlled, by the parent company.
VI. DISCUSSIONS IN THE WORKING GROUP
A. N
ARROW DEFINITION OF INVESTMENT
50. Support for defining the term "investment" narrowly, to cover essentially only FDI, has been
expressed by some in the Working Group in term s of the view that "production-based" forms of
investment contribute most directly and substantially to economic and technological development,
employment and growth in host countries.  It has been suggested, also, that account should be taken of
different forms of FDI, with some taking the view that greenfield FDI is generally more beneficial to
host country economies than FDI through merger and acquisition activity.
51. The value of FDI relative to other forms of foreign investment has been related, in addition, to
the long-term commitment it involves on the part of foreign investors, and to host-country concerns
about the potentially volatile nature of portfolio capital movements, particularly those of a short-term,
speculative nature.  The stability of FDI during the emerging-markets financial crisis of 1997-99 has
been used to illustrate this point.  Some of these concerns would appear to relate primarily to  IIAsthat focus on the pre-establishment treatment and liberalization of investment, but it has been noted
that the stability of foreign investment can matter too at the post-establishment stage because of its
link to incomes, jobs and exports in the host country.WT/WGTI/W/108
Page 13
52. The advantage of a narrow definition of invest ment has also been put forward in terms of
there being a better level of understanding among WTO Members of the concept of FDI relative to
other forms of foreign investment, and a definition that is readily available from the IMF.  By
narrowing the scope of a possible investment agreement, it has been suggested that any rule-making
process would be easier and could be completed more quickly, and that it would facilitate the task inthe WTO of harmonizing any eventual agreement on investment with the "commercial presence"
provisions of the GATS.
53. A related point has been that before use of a broad definition of investment covering also
portfolio and short-term capital flows could be considered, further progress on reforming the
international financial architecture would be needed in fora other than the WTO, in particular on the
issues of capital account liberalization and prudential control.  Excluding these forms of investment
from further consideration in the WTO would spare the need to wait for progress to be madeelsewhere on these matters.
54. The advantages of a narrow definition of invest ment, limited to traditional forms of FDI, have
not been accepted by all.  Another view has been that both FDI and foreign portfolio investment can
generate economic benefits for host countries, and that in today's global economy the distinction
between the two has become increasingly difficult to make (in the case of merger and acquisitionactivity, for example).  Both portfolio and short-te rm capital can play important roles in providing
foreign exchange and financing capital formation in a host country's economy.  Excluding portfolio
capital from coverage in an IIA would impede the growth of all international investment, including
FDI, especially to developing countries, since successful FDI depends upon a range of associated
capital flows, including some forms of short-term  capital.  Given this, and the substitutability of
financial instruments in global capital markets, doubt has also been expressed about the practicality of
trying to make a clear-cut differentiation betw een FDI and other forms of foreign investment.
According to this view, the key distinction that ne eds to be made in the context of designing closer
multilateral cooperation in this area is between foreign investment of a lasting nature on the one hand,
and speculative capital flows on the other.
55. It has been suggested that the use of the IMF threshold of 10 per cent ownership to
differentiate FDI from portfolio investment can be artificial, particularly in the context of modern
corporate strategies and of volatile stock-markets and share prices.  In the case of merger and
acquisition activity, participation of less than 10 per cent ownership can still imply a lasting interest in
an enterprise and a significant influence over its management, particularly if it is an initial step in a
longer-term strategy aimed at building up a more si gnificant stake.  Also, treating FDI under the IMF
definition simply in terms of cross-border transactions of capital and related resources, and failing tocover tangible and intangible assets associated with it (e.g., contractual rights and intellectual property
rights), would significantly weaken the level of investment protection that could be provided to
foreign investors.  Consequently, it has been sugge sted that the concept of FDI, particularly when
based on notions of “control” and “lasting interest”, is not sufficiently precise to allow for the
development of clear and meaningful substantive provisions in an IIA.  The point has also been madethat developing countries that wish to limit foreign ownership of local assets might have an interest in
encouraging portfolio investment rather than FDI that is foreign controlled.
B. B
ROAD DEFINITION OF INVESTMENT
56. An advantage of the broad, assets-based approa ch as a starting-point for defining investment
in IIAs, it has been suggested, is its flexibility.  It provides protection to as wide a range of assets aspossible, while at the same time giving host countries discretion in the way they treat certain, sensitive
categories of assets.  In this respect, it has been noted that UNCTAD concludes that development
policy objectives and concerns are not necessarily incompatible with the broad approach to definition,WT/WGTI/W/108
Page 14
given the scope that exists to narrow the coverage of an IIA through its substantive obligations and the
specific commitments of individual parties.21
57. Another advantage is that a broad approach would assist in ensuring that an IIA is compatible
with existing bilateral investment agreements, a nd its provisions can be harmonized with theirs.
However, in this context it has been suggested that the use of a broad, asset-based definition in manyBITs should be seen in the light of the fact th at they cover only the post-establishment stage of
investment, and it would not necessarily be appropriate to use it at the pre-establishment stage.
58. A further advantage of this approach that has been put forward is that it is open-ended and
forward-looking, and consequently it can be adapted to the evolution of new or hybrid forms of
foreign investment.  A definition covering "all kinds of assets" would cover new forms of foreign
investment automatically, and avoid any need to renegotiate the definitions of an IIA in order to
maintain its relevance.  A narrow definition of investment would run the risk of becoming outdated bythe emergence of new forms of assets and new modes of ownership, and hence would not offer the
kind of protection to "lasting" economic interests that is intended.  It has been pointed out, on the
other hand, that such a forward-looking approach mi ght result in protecting future business interests
that go beyond the scope of what was intended at the time an IIA was concluded.
59. The use of a broad definition, including FDI and portfolio investment but excluding
"transactions of a speculative nature", was suggested as a possible option.  However, it was noted that
identifying and differentiating short-term capital flows of a speculative nature could be conceptually
and technically difficult.  One criterion used for statistical purposes was the maturity of a financial
asset, but this would not necessarily be appropriate since in practice businesses sometimes used short-
term instruments for long-term financing purpos es, and longer-term instruments for short-term
financing purposes, such as forward sales of currencies.
60. It was suggested that host-country concerns about certain kinds of investment and capital
movements could be addressed through the use of exceptions to substantive obligations in an IIA,
rather than by limiting the scope of an IIA through its definitions.  Reference was made in this respect
to provisions in most IIAs on transfers of capital and funds.  These could be formulated to allow forpolicy flexibility by permitting certain restrictions on transfers for macro-economic reasons or for the
stability of financial systems, for example by prohibiting the repatriation of capital within less than a
year after it had been invested.
61. It has been noted that the inclusion of intellectual property rights in the definition of
investment did not require a particular level or nature of protection of intellectual property rights, and
that the level of protection of specific forms of intellectual property rights was addressed in other
contexts such as the TRIPS Agreement.
C. M
IXED DEFINITION OF INVESTMENT , WITH SCOPE FOR LIMITING ITS APPLICATION
62. One suggestion was that there could be merit in distinguishing between narrow and broad
definitions of investment on the basis of the nature of the substantive obligations to which they are
applied.  An example given, based on a Member's domestic legislation, was to use the concept of FDI
in connection with provisions applicable to pr e-establishment issues and the liberalization of
investment, while reserving the broader, asset-based definition for purposes of protecting foreign
investment at the post-establishment stage.
63. One view was that, on the one hand, using the option of changing the scope of the definition
according to each element of a possible multilateral framework could facilitate a consensus.  On the
other hand, however, efforts should be made to av oid unclear and complex definitions that could
                                                     
21 UNCTAD, Scope and Definition, (1999), pp. 62-65.WT/WGTI/W/108
Page 15
cause problems of interpretation, and that could be difficult to understand for investors and to enforce
for authorities.
VII. OUTSTANDING ISSUES
A. DEFINITION OF INVESTMENT
64. A number of issues have been raised in the Working Group's discussions as warranting
further consideration.  With regard to the broad, asset-based definition of "Investment", they are:
• whether a broad definition can adequately take into account the development needs of all
Members.
• how to identify, define and exclude capital transactions which are not investments but which
are financial transactions of a speculative nature.
• whether branches and other unincorporated forms of enterprises should be covered as
investments.  It has been suggested that all types of entity should be included that are
recognized by applicable law, even though formal registration might not be required.
• whether the treatment of loans as investments should be limited to loans of a long-term
nature.
• the need to clarify the treatment of rights aris ing under contracts as investments, in particular,
the need to make a distinction between contracts related to the sale of goods or services and
contracts that involve the commitment of financial and/or human resources by an investor.
• whether the capital or other resources committed by an investor should be located in the host
country.
• the implications of treating intellectual property rights as investment assets.  The need to
clarify the relationship between investment agreements and the TRIPS Agreement.
• the need to examine the conditions under which real estate should be considered as a form of
investment.
• how to ensure flexibility and comprehensiveness so as to include new forms of investments.
65. With regard to the narrow, enterprise-based definition of "Investment", they are:
• whether differentiating FDI and portfolio foreign investment has any economic or operational
relevance.
• how the notion of "lasting interest" in an enterprise can be clarified, and whether a 10 per cent
threshold is relevant and practical.
• how to define the notion of "control" of an ente rprise, in light of modern forms of FDI and of
indirect forms of ownership or control through subsidiaries or other intermediate companies
or persons, including those of third countries.
• what the implications are of differentiating greenfield FDI from other forms of FDI.WT/WGTI/W/108
Page 16
B. DEFINITION OF INVESTOR
66. A number of issues were raised regarding the categories of natural and juridical persons
which should be considered as "investors", in particular:
• Regarding natural persons, whether permanent residents should be included among the
natural persons considered to be investors.
• Regarding juridical persons, whether any enterprise formed under the law of a party should be
considered as an investor of that party, regardless of the nationality of the ultimate ownership
or control of the enterprise.
• Whether a combination of place of incorporation, administrative seat, and nationality of
control or ownership should be used to determ ine whether an enterprise should be considered
an investor of a party.
• The possible merits of a denial of benefits clause to prevent non-party nationals from
establishing "mail-box" companies solely to gain benefits under an agreement.
• The treatment of investors of all types of busin ess recognized by applicable law, including
those requiring formal registration.
• The inclusion of governmental and non-profit organizations as investors.WT/WGTI/W/108
Page 17
ANNEX I
Main categories of investment covered by "asset-based" definitions
• Moveable and immovable property  covers all merchandise (such as capital equipment and
inventories), buildings (such as factories) and land, and legal interest in properties of this kindin which the investor may have less than full ownership (mortgages, liens and pledges).
• Participation in companies  covers various forms of equity participation such as stocks and
shares, as well as bonds, debentures, loans, and other forms of long-term debt interests.  Theinvestor is not required to exercise "ownership" or "control" of a company, so the definition
covers all levels and percentage of participation, both FDI and portfolio investment.  Debt
instruments can include public sector debt;  bonds issued by public enterprises or that are
publicly-guaranteed.
22
• Contractual rights  cover rights for the performance of services such as construction and
management contracts, contracts for accounting and other professional services, turnkeycontracts, production and revenue-sharing rights.  The contracts do not necessarily have to be
long-term.
• Intellectual property rights (IPR)  can cover not only "traditional" IPR such as trademarks,
patents, copyrights and related rights, rights in plant varieties, industrial designs and trade
secrets, but also in some cases "technical processes" and other forms of "know-how" that arenot usually protected legally by international conventions or agreements on IPR as traditional
forms of intellectual property.  This catego ry can also include "goodwill", such as the
reputation of the company.
• Concessions conferred by law or under contract  typically include rights and privileges
conferred by public authorities by virtue of legislative and administrative decisions, or
contracts, licenses and permits allowing the use and exploitation of natural or publicresources.  Business and public concessions fall under this category.
23
                                                     
22 In some IIAs negotiable claims over the public sector are referred to explicitly in the definition.
23 Australia's Model Investment Protection and Promotion Agreement defines this as "business
concessions and any other rights required to conduc t economic activity and having economic activity conferred
by law or under a contract, including rights to engage in agriculture, forestry, fisheries, and animal husbandry, tosearch for, extract or exploit natural resources, and to manufacture, use and sell products" (WT/WGTI/W/80).WT/WGTI/W/108
Page 18
ANNEX 2
Definition of Investment in the North American
Free-Trade Agreement
Investment means,
(a) an enterprise;
(b) an equity security of an enterprise;
(c) a debt security of an enterprise;
(d) a loan to an enterprise;
(e) an interest in an enterprise that entitles the owner to share in the income or profits of the
enterprise;
(f) an interest in an enterprise that entitles the owner to share in the assets of that enterprise on
dissolution, other than a debt security or a loan excluded from subparagraph (c) or (d);
(g) real estate or other property, tangible or intangible, acquired in the expectation, or used for the
purpose of economic benefit, or other business purposes;
(h) interest arising from the commitment of capital or  other resources in the territory of a Party to
an economic activity in a such a territory, such as under
(i)  contracts involving the presence of an investor's property in the territory of the Party,
including turnkey or construction contracts, or concessions, or
(ii)  contracts where remuneration depends substantially on the production, revenues, or
profits of an enterprise;
but investment does not mean,
(i) claims to money that arise solely from
(i) commercial contracts from the sale of goods or services by a national or enterprise in
the territory of a Party to an enterprise in the territory of another Party, or
(ii) the extension of credit in connection with a commercial transaction, such as trade
financing, other than a loan covered by subparagraph (d); or
(j) any other claim to money, that does not involve the kinds of interests set out in subparagraphs
(a) through (h).
__________