Could UBS Dodge a $2 Billion Tax Penalty By Taking France to Arbitration?
Published on Oxford Business Law Blog on 28 July 2022
By Danilo Ruggero Di Bella (Bottega Di Bella)
In December 2021, UBS AG Group appealed to the French Supreme Court a verdict of the Paris Court of Appeal that ordered the Swiss bank to pay €1.8 billion ($2 billion) in penalties for soliciting French clients to open bank accounts in Switzerland, allegedly for evading taxes. The main penalty breaks down into €800 million in civil damages to the French State and a confiscation order of €1 billion. In the first and second instances, UBS contested the calculation of the penalty as unsupported and contradictory. The Bank even filed an appeal based on constitutional law which was nevertheless rejected. Originally, the lower court set the penalty at 4.5 billion euros ($5 billion). Although UBS is a Swiss bank, its most significant shareholders are US investment management firms and funds—representing over 13% of its shareholding—which will be most affected by such a hefty fine. Assuming the French Supreme Court upholds the findings of the Court of Appeal, could UBS rely on any international remedies to quash or reduce this penalty?
International Remedies and Bilateral Conventions of Establishment
UBS AG may launch an international arbitration against France by invoking the 1882 Switzerland-France Bilateral Convention of Establishment (Switzerland-France BCE) in conjunction with the 1993 France-Trinidad and Tobago Bilateral Investment Treaty (France-Trinidad and Tobago BIT) in an attempt to reduce the multi-billion euros penalty.
BCEs are—almost forgotten—ancient international instruments that protect foreign property and undertakings abroad on a reciprocal basis, and in many aspects predated and inspired BITs, which are their modern counterparts. Reminiscent of such ancient conventions, some modern instruments which focus on the protection of foreign investments still use the term ‘Convention of Establishments’ to indicate an investment contract concluded by the government with a foreign investor with the view of exercising a specific economic activity (eg Article 16 of Cabo Verde’s Foreign Investment Law).
Definition of National Treatment Standard
BCEs—just as BITs—often stipulate a national treatment standard provision (NT standard). Article XIV of the 1959 USA-France BCE provides a definition of the term ‘national treatment’: ‘treatment accorded to nationals and companies of either High Contracting Party within the territories of the other High Contracting Party upon terms no less favorable than the treatment therein accorded, in like situations, to the nationals and companies, as the case may be, of such other High Contracting Party.’
Arguably, French courts breached the NT standard towards UBS because the penalty imposed upon UBS is arbitrary and discriminatory, as no French bank—such as Société Générale, PNB Paribas or Crédit Agricole—has been fined for facts that were similar in nature and committed at the same time as those UBS has been punished for. Indeed, none of the French Banks were fined for helping their French customers to open bank accounts in Panama in the period preceding 2012, despite that some of them were found to be at the heart of the Panama papers scandal. Société Générale was simply summoned by the French Senate where it declared that the several hundred offshore shell companies which were suspected to have been created by Société Générale were in fact set up by Société Générale’s clients and not by the bank itself, thus fending off all allegations.
As no French bank was fined for facts that are essentially the same as the allegations against UBS for their pre-2012 activities (or at the very least not in the same proportions), French courts, by ordering UBS to pay a penalty in the billions—a substantial part of which will go directly to the French State—were arguably discriminating UBS because of its foreign nationality.
BCEs’ Applicability in the UBS Case
BCEs and BITs being similar in scope, they can be combined together. By virtue of the broad most-favored-nation clause (MFN clause) contained in Article 6 of the Switzerland-France BCE, a Swiss claimant can avail itself of any more advantageous provision contained in a BIT that France entered with a third State, such as the dispute resolution provisions allowing for recourse to an international arbitral tribunal. Recourse to international arbitration rather than domestic courts can be more advantageous for a variety of reasons, the main one being the impartiality of an international arbitral tribunal when national interests may be at stake.
Hence, UBS AG may rely on the Switzerland-France BCE in conjunction with the 1993 France-Trinidad and Tobago BIT to claim before an international arbitral tribunal that France failed to accord UBS AG’s French subsidiary, UBS (France) SA, the national treatment standard (NT standard).
During the 20th century, BCEs have been invoked by foreigners in a number of cases, also before French criminal courts. BCEs are directly actionable by natural and legal persons just as BITs in that they confer private rights of action to contracting States’ nationals directly against other contracting States (as opposed to other international treaties providing for conventional rights to be wielded by and through the contracting States only).
While foreign nationals can directly invoke these international instruments before national courts, they can do so also before international tribunals. By way of contrast, there are international treaties—such as the International Covenant for Civil and Political Rights (ICCPR) or the International Covenant on Economic, Social and Cultural Rights (ICESCR)—that are neither directly applicable nor directly invocable before domestic courts of many jurisdictions. Complaints under such treaties are required to be brought instead before an international adjudicating body. Many international treaties are indeed not directly invocable before national courts, but only before international adjudicating bodies. It follows that it can be more challenging to invoke an international treaty before a domestic court rather than before an international tribunal. So, in those instances where individuals can directly invoke a particular treaty also before a State’s domestic courts for actions or omissions attributable to that State, then the invocability of that same treaty before an international adjudicator against that given State cannot be challenged.
In parallel or alternatively, the US shareholders of UBS—such as BlackRock Inc, Massachusetts Financial Services Company, Dodge & Cox International Stock Fund, and Artisan Partners Limited Partnership—may attempt to protect their interests by invoking in turn the USA-France BCE, which protects US investors in France. For instance, this might be a possibility worth exploring whenever shareholders’ and company’s interest do not perfectly align.
In 2020, for the first time ever, an international arbitration based on a BCE was successfully registered at the International Centre for Settlement of Investment Disputes (ICSID) in Washington DC. This ICSID arbitration concerned a 300-million-dollar claim against Switzerland relating to real estate expropriation and was based on the 1868 Italy-Switzerland BCE. The case was later discontinued for lack of advance payments by the disputing parties. Although this case was discontinued, it may serve as a precedent for UBS to lodge a BCE-based arbitration and thereby challenge the substantial fine to which it has been sanctioned.