Scenario: a French investor is hit with a tax reassessment plus penalties equal to 15% of its total invested capital, after the tax authority reinterprets an incentive already granted. It wants to sue in ISDS “for expropriation by taxation”. This is where many investors meet a wall few knew existed: the tax carve-out in BITs and EVIPA limits or excludes claims over tax measures. This article explains where that wall stands, how the “tax filter” works, and the narrow paths that remain open.
What is the tax carve-out and why does it exist?
Tax sovereignty is every State’s hard core, so investment treaties separate tax measures from ordinary protection to varying degrees: some BITs exclude tax disputes entirely; others allow claims under special conditions; EVIPA belongs to the sophisticated group — tax measures are in principle outside, or limited within, the dispute mechanism, save for narrow claims such as taxation-as-expropriation that must pass a joint filter.
The costliest misunderstanding is assuming that dressing a tax assessment in “expropriation” or “FET” language automatically opens the ISDS door. Tribunals and the treaty text strip that costume off first: if the substance is a tax measure, the carve-out applies whatever provision the claim form cites.
How does the tax filter work?
For claims that are permitted (typically an allegation that a tax measure amounts to expropriation), EVIPA and many new-generation treaties require the investor first to refer the question to the competent tax authorities of both sides. The two authorities have a defined period to jointly determine whether the measure is expropriatory; only if they cannot agree, or fail to decide in time, may the investor proceed. Two practical consequences follow: tax cases always run one beat slower than ordinary claims, and the file must be built to persuade, first of all, two tax administrations — not a tribunal.
In parallel, do not neglect the domestic front: the reassessment must still be challenged through domestic tax complaint/administrative litigation within its own procedures and deadlines — skipping it forfeits domestic rights and weakens the international file.
What paths remain open to the investor?
- Re-characterise honestly: sometimes the core is not “tax” but breach of a specific stabilisation commitment or arbitrary procedure — but classification must follow substance, not wordplay;
- Use the double-tax treaty channel (DTA): the mutual agreement procedure (MAP) between the two tax authorities is a dedicated channel for many tax conflicts, parallel to the BIT;
- Consultation and negotiation: with the tax filter ahead, a well-built negotiation file quantifying the State’s own risks often delivers faster results than litigation;
- Check stabilisation clauses in your licence: a specific tax-stabilisation commitment in the investment documents is a distinct legal asset, valuable in both negotiation and carve-out analysis.
Frequently asked questions
How do tax carve-outs in BITs limit protection?
The carve-out separates tax measures from ordinary investment protection: some BITs exclude them entirely; others allow claims only through a joint two-authority tax filter. Dressing a reassessment as expropriation/FET does not automatically defeat the carve-out.
Can tax disputes be taken to ISDS?
Only very narrowly. Most tax measures are excluded or limited; expropriation-by-taxation claims usually must pass the two-authority referral first. In parallel, domestic tax complaints/litigation must be filed on time.
What does the tax carve-out cover?
It varies by treaty: usually a broad definition of tax measures (laws, assessments, reassessments), a filter mechanism for expropriation allegations, and preservation of DTA/MAP channels. Read the definition in your own BIT/EVIPA.
How can the tax carve-out be overcome?
Not by wordplay — if the substance is tax, the carve-out applies. Real paths: honestly classify the non-tax core (broken stabilisation commitments, arbitrary procedure), use DTA/MAP, and negotiate with a well-prepared risk file.
This article has been quality-reviewed by the FLAW AI Legal Council