On 23 July 2024, a distinguished international arbitral tribunal issued a significant decision on provisional measures in Klesch Group and Raffinerie Heide v. Germany (ICSID Case No. ARB/23/49). The three arbitrators – Mr. Cavinder Bull SC (president), Judge O. Thomas Johnson, Jr. and Professor Jorge E. Viñuales (co-arbitrators) – ordered Germany to refrain from requiring claimant Raffinerie Heide to pay EUR 47.2 million allegedly owed to the State under the German Annual Tax Act 2022 (the “Act”). Like a number of other EU Member States, Germany had imposed a windfall profits tax (labelled a “solidarity contribution” by the European Union) on companies in the energy sector pursuant to the Act, in accordance with EU Regulation 2022/1854. As a result of the tribunal’s decision, however, the claimant is relieved – at least for now – from its obligation to comply with the German windfall tax.
This decision is of particular interest to any company affected by such windfall tax measures, whether in Germany, other EU Member States or the UK. While efforts to challenge the enforceability of the German windfall tax through domestic court proceedings have thus far proved unsuccessful, the tribunal in this case held that the claimants had established a “prima facie case on the merits” that the windfall tax measures ordered by the European Union were incompatible with international law.
Legislative Context and Overview of the Dispute
The claimants, Klesch Group Holdings Limited (incorporated in Jersey) and Raffinerie Heide GmbH (incorporated in Germany), commenced ICSID proceedings against Germany in October 2023, alleging that the State had breached the Energy Charter Treaty (“ECT”) by passing the Act.1 The Act requires companies like Raffinerie Heide – earning at least 75% of their revenue from crude petroleum, natural gas, coal or refinery activities – to pay an additional 33% solidarity contribution on their 2022 or 2023 profits that exceed their average profits from 2018 to 2021 by more than 20%.
The Act implements a European initiative responding to the energy market disruption caused by Russia’s invasion of Ukraine. In March 2022, the European Commission recommended temporary windfall taxes on energy providers in its REPowerEU communication. EU Regulation 2022/1854 followed in October 2022, imposing an EU-wide “solidarity contribution” on companies with their primary activities in the crude petroleum, natural gas, coal and refinery sectors. Article 14 of the Regulation mandates that surplus profits in these sectors must be taxed unless Member States have implemented equivalent national measures by 31 December 2022. As a result, most EU Member States countries adopted windfall tax measures in 2022 and 2023.Raffinerie Heide’s solidarity contribution for 2022 was due on 31 July 2024, while the ICSID proceedings were ongoing. On 6 June 2024, the claimants, concerned that non-compliance could result in financial or even criminal penalties under German law, sought provisional relief from the ICSID tribunal to suspend any attempt by Germany to collect the contribution. In its decision of 23 July 2024, the tribunal granted the requested relief.
In addition to the proceedings against Germany, the Klesch Group has also initiated proceedings under the ECT relating to the legality of the solidarity contribution against Denmark (ICSID Case No. ARB/23/48) and the EU (ICSID Case No. ARB(AF)/23/1). The cases are being heard together by the same tribunal.
Legal Analysis
In deciding whether to grant the claimants’ application for provisional measures, the tribunal applied Article 47 of the ICSID Convention (the “Convention”) and Rule 47 of the 2022 ICSID Arbitration Rules. The tribunal considered five criteria relevant to its decision: (i) whether the claimants had established prima facie jurisdiction; (ii) whether the claimants had established a prima facie case on the merits; (iii) necessity; (iv) urgency; and (v) proportionality. The tribunal’s findings regarding each of these criteria are outlined below.
(i) Prima Facie Jurisdiction
Germany argued that the tribunal lacked jurisdiction to grant provisional measures on the basis that Article 40 of the Act, which imposes the solidarity contribution, qualifies as a taxation measure under the ECT and is therefore excluded from the Treaty’s scope. The tribunal dismissed this objection, noting that the threshold for establishing prima facie jurisdiction is “is not high”, requiring only a preliminary showing of jurisdiction “at first sight”2 and the claimants had met that threshold. The tribunal noted that Germany’s “arguments on the applicability of Article 21 of the ECT as a ‘carve-out from the Tribunal’s jurisdiction for Article 10 ECT claims’ are to be properly determined in a jurisdictional challenge if and when one has been brought by the Respondent, and after hearing full arguments on the matter.”3
(ii) Prima Facie Case on the Merits
The claimants alleged that the Act breaches several substantive provisions of the ECT, specifically: (i) Article 10(1) (for failing to provide “the most constant protection and security” and “fair and equitable treatment”); (ii) Articles 10(3) and 10(7) (regarding national treatment and most-favoured-nation treatment); (iii) Article 10(12) (regarding effective means for the assertion of claims and enforcement of legal rights); and (iv) Article 13 (regarding unlawful expropriation).
The tribunal held that the threshold for establishing a prima facie case on the merits for the purposes of granting provisional relief is “relatively undemanding”.4 Specifically, the tribunal emphasised that its role was limited to determining whether the claimants had presented a “reasonable case” that, if proven, “might possibly” result in an award in their favour.5 The tribunal held that the claimants had met that threshold. The tribunal did not elaborate on why the facts asserted by the claimants, if proven, could give rise to a claim under the ECT.
(iii) Necessity
The tribunal held that the “relevant test for necessity is that of harm”.6 To demonstrate necessity, the claimants had to establish either (i) harm that could not be adequately addressed by damages; or (ii) a material risk of serious or grave damage. The tribunal accepted the claimants’ arguments that provisional measures would protect them from two types of harm. First, the exclusivity of ICSID arbitration would be undermined if provisional measures were not granted and the claimants were compelled to dispute the solidarity contribution in German legal proceedings.7 Second, provisional measures were necessary to preserve the status quo of the arbitration. The tribunal reasoned that the contested payment obligation under the Act was “the very subject-matter of this arbitration, and the legality of the Claimants’ obligation to pay the same” was a “a key issue in this arbitration”.8 In the tribunal’s view, the claimants should not be forced to “pay this solidarity contribution while the arbitration is pending and the Tribunal has not determined this issue”.9
Crucially, the tribunal rejected Germany’s argument that provisional measures should not be ordered because the claimants could be adequately compensated by an award of damages, if they were ultimately successful on the merits. Noting that Germany had declined to unconditionally confirm that it would comply voluntarily with a damages award in the claimants’ favour, the tribunal acknowledged that the claimants might face potential enforcement difficulties and delays, concluding that there was a “reasonable basis for the Tribunal’s view that the enforcement of any award in the Claimants’ favour may not be a straightforward matter and the satisfaction of such an award may be delayed”.10 Notably, while the European Commission confirmed that it would assume full responsibility vis-à-vis the claimants for any financial liability arising from the arbitration, the tribunal found this insufficient to alleviate the claimants’ enforcement concerns.11
(iv) Urgency
The tribunal held that the relevant test here was whether the claimants needed to obtain the provisional measures before the issuance of the tribunal’s final award. That threshold was satisfied, as Raffinerie Heide was compelled by German law to file its self-assessment and pay the solidarity contribution no later than 31 July 2024; failure to do so would have exposed Raffinerie Heide to enforcement action under German law. The tribunal noted that the claimants did not need to wait for harm to occur, nor prove the existence of actual harm, in order to justify the requested relief.12
(v) Proportionality
Finally, the tribunal considered whether harm to the claimants if provisional measures were not granted would “substantially outweigh” the harm to Germany if they were granted.13 In siding with the claimants, the tribunal drew two conclusions. First, granting provisional measures did not prejudge the outcome of the arbitration; instead, it preserved the exclusivity of the proceedings and maintained the status quo between the parties. Second, there would be no disproportionate harm caused to Germany, as it could still enforce payment of the solidarity contribution at a later date if it prevailed in the arbitration.
Key Takeaways
The tribunal’s decision on provisional measures is significant for several reasons.
First, the tribunal demonstrated that it was unafraid to take steps that would interfere with Germany’s ability to exercise its sovereign taxation powers before it had rendered a final decision on whether the State had breached its obligations under international law. The tribunal noted that “[w]hen a State ratifies the [ICSID] Convention, the State must accept that an ICSID tribunal may order provisional measures which entail ‘some interference with sovereign powers and enforcement duties’”.14 Germany had argued that the provisional measures would require the suspension of “the regular, lawful implementation of its tax laws to [Raffinerie Heide], a corporation established under the laws of Germany”, which would represent “a severe limitation of [Germany’s] sovereignty”, as well as the need to apply its laws in a uniform, non-discriminatory manner.15 The tribunal was unpersuaded by these arguments, and seemed to accept that compliance with its decision might expose Germany to discrimination claims by other taxpayers in similar circumstances.16
Second, provisional measures are ordinarily not granted if the harm the applicant might suffer could be undone through a final award of damages. In this regard, Germany’s refusal to unconditionally confirm that it would comply with a potential damages award in the claimants’ favour was undoubtedly a major concern for the tribunal. Moreover, the tribunal considered it was relevant that the claimants were seeking declaratory relief first, and damages only if compelled to pay the windfall tax during arbitration. Requiring Raffinerie Heide to pay the tax now could therefore “aggravate or extend [the parties’] dispute or prejudice the execution of the award”.17
In reaching its decision, the tribunal relied on the decision granting provisional measures in Perenco v. Ecuador. That case also involved a tribunal ordering a State to refrain from collecting payments from the investor, in that case under Ecuadorian Law 42 (which increased the State’s share of investors’ oil revenues). In that case, however, the tribunal required the investor to deposit the disputed funds into escrow as security. The tribunal in Klesch Group and Raffinerie Heide v. Germany did not take that step (and, indeed, did not consider this possibility in its decision). Consequently, Raffinerie Heide will continue to enjoy the EUR 47.2 million it is not required to pay to the German treasury, at least for the pendency of the arbitration. At the same time, Germany must assume the risk that Raffinerie Heide may not be able to pay this tax liability in the future if its claim is ultimately dismissed (if, for example, the company is declared bankrupt or moves its assets offshore).
At the end of its decision, by way of obiter, the tribunal drew comparisons with Klesch v. Denmark, the arbitration regarding the Danish windfall tax that is being heard by the same arbitral tribunal in separate ICSID proceedings brought by the Klesch Group.18 The tribunal noted that, in contrast with Germany, Denmark has voluntarily suspended the collection of the solidarity contribution from the investor, pending the outcome of the legal challenge. Although the Danish and German laws are not identical, the tribunal held that Denmark’s approach of voluntarily preserving that arbitration’s exclusivity and maintaining the status quo was a “desirable” approach.19
Conclusion
The tribunal’s decision, effectively suspending Raffinerie Heide’s tax obligation until the end of the proceedings, sets a significant precedent for other affected parties to potentially resist payment of such windfall taxes, at least on a provisional basis. However, it remains for the tribunal to decide on the merits whether Germany – and the other EU Member States who have applied windfall taxes pursuant to EU Regulation 2022/1854 – can lawfully impose the EU solidarity contribution under international law. The decision may also affect other non-EU States which have imposed windfall taxes, such as the UK.
It remains to be seen how the tribunal will address the tax carve-out provision in Article 21 of the ECT, which Germany has argued deprives the tribunal of jurisdiction over the claimants’ claims. Notably, many other bilateral investment treaties (including those applicable to EU Member States) do not contain any such tax carve-outs. Investors proceeding under such treaties would therefore not face the same jurisdictional problem. If the claimants in the present case can overcome this hurdle, then the assessment of the legality of the solidarity contribution under international law will raise complex issues, including questions concerning the interplay between the ECT, EU and domestic law. The tribunal’s final award could set an important precedent for other investors in the energy sector impacted by windfall profit taxes across the EU and beyond.20
1 According to publicly available information, Raffinerie Heide GmbH is ultimately controlled by Klesch Group Holding Limited (incorporated in Jersey). By virtue of this foreign control, the German-incorporated entity has standing to bring a claim under the ECT and the ICSID Convention (the “Convention”). This structure also exempts the case from any intra-EU investment arbitration issues (as per the European Commission’s 19 July 2018 communication on intra-EU investments), and it appears that the EU is not contesting this point.
2 Decision on Provisional Measures, 23 July 2024 (“Decision”) at [22].
3 Ibid at [25].
4 Ibid at [29].
5 Ibid.
6 Ibid at [33].
7 Ibid at [43].
8 Ibid at [56].
9 Ibid.
10 Ibid at [61].
11 Ibid at [60].
12 Ibid at [67].
13 Ibid at [70].
14 Ibid at [74].
15 Ibid at [73].
16 Ibid at [73]–[74].
17 Ibid at [59].
18 As mentioned above, the Klesch Group has initiated three separate ICSID proceedings under the ECT against Germany, Denmark and the EU. The same arbitral tribunal has been appointed in all three cases.
19 Decision at [82].
20 Additionally, the judgment in ExxonMobil Producing Netherlands and Mobil Erdgas-Erdöl v. Council of the European Union (Case No. T-802/22) will be key in determining whether the EU lacks the competence to impose a measure such as the solidarity contribution under EU law.
