Indirect Expropriation in Investment Arbitration and Its Position in Iranian Law: From Article 9 of the Foreign Investment Promotion and Protection Act to the “State’s Right to Regulate” in International Jurisprudence

Abstract

Indirect expropriation, as one of the most contentious concepts in international investment law, occurs when a state, without formally transferring title, adopts regulatory or administrative measures—such as changes in taxation, foreign-exchange restrictions, environmental regulations, or administrative interventions—that impair the economic value of an investment to such an extent that its essential functions and benefits are effectively extinguished or severely restricted. In Iranian law, Article 9 of the Foreign Investment Promotion and Protection Act of 2002 primarily addresses confiscation and expropriation in their classical sense, while its relationship with contemporary forms of expropriation recognized in investment arbitration, including indirect expropriation, remains ambiguous with respect to the applicable criteria for establishing expropriation, the scope of compensation, and compatibility with the “state’s right to regulate.” The principal issue addressed in this study is the normative and interpretive gap between Iran’s domestic legal framework and the standards developed in international practice, particularly investment arbitration, and the following question is examined: What are the criteria for identifying indirect expropriation in international practice, and how can these criteria be reconciled with Article 9 of the 2002 Act and the principles governing state regulation within the Iranian legal system? The findings indicate that the predominant trend in arbitral jurisprudence has moved toward the application of composite tests involving the severity of the measure’s effects, interference with legitimate expectations, and the purpose and proportionality of the measure. At the same time, through recognition of the state’s right to regulate, non-discriminatory and proportionate measures adopted in the public interest are generally regarded as falling outside the scope of expropriation. The study concludes that, in order to reduce the risk of investment disputes and enhance legal predictability, Iranian law should adopt a broader yet criteria-based interpretation of Article 9, expressly incorporating standards concerning the effects and proportionality of state measures and compensation, while also developing contractual provisions designed to manage regulatory risk. This study employs a descriptive–analytical methodology with a comparative approach and is based on documentary research.