Selective discrimination (political risk)

In 2010, Hungary introduced a special tax on retail trade, based on turnover, with steeply progressive rates. The statute named no one; in practice, the top brackets fell almost entirely on foreign-owned chains. In Hervis Sport (C-385/12), the Court of Justice of the European Union held on February 5, 2014 that such a tax breaches freedom of establishment if in practice it mainly disadvantages foreign companies. It left it to the Hungarian court to check the facts. In political risk vocabulary, selective discrimination means exactly this kind of measure: a government act aimed at a foreign investor or a class of foreign investors. It is one of the triggers in CEND policies (confiscation, expropriation, nationalization, deprivation), alongside outright seizure. The market draws the line between two cases. A general measure, taken in good faith and applying to all (a tax, a sector regulation), stays excluded; a targeted measure triggers cover if it causes the loss defined in the contract. The MIGA Convention likewise carves out non-discriminatory measures of general application that governments normally take to regulate economic activity. The whole claim therefore rests on proving targeting, and a statute drafted in neutral terms, like the Hungarian tax, is the hardest case, because the discrimination then shows only in its effects. An underwriter looks at the structure of the targeted markets (who the large players are, and of what nationality) before trusting that a rate schedule is neutral. Not to be confused with creeping expropriation, a series of measures that strip an investment of its value without any transfer of title. Discrimination can be one element of it, though not every discriminatory act deprives the investor of the asset.

• CJEU, 5 February 2014, Hervis Sport- és Divatkereskedelmi Kft., C-385/12