EFTA states modernise Free Trade Agreement with Ukraine, featuring distinct international investment protection rules

Introduction

On 8 April 2025, the member states of the European Free Trade Association (EFTA) – Iceland, Liechtenstein, Norway, and Switzerland – signed a modernised Free Trade Agreement (FTA) with Ukraine. The modernisation process began in June 2023, and the FTA has not yet come into effect. This new FTA is part of a broader EFTA initiative to strengthen its international trade and investment relationships (see our coverage of EFTA's recent signing of an FTA with Thailand here).

This most recent EFTA-FTA offers comprehensive coverage, including trade in goods and services, e-commerce, intellectual property (IP) protection, government procurement, competition, and sustainable development.

Additionally, the FTA is particularly noteworthy from an international investment law perspective, as it includes a detailed "Investment Chapter" in Chapter 5, outlining distinct international rules for the protection of foreign investments. This represents a departure from EFTA's approach in other recent trade agreements. This article discusses the key provisions of the Investment Chapter.

Scope of application

Covered investments

The FTA’s Investment Chapter defines "investment" broadly as "every kind of asset, including but not limited to" any form of equity in an enterprise, claims to money and performance, IP rights, rights conferred under laws or contract, such as concessions, licences, and permits, and rights over movable and immovable property (Art. 5.2(c)).

Insofar as ownership in enterprises is concerned, the Investment Chapter applies to foreign investments "which constitute, or are related to, a direct investment" (Art. 5.1.1). In line with IMF and OECD definitions of foreign direct investment (FDI), the Investment Chapter defines FDI as the "participation of an investor in an enterprise, consisting of at least 10 percent ownership" (Art. 5.2(a)). This excludes portfolio investments.

Directly or indirectly owned or controlled 

The Investment Chapter applies to investments that are "owned or controlled, either directly or indirectly" by a foreign investor (Art. 5.2(e)). This means, for example, that the rules of the Investment Chapter apply to indirect investments by investors from EFTA states in Ukraine, even when these investments are made through companies owned or controlled in third states.

Temporal scope

Notably, the Investment Chapter applies to covered investments regardless of whether they were made before or after the entry into force of the FTA. An exemption, however, is made for disputes arising from events that occurred prior to the FTA entering into force, which are not covered by the Investment Chapter (Art. 5.1.2).

Substantive investment protection rules

Regarding substantive law, the FTA's Investment Chapter establishes important international rules for the protection of foreign investments. These rules are typically found in standalone bilateral investment treaties (BITs), which specifically govern the promotion and protection of foreign investments.

Fair and equitable treatment

The Investment Chapter includes a clause requiring the parties to accord foreign investors "fair and equitable treatment" (FET) (Art. 5.3). FET has become a key feature in international investment law. Tribunals in investment arbitration have held that FET requires a minimum standard of treatment and is breached if, for example, a state measure constitutes a denial of justice, a fundamental breach of due process, manifest arbitrariness, targeted discrimination, or abusive treatment of investors, such as coercion, duress, or harassment.

Full protection and security

The Investment Chapter also contains a "full-protection-and-security" (FPS) clause (Art. 5.3). As a rule that is also recognised under customary international law, FPS refers to a state's obligations regarding the physical security of foreign investors and their investments.

National Treatment

Moreover, the Investment Chapter includes a "national treatment" (NT) clause (Art. 5.4). Subject to the reservations set out in Annex XI of the FTA, this non-discrimination standard requires states to accord foreign investors and their investments treatment no less favourable than that given to their own investors and investments in like situations.

Most-favoured-nation treatment

The "most-favoured-nation" (MFN) clause in the Investment Chapter (Art. 5.5) is a separate non-discrimination standard requiring a state to create a level playing field between foreign investors from different states. Except as provided in the reservations by Norway in Annex XII, or any preferential treatment granted through customs unions, common markets, or regional economic integration agreements, the MFN clause requires each FTA party to accord investors and their investments from another party treatment no less favourable than that accorded, in like situations, to foreign investors and their investments from a third state.

The Investment Chapter clarifies that both NT and MFN apply to foreign investors' access to courts and other legal proceedings (Art. 5.6).

Free transfer of funds

As another standard often found in BITs, the Investment Chapter includes a "free-transfer-of-funds" obligation, which requires the FTA parties not to restrict payments or capital movements related to investment activities by foreign investors (Art. 5.12).

Transparency

The Investment Chapter also includes a transparency rule (Art. 5.9). Domestic laws, regulations, judicial decisions, administrative rulings, and any agreements affecting investment matters must be promptly published or made publicly available by the FTA parties to ensure foreign investors are informed.

Right to regulate

Finally, the Investment Chapter includes an article recognising the FTA parties' right to regulate for legitimate policy objectives, including public health, safety, and the environment, or to implement reasonable measures for prudential purposes (Art. 5.8.1). The parties commit not to derogate from or waive such measures for the purpose of attracting investments (Art. 5.8.2).

Dispute settlement by international arbitration

In cases of disputes between the parties regarding the FTA, including the Investment Chapter, Chapter 13 stipulates that resolution must be sought through state-to-state arbitration. Prior to initiating arbitration, the complaining party is required to attempt an amicable resolution through consultations. If these efforts prove unsuccessful, arbitration may proceed by requesting the formation of a three-member arbitral tribunal. The tribunal resolves a dispute by issuing an initial report, followed by a binding final report after considering party comments on the initial report.

This same dispute resolution mechanism is also found in earlier EFTA FTAs (see our article here).

Relationship with the Switzerland-Ukraine BIT

Switzerland concluded a BIT with Ukraine in 1995 (the Switzerland-Ukraine BIT). In contrast, Iceland, Liechtenstein, and Norway do not have BITs with Ukraine. As a result, the FTA's Investment Chapter and its protective rules are especially important for foreign investments from these three EFTA states.

As far as Swiss investors are concerned, the substantive and procedural protections in the Switzerland-Ukraine BIT go beyond those in the FTA's Investment Chapter in two key aspects. First, the BIT includes a clause protecting Swiss investments against unlawful direct or indirect expropriations. Additionally, the BIT contains an "umbrella" or "observance-of-undertakings" clause, which requires the host state to honour any direct commitments made concerning a foreign investment. Second, under the Switzerland-Ukraine BIT, investors from either contracting state can directly enforce the BIT's protections by initiating investor-state arbitration against the host state. Importantly, Art. 5.1.3 of the FTA clarifies that its Investment Chapter does not affect the interpretation or application of the Switzerland-Ukraine BIT.

Comment

EFTA's most recent FTA with Ukraine is expected to contribute to economic growth on both sides and strengthen ties between the parties by benefiting economic operators across various sectors. Bilateral trade reached nearly EUR 1.1 billion in 2024, with an average growth rate over the last five years of 4.9% for imports and 9.3% for exports, while the trade surplus in favour of the EFTA states has continued to widen.

Regarding cross-border investment, the FTA's Investment Chapter includes key protection rules for foreign investments by investors from EFTA states. These rules are in line with established international standards.

For more information on the EFTA states' FTA with Ukraine, contact your CMS client partner or this CMS expert.