By Haggai Carmon

The Vienna Conventions on Diplomatic and Consular relations exempt foreign missions from taxes in the receiving states.

            Article 23 of the Vienna Diplomatic Relations Convention:

1. The sending State and the head of the mission shall be exempt from all national, regional or municipal dues and taxes in respect of the premises of the mission, whether owned or leased, other than such as represent payment for specific services rendered.

Similar language was used by Article 32 the Vienna Convention on Consular Relations:

            Article 32

1. Consular premises and the residence of the career head of consular post of which the sending State or any person acting on its behalf is the owner or lessee shall be exempt from all national, regional or municipal dues and taxes whatsoever, other than such as represent payment for specific services rendered.

The City of New York sued the Philippines in April 2003 in the United States District Court for the Southern District of New York, seeking $37 million in unpaid real property taxes on the Philippine Center Building. The City sought the taxes on portions of the Philippine Center occupied by Maharlika, a Philippine restaurant, by the Philippine National Bank, and by Philippine Airlines.  Also named in the lawsuit were India and Mongolia over similar tax issues.

The federal district court ordered the Philippines to pay $10.9 million for the operations of PNB and PAL which the court determined they were commercial in nature and not exempt from local taxation under international law. The Maharlika restaurant was found by the court to have served consular purposes and was therefore exempt from New York City taxes. The court ruled that only the home of the head of a mission is exempted from taxes under the Vienna Conventions. The court has also ordered India to pay $42.4 million and Mongolia to pay $4.3 million to the City of New York.

The Philippine government, India and Mongolia and New York City appealed the judgment. Last week, the Philippine government settled and agreed to pay $9 million, saving $1.9 million and a potential loss of $27 million, if it lost its appeal. However the appeal of India and Mongolia over similar issues is still pending before the United States Court of Appeals of the Second Circuit in New York City.

The legal issues involved are complex. In May 2006, a United States Court of Appeals for the Second Circuit sitting in New York cleared the way for New York City to sue foreign governments for nonpayment of taxes on diplomatic buildings within the city. In addition to the City’s attempted to collect taxes from India the Philippines and Mongolia on portions parts of diplomatic and consular buildings used for non-diplomatic purposes, such as restaurants or housing. New York has also been trying to collect also from Hungary, Libya, Rwanda, Nigeria and Uganda. The Second Circuit affirmed a U.S District Court’s decision that it had jurisdiction to hear the City’s lawsuits. The Court said that a foreign country cannot “assume the benefits of ownership…while simultaneously disclaiming the obligations associated with them.” The Court also said that “When owning property here, a foreign state must follow the same rules as everyone else.”

On appeal to the Supreme Court the respective parties disagreed whether U.S court have jurisdiction over foreign countries’ taxes. The Supreme Court in a 7-2 decision ruled that U.S. courts can decide New York City’s property tax disputes with foreign governments. Federal law “does not immunize a foreign sovereign” in such cases, the court said. Under the Foreign Sovereign Immunities Act, the jurisdictions of U.S. courts do not extend to foreign governments, subject to an exception when “rights in immovable property” are at issue. The Supreme Court found that the exception applies in the New York case.

If India and Mongolia will decide to resist collection of the judgment, the City of New York could be faced with significant difficulties due to the very restrictive nature of the Foreign Sovereign Immunity Act when attachment is concerned. One interesting avenue would be through the Foreign Operations Appropriations Act, which enables the U.S. government to withhold 110 percent of any unpaid taxes from a country’s foreign aid.

By Haggai Carmon

The Kingdom of Saudi Arabia and members of the royal family claim in the U.S. Supreme Court that they enjoy immunity from lawsuits brought by insurance companies. The companies are trying to recover billions they paid in property-damage claims following the September 11^th attacks. The insurance companies claim that Saudi Arabia should be held accountable for the attacks because Saudi Kingdom-supported Islamic charities financed al-Qaida. The plaintiffs will have to convince the court that although the United States Department of State has never designated the Saudi Kingdom as “a state sponsor of terrorism,” nonetheless, the Kingdom supported al-Qaida and therefore, cannot be protected by immunity under the federal Foreign Sovereign Immunities Act.

By Haggai Carmon

How Comity, Reciprocity and Political Questions became a Hurdle

The federal District Court in Manhattan dealt a blow to a group of Jewish French Holocaust survivors that attempted a class action to hold in the French Republic, Caisse des Dépôts et Consignations (CDC) bank, and the Société Nationale des Chemins de Fer Français (SNCF), France’s national railroad responsible for their property confiscated in a French camp before they were sent to German concentration camps during World War II.  The court dismissed the lawsuit on multiple grounds. First it ruled that plaintiffs’ claims are barred by the Foreign Sovereign Immunities Act (FSIA), which protects “agencies or instrumentalities” of a foreign state. Then, the court found it had no jurisdiction against the bank and the train companies because they met the requirements  of an FSIA article that excludes jurisdiction when the instrumentality is ”is neither a citizen of a State of the United States…nor created under the laws of any third country.”

The court has also found that an exception to immunity under FSIA for “takings” did not apply in that case.  FSIA’s “takings” exception allows courts’ jurisdiction over entities that could otherwise be entitled to immunity if a taking of property “was in violation of international law” and the property is either in the United States “in connection with a commercial activity” carried on in the United States by a foreign state or where the property is held “by an agency or instrumentality” of the foreign state that is engaged in commercial activity here.
The court was reluctant to allow indirect U.S presence of the bank and applied reciprocity concerns. “Declining to recognize CDC’s sovereign immunity based on its limited and largely indirect holdings in other entities would disregard the distinction between CDC and its independent subsidiaries, doing so would encourage foreign courts to do the same when assessing the conduct of U.S. corporations.” With respect to the railroad company, the court dismissed the lawsuit against them although it clearly engaged in commercial activity in the United States, because plaintiffs never argued that the confiscated property is “owned or operated” by the railroad. The court also refused plaintiffs’ request that the court assert “jurisdictional discovery” on the railroad company and the France government because the plaintiffs had difficulty getting access to French archives.  Here the court applied “Comity” considerations, which the court should maintain, while it allowed under FSIA certain lawsuits against foreign states to proceed. The discovery request would “require the court to order a foreign sovereign and its instrumentality to provide access to their sealed archives,” the court said. And ordering discovery on the Société Nationale des Chemins de Fer Français and the French government, would “directly conflict” with an executive agreement between France and the United States signed in 2001 to ensure compensation for victims by resolving all claims arising out of World War II without litigation. It seems that the court was very reluctant to let this lawsuit to proceed because of the underlying fundamental political question doctrine, making judicial abstention appropriate.

Freund v. The Republic of France, 06 Civ. 1637.