Cuba adopted a new foreign investment law
earlier this year that abolished duty-free zones and industrial
parks while expanding areas for investment. Under the new law,
investment is allowed in all economic sectors, including utilities,
administrative concessions, real estate (purchase, sale and leasing
of houses and offices), hotel management and professional services.
The law also provides for investments in stocks and other
securities or bonds, public or private, that do not fit the
definition of direct investment.
No foreign investment is authorized in the public health and
education sectors or in any institution of the armed forces other
than their system of enterprises. Likewise, foreign investment is
not authorized if it will be detrimental to national defense and
security, national resources or the environment.
Any foreign investment must be approved by an
"authorization" issued, depending on its content and
extent, by the Council of State, the Council of Ministers or
another authority appointed by the latter. The authorization is
granted upon the submission of business proposals to the Ministry
of Foreign Trade and Foreign Investment (MINCEX), which relies on a
Business Evaluation Commission, made up of representatives from
eight ministries and the Central Bank of Cuba, to assess the
proposals.
Every year, the state establishes a portfolio of foreign investment
opportunities containing those opportunities identified by the
Cuban government entities. This portfolio responds to the
state's priorities. MINCEX outlined provisions regarding the
format and content of the documents for both the investments and
proposals to be registered in the portfolio. It also publishes and
promotes the investments proposed in the portfolio, albeit without
excluding the possibility that potential investors will make
further proposals.
Foreign investment must adopt one of the following three forms:
joint venture, international economic association contract or
totally foreign capital company. The international economic
association contracts cover contracts for hotel, production or
service management and contracts for the provision of professional
services.
Key Changes in the New
Law
- It cuts the tax on profits in half — from 30 percent to 15 percent for most industries — and eliminates the prior 25 percent tax on labor costs.
- It allows 100 percent foreign ownership, which, though previously legal, was never allowed in practice.
- Investors in joint ventures get an eight-year exemption from all taxes on profits.
- Investments in real estate can be in private housing.
- It offers new control measures to evaluate, inter alia, compliance with the legal provisions in force and the conditions approved for the establishment or implementation of every business. As the main entity in charge of controlling the investments, from both the financial and implementation viewpoints, MINCEX reviews all financial statements, balance sheets and annual results, all duly certified by independent entities.
- It provides for stricter environmental controls. The individuals or corporations responsible for environmental damages will be required to reestablish the previous environmental situation, repair the damage or pay the corresponding indemnification, as appropriate.
- It recognizes the intellectual property rights and technological innovation of the foreign investor.
- All the forms of investments are officially registered by a public instrument before a notary and inscribed in the Trade Register Office. The prior inscription requirement in the Cuba Chamber of Commerce has been rescinded.
Guarantees
The guarantees for investors are similar to those stipulated in the
previous law. They mostly refer to the validity of the
authorizations for the whole period of time granted, albeit the
foreign investor's assets may be expropriated for reasons of
public utility or social interest, as declared by the Council of
Ministers, contingent on indemnification based on the agreed
commercial value of the assets.
- Subject to authorization, the investors may sell or transfer stocks and shares in any investment or any form of contract.
- The foreign investors may transfer abroad the net profits or dividends derived from their investments, as well as the proceeds resulting from the liquidation or sale of shares, in convertible currency free from taxes, withholding or deductions.
- Foreign temporary residents who render services to a joint venture, the parties to an international economic association contract or a totally foreign capital company are entitled to transfer abroad 66 percent of their earned income.
Labor Force
The labor force needed by joint ventures and fully owned companies
is selected and provided by a government employment agency, which
charges a fee for such services and pays the employee's salary
in Cuban pesos (CUP) while charging the investors in convertible
currency (CUC). This salary is negotiated with the foreign investor
on the basis of the minimum pay equivalent to the national average
salary, which currently amounts to 456.00 CUP (1 CUC=25 CUP; 1
CUC=$1).
No foreign investor can hire labor directly except for certain top
management or technical positions to be held by nonpermanent
residents. These positions are stated in the authorization. In
these cases, the foreign investor must note the relevant labor
regulations, as well as the rights and duties of the said
employees, who must comply with the current immigration
legislation.
The foreign investor may discharge the employees hired through the
employment agency, but it is required to pay the agency the
compensation amount established by the Ministry of Labor and Social
Security.
An enterprise may establish, subsequent to the approval by MINCEX,
an economic incentive fund, a cash incentive, for both the Cuban
workers and the foreign employees who reside permanently in Cuba.
Any contribution to the economic incentive fund must stem from the
profits made by the enterprise.
All employees subject to international economic association
contracts will be hired by the Cuban employment agency and must
abide by the current Cuban legislation.
Special Taxation System
Joint ventures and national and foreign investors who are parties
to an international economic association contract are subject to
tax obligations and exemptions:
- Foreign investors are exempt from payment of income taxes on net profits for business.
- Exemption from payment of profits taxes during eight years following the establishment of the enterprise. This period may be extended by the Council of Ministers. Once the time is over, the tax shall be levied at 15 percent of the net profits. When natural resources (renewable or not) are used, the Council of Ministers may decide to raise the rate up to 50 percent. (The tax law provides for the payment of taxes for up to 35 percent of the profits.)
- Exemption from payment of net profits taxes and other taxes authorized by the relevant authority for reinvestment in the country.
- Exemption from payment of wholesale and service taxes during the first year of operation of the investment. A 50 percent tax deduction, equivalent to two percent of the total wholesale of goods and 10 percent for services, will be levied in the following years.
- Exemption from payment of taxes for the sales of goods and services in the case of contracts for hotel, production and service management and for the provision of professional services.
- Exemption from payment of labor taxes. (The tax law provides for the payment of five to 15 percent of the total payroll.)
- A 50 percent tax deduction during the period of return on investment for:
-
- The use and exploitation of harbors. (This tax, which adds up to $0.25 per linear meter per day, is being levied only on the harbor of Havana.)
- The use and exploitation of forest and wildlife resources. (The tax law provides for a scale of rates that fluctuates between 13 CUP and 45.50 CUP depending on the type of wood.)
- The right to use inland waterways. (The tax rate depends on the budget law.)
- Territorial contributions to local development, except in the cases of contracts for hotel, production and service management and contracts for the provision of professional services. (The tax rate depends on the budget law.)
- Exemption from paying customs taxes (tariffs) for the importation of equipment, machinery and other assets during the investment process, according to provisions established by the Ministry of Finance and Prices.
Totally foreign capital companies have an obligation to pay
taxes for the duration of their contract, pursuant to the current
legislation and without detriment to the fiscal benefits stipulated
by the Ministry of Finance and Prices, provided it is in the
interest of the country.
Resolution of Conflicts
Any conflict that may arise in the relations between partners of a
joint venture, or between foreign and national investors who are
party to an international economic association contract, or between
partners in a totally foreign capital company established in the
form of a nominal share corporation, must be resolved in accordance
with the provisions stipulated in the corporate documents. The same
rule applies when conflicts arise between one or more partners and
the joint venture or the full foreign ownership company to which
they belong.
The Cuban court has jurisdiction over disputes arising from the
following:
- Inactivity on the part of the top management of any form of foreign investment envisaged in the legislation or situations conducive to the dissolution or termination/liquidation of the investment.
- Relations between the partners to a joint venture or a totally foreign capital company or between national and foreign investors who are party to an international economic association contract who have been authorized to carry out activities involving the use of natural resources and public utilities and the execution of public works.
- Any dispute regarding the implementation of economic contracts that may arise within the context of the various forms of foreign investment envisaged in the legislation or between the said forms and Cuban legal entities or individuals.
Conclusion
Despite the initial success of the prior Law 77 of 1995 and the
publicity obtained in the late 1990s, Cuba has not been able to
secure foreign investment to the degree that the country needs and
is capable of attracting when compared with other countries in the
region and across the globe. The new Law 118 of 2014 redefines the
legal framework and offers greater incentives to the foreign
investors in a crucial moment where the Cuban government needs
foreign investment to continue its economic growth and the foreign
investors need the Cuban government to honor its pro-investment
policies and promises. It is possible, therefore, to balance the
rewards for both sides to ensure profitable ventures for all the
players involved. However, there are still challenges such as
uncertainty about the Cuban government's commitment to foreign
investment, state control on the economic activities and on the
operation of the enterprises and finally the inability of foreign
investors to hire directly and to pay workers in convertible
currency.
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