What the New Cuban Foreign Investment Law Means

August 11, 2014Articles Law360

Reprinted with permission from Law360. (c) 2014 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.

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.

Reprinted with permission from Law360. (c) 2014 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.