Caribbean & Central America - April 2014 (ISSN 1741-4458)

An extraordinary session of Cuba’s National Assembly on 29 March approved a new law designed to entice new foreign investors into the state-owned and sanctions-constrained economy.

Terms for investors are improved

The new law is the outcome of a long process of review and debate, in which reformers managed to convince doubters of the need for more foreign investment to strengthen Cuban economic growth and development. The terms for foreign investors are improved by the law and, perhaps more significantly, the government led by President Raúl Castro has made a commitment to adopt a more open approach in its dealings with potential partners. The extent of change will become apparent in the coming months, as regulatory details are published and new procedures are introduced within the government institutions that negotiate agreements.

The following changes, contained in the law, are designed to attract new foreign business partners:

Reduced taxes: The most obvious improvement for foreign businesses is an overhaul of the tax treatment of their investments. All joint ventures will be exempt from profits taxes for a standard eight years, where previously any exemptions had to be negotiated. A further period remains possible in special cases. After that, the rate of profits tax is reduced from 30% to 15%, with no tax payable on reinvested profits. Employment taxes, which previously amounted to 24% of salaries, are eliminated, in an effort to provide improved incentives for job creation. Profits from mining, oil and other raw material ventures, are halved to maximum of 22.5%. Projects are exempt from customs duties while they are being established, and any joint ventures set up within the Mariel Special Development Zone will retain their more favourable tax laws.

Streamlined approvals process. Although large projects continue to require approval from the Ministry of Foreign Trade, Investment and Economic Cooperation (known as Mincex) and the Council of State or Council of Ministers, the government has made a commitment to accelerate the process and improve its transparency. For smaller projects, a fast-track procedure will remove some of the stages of the approvals process, with the relevant ministry empowered to give the go-ahead within 45 days of the submission of the joint venture proposal.

New types of Cuban partners. So far, joint ventures have only been possible with Cuban state enterprises. In the case of new small private business sector, remittances from abroad have been an important source of financing, but the foreign partner does not have any ownership rights recognised in law. The new legislation opens up the possibility of joint ventures in the non-state sector, although it is limited to Cuban cooperatives. Until 2013, cooperatives were limited to the agricultural sector, but in the past year their number, and the range of activities, has been growing rapidly. This form of enterprise already enjoys tax preferences, and by opening it up to foreign investment, it appears that the government is hoping inject additional dynamism.

But the framework remains intact

Despite these changes, the overall framework for foreign participation, in terms of the process of government vetting and control, remains intact. In the Cuban economic system, the state retains the right and obligation to direct economic development. Although it has created new space for non-state enterprises, it continues to dominate the economy and own most enterprise. Foreign investors will still have to secure the approval of the government by demonstrating the contribution of their proposed participation to Cuban development. The requirements are clearly set out: the investment must bring new financing, technology, management skills or markets. Other aspects of policy also remain unchanged:

Priority sectors: Economic planners will continue to maintain a list of investment priorities, so that the chances of approval will depend on the extent to which the proposal accords with the economic plan. At present, Cuba’s list of main interests includes agricultural output, food processing, export expansion and diversification (by product or destination), import substitution, infrastructure development, biotechnology and information technology.

Closed sectors: The list of sectors that remain closed to foreign investment also remains unchanged: health, education, defence and the media will remain completely in state hands, although investment in ‘health tourism’ facilities is encouraged.

Employment system: One of the peculiarities of joint ventures in Cuba is that Cuban staff have to be contracted from a state employment agency. However, there seems to be some change here, in terms of the setting of wages. Although the company still has to agree wages with the agency, there are no statutory pay scales. Instead, there is only a minimum wage. The new law continues to require that all staff should be Cuban, apart from the foreign partner’s appointees to the most senior management positions.

Disputes resolution: The joint venture agreement can include special clauses to provide for international arbitration, but unless these are agreed, Cuba-based arbitration will be used to settle disputes.

Freedom to trade: The Ministry of Foreign Trade, Investment and International Collaboration allows joint ventures to export and import directly with foreign customers and suppliers. This gives them an advantage compared with most Cuban state enterprises, which have to trade through the ministry. As economic reforms progress and once the exchange rate has been unified, Cuban state enterprises will operate more like joint ventures in this respect.

Uncertainties

The new law strengthens guarantees for investors in areas of concern. It provides further reassurance to those fearing nationalisation, specifying the conditions under which it can be allowed and the compensation to which the investor would be entitled. It also specifies legal protection against previous owners of Cuban assets who might make claims under the 1996 Cuban Liberty and Democratic Solidarity (Libertad) Act (known as the Helms-Burton Act).

The greatest uncertainty for investors is the future of US sanctions against Cuba, which not only close the US market for Cuban exports but also make it difficult to obtain inputs, secure access to international finance and conduct foreign exchange transactions.

The combination of US restrictions on Cuban trade and financing and the Cuban government’s controls on the scope of foreign investment will continue to constrain foreign investor participation in the Cuban economy. Nonetheless, the new law and regulations, combined with the Cuban authorities’ new interest in attracting new partners, will open the way for a new batch of joint venture projects.