Cuba: What The New Cuban Foreign Investment Law Means

Last Updated: 19 August 2014
Article by Law 360

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions