Luis M. Alcalde, Director

On April 16, 2014, Cuba published its new law on foreign investment (LFI) in the Official Gazette of the Republic of Cuba. The LFI replaces Law 77, enacted in 1995, with a more detailed act intended to attract foreign capital with tax, and other incentives and guarantees.¹ In the preamble to the LFI, the Cuban National Assembly makes clear that the underlying basis for the law is Cuba's need to provide greater incentives to attract foreign capital, new technologies, and know-how to increase domestic production and better position Cuba to export to international markets.² The objective of the LFI is to establish the legal framework for foreign investment as well as the guaranties and legal security to attract and utilize foreign capital.³

Only time will tell if the LFI is more successful in attracting foreign investment to Cuba than Law 77. The LFI does provide tax incentives not present in the previous law. Those include, among others, no tax on dividends, no income tax for the first eight years of existence and a fifteen percent tax rate thereafter.⁴ However, as discussed below, the details in the LFI serve to confirm the government's central role in controlling and approving all foreign investment opportunities. Moreover, the requirements to present foreign investment proposals for analysis guarantee that only well-funded big capital projects will be approved. Cubans employed in approved projects will continue to work for Cuban employment agencies and not directly for companies created with foreign money. Only Cuban companies approved by the Cuban government can partner with foreigners; and, it is not clear that native Cubans will be allowed to form companies to invest with foreigners. The LFI is meant to channel big investments to government-approved sectors. It is not a law intended to promote individual domestic entrepreneurship with foreign money.

To publicize Cuba's foreign investment priorities, the Cuban government will annually prepare and market through official channels a Portfolio of Foreign Investment Opportunities (Investment Portfolio). The Investment Portfolio will list desired and pre-approved sectors for foreign investment.⁵ Consistent with the Investment Portfolio and the LFI, foreign investment will be allowed in all sectors except those in health, education and the armed forces.⁶ Investments in real estate are permitted to include housing and buildings for private residences, foreign companies and tourism.⁷ The Cuban state "authorizes foreign investments that do not affect defense, national security, national patrimony or the environment".⁸ Investment opportunities not listed in the Investment Portfolio can be proposed and may be approved so long as they are consistent with law and Cuba's foreign investment objectives.⁹ All foreign investment through any modality listed in the LFI must receive "Autorizacion" (Authorization) from the Council of Ministers or the appropriate governmental authority with jurisdiction over the particular investment.¹⁰

To assure foreign investors, the LFI provides that the Cuban state guarantees that all benefits conceded to a foreign investment and foreign investor will remain in force throughout the specified approved term.¹¹ Foreign investments are protected from expropriation without due process of law. Moreover, should there be a government taking, the LFI provides for the payment of "commercial value" duly agreed to by the parties or as determined by a third-party valuation expert chosen by the parties.¹² The LFI guarantees foreign investors the free and unencumbered repatriation of dividends and monies received from a liquidation, transfer or sale of any capital interests in a foreign investment without tax, charge, encumbrance or lien.¹³

To address possible concerns over claims filed in third countries involving investments in Cuba (presumably related to U.S. laws sanctioning Cuba) the LFI provides that "foreign investments are protected in the country in accordance with Cuban law and the decisions of Cuban courts against claims of third parties based on rights or the application of the extraterritorial laws of other states."¹⁴

Foreign investment is permissible as a shareholder in a mixed, a completely foreign-owned company, through contractual relations in an economic international association, effectively participating in the control of a business and, investments in public or private shares or other securities not considered to be direct investments.¹⁵

The principle investment entities discussed in the LFI are the mixed company, the completely foreign-owned company and the contractual economic international association. As the name implies, mixed companies are legal entities adopting a corporate structure with foreign and Cuban shareholders. The latter are for the moment limited to judicial entities and excluding natural persons.¹⁶ The parties will decide among themselves the percentages of ownership and the valuation of the respective capital invested.¹⁷ Corporate governance is per the terms of the parties' agreement, the company's constitution and other applicable Cuban laws.¹⁸ The company obtains legal status once registered in the Commercial Registry and certain of the documents such as the constitution, the government's authorization, the parties' agreement (including ownership interests) become public documents.¹⁹

Foreign-owned entities must also be registered in the Commercial Registry²⁰ A foreign investor can operate as a "natural person" acting in an individual capacity²¹ and/or as a separate legal Cuban subsidiary or as a branch office of a foreign corporation duly registered as such²².

A contractual economic international association, as the name implies, is a contractual relationship between Cuban and foreign investors to engage in a joint business venture. This investment model has the following characteristics: it is not a separate legal entity apart from the parties; it can engage in whatever activity is authorized by the government in the enabling act and applicable law; the parties have contractual freedom to define their relationship and objectives consistent with the enabling authorization and applicable law; the parties contribute differing capital or resources to which they retain ownership at all times; the aggregate capital can serve as a common fund so long as the separate interest of each owner is identifiable²³

Examples of contractual economic international associations in the LFI are ventures to exploit non-renewable natural resources, agricultural construction and production, hotel administration and providing professional services.²⁴

Foreign investments in partnership with Cuban parties are to first be negotiated between the parties who will thereafter take their proposed deal and investment to the government for approval. Investments to be owned 100 percent by foreign capital will be negotiated with the appropriate Cuban ministries.²⁵

All foreign investment proposals must be presented for approval to the Ministry of Foreign Commerce and Investments.²⁶ The Regulations detail the required information and documentation that must be presented as well as the process. The information required for the approval process is fairly extensive requiring business, marketing, financial and legal planning. For example, solicitation for approval of a foreign investments to the Minister of Foreign Commerce requires: the certification of approval from the state organ or other authorities proposing the foreign investment; certification from the competent authorities that the investment is compatible with the interest of Defense; evaluation from the Minister of Science, Technology and Environment respecting the environmental, technological, intellectual property, weights and measures and quality aspects of the investment; a listing of Cuban nationals that are to assume management positions; listing of products to be imported or exported; identification of the proposed agency to employ the Cuban workforce; the evaluation by the governmental organ promoting the investment of the economic and technical prospects of the business plan; and any other document required to regulate the investment process.²⁷

In addition to the above, investors in mixed companies, foreign-owned companies and contractual international economic associations will need to present, among other information, corporate governance and financing documents and information, business plans, market studies, valuation and ownership information respecting the capital and property invested and environmental studies as needed.²⁸

Investment contributions are considered as being money, machinery, equipment and other tangible property, intellectual property rights and rights over intangible property, real estate and rights related to real estate, surface and subsurface rights in land and other rights and benefits.²⁹ Investment are to be valued in monies freely convertible in the international markets.³⁰ Transfers of state property to Cuban investors will be decided by the Cuban government in accordance with Cuban law.³¹

The value of foreign investments that are not money will be decided among the parties in accordance with international valuation norms and accompanied by a certification from an expert authorized by the Minister of Finance and Prices.³²

Tax incentives include no tax on dividends, no income tax for the first eight (8) years of existence and a fifteen percent (15 percent) tax rate thereafter.³³ In addition to the favorable treatment of dividends and taxable income, mixed companies and investors in contracts of international economic association will pay no sales tax during the first year. After the first year the rate is calculated at fifty percent of the rate charged for wholesales.³⁴ Tax on services is treated the same. No tax is paid during the first year and thereafter at a rate of fifty percent of the normal rate.³⁵ No tax is paid for the use of labor.³⁶ Mixed companies and investors (Cubans and foreign) in contracts of international economic associations are exempt from paying local development taxes during the time required to recover the investment.³⁷ Mixed companies and investors in contractual international associations will also pay lower taxes during the period they are recouping an investment for various taxes related to natural resources such as beaches, forest and wild fauna, land waters, bays and river basins.³⁸

Excluded from the tax benefits of the LFI are Cuban and foreign investors in contractual international economic associations in hotel administration and professional services.³⁹ These investors will be exempt from sales and services tax.⁴⁰

No custom duties are paid for importing equipment, machinery and other mediums during the period of investment in accordance with "norms established by the Minister of Finance and Prices."⁴¹ Per the LFI, mixed companies, foreign-owned companies and contractual international economic associations are free to import directly what they require "in accordance with the established norms."⁴² Additionally, when purchasing goods and services domestically, mixed companies, foreign-owned companies and contractual international economic associations are to receive preferential treatment on pricing, quality and terms as are found in the international market.⁴³

Mixed companies, foreign owned companies and investors in contractual international economic associations shall open accounts in the Cuban banking system to finance their domestic operations.⁴⁴ Mixed companies and investors in international economic associations, with prior authority from the Cuban Central Bank, will be able to open foreign bank accounts.⁴⁵

Established labor and social security laws, as modified by the LFI, remain applicable to mixed companies, foreign-owned companies and international economic associations.⁴⁶ In general it is expected that Cuban nationals or permanent residents of Cuba will fill most labor requirements. Cuba's current labor model does not change in that Cubans and permanent residents providing the services will actually be employed by a Cuban employment company proposed by the Cuban government.⁴⁷ Cuban nationals and permanent resident workers will be individually contracted by the Cuban employment company.⁴⁸ If an employee is not performing satisfactorily, the Cuban employment company can be asked to provide a substitute employee.⁴⁹ All labor and employment claims are to be resolved with the Cuban employment company.⁵⁰ Interestingly, this does not apply to contractual international economic associations because in those arrangements, all Cuban and permanent resident workers are hired by the Cuban part of the association directly and the employment relationship is otherwise governed by established labor laws governing domestic employment.⁵⁰

The exception from these requirements are employees that are "integrated to the management and administrative organs" of mixed and foreign owned companies who can be contracted directly.⁵¹ Cubans and permanent residents are to be paid in Cuban pesos.⁵²

Some designated positions in higher management and technical areas can be filled by foreigners not permanently residing in Cuba.⁵⁴ With respect to these higher management and technical positions, the companies can designate the applicable labor regime and the rights and obligations of the employees.⁵⁵

The LFI provides that mixed companies, foreign-owned companies and international economic associations are authorized to create from earnings an economic stimulus fund for their Cuban and permanent resident workers.⁵⁶ The LFI also provides that when a foreign investment is approved, special labor regimes can also be approved on a case by case basis.⁵⁷

Companies involved in activities generating valuable intellectual property must be cognizant that the LFI provides that "the rights of Cuban workers who participate in obtaining technological or organizational innovations providing economic, social and environmental benefits will be recognized in accordance with existing legislation."⁵⁸

Mixed companies, foreign companies and international economic associations are required to maintain adequate reserves and insurance to cover loss contingencies resulting from operations.⁵⁹

The LFI provides a section on Conflict Resolution applicable to all entities and individuals falling within the sphere of the law.⁶⁰ Generally conflicts are to be resolved as agreed to by the parties in the documents establishing the investment entities. Conflicts with the Cuban government and Cuban entities and individuals are to be resolved in the local courts.⁶¹

The LFI will also apply to investments set up in special development zones such as the Mariel Special Development Zone to the extent there are no conflicts with such specific laws. However, to the extent the LFI is more beneficial than laws in the special development zones the LFI will apply.⁶²

Liquidations of foreign investments, absent the parties' agreement to the contrary, shall be paid in monies fully convertible.63 The sale or transfer of a foreign investor's interest in an investment wholly owned by foreign capital or one owned jointly with Cuban nationals or the Cuban government will require "prior authorization" from the Cuban government.⁶⁴ As such, it will be good practice for foreign investors to negotiate liberal sale, assignment and transfer rights at the start of any investment process to avoid issues or restrictions later on. The value of interests on liquidation, sale or transfers will be determined as agreed upon by the parties. Absent agreement by the parties, an internationally recognized valuation expert authorized by the Ministry of Finance and Prices will be selected to determine value.⁶⁵

Cuba needs significant foreign capital, for among other reasons, build infrastructure, diversify its energy sectors, build domestic food production and generate employment. The LFI and the laws regulating the Mariel Special Development Zone, with an emphasis on projects seemingly requiring big start-up capital and highly centralized government direction and approval will not answer all those needs. Nevertheless, the LFI is a good start in laying the framework for well-planned projects viewed to be viable by both foreign investors and the Cuban government. Since there is no existing body of executive, administrative or judicial precedents to serve as a guide in the interpretation and implementation of the LFI, Cuba's early efforts in applying the LFI will set the critical tone that will either encourage or repel potential investors to the new opportunities in Cuba.

1. Cuba also enacted accompanying Regulations for the Foreign Investment Law (Regulations). The Regulations provide greater detail on how foreign investments will be approved and regulated.
2. Law on Foreign Investment, Law 118, March 29, 2014, Preamble.
3. Id. Chapter I, Article 2.
4. Tax rates in some sectors such as those involving the exploitation of natural resources can be taxed at substantially higher rates up to 50%. Law on Foreign Investment, Law 118, Chapter IX, Article 36.1 (4).
5. Regulations on Foreign Investment Law, Chapter II.
6. Law on Foreign Investment, Chapter IV, Article 11.1.Foreign investment with the armed forces’ commercial business sector is allowed.
7. Id. Chapter VI, Articles 17.1 and 17.2.
8. Id. Chapter VIII, Article 20.
9. Id.
10. Id. Chapter VIII.
11. Id. Chapter III, Article 3
12. Id. Chapter III, Article 4.1.
13. Id. Chapter III, Article 9.1.
14. Id. Chapter III, Article 5.
15. Id. Chapter V, Article 12.
16. Id. Chapter V, Article 14.1.
17. Id. Chapter V, Article 14.2.
18. Id. Chapter V, Articles 14.3-14.5.
19. Id. Chapter V, Article 14.4.
20. Id. Chapter V, Article 16.2.
21. Id. Chapter V, Article 14.2(a).
22. Id. Chapter V, Article 14.2(b) and (c).
23. Id. Chapter V, Articles 15.1(a)-(d).
24. Id. Chapter V, Article 13.2.
25. Id. Chapter III, Article 10.1
26. Id. Chapter III, Article 11.1.
27. Regulations, Chapter III, Article 11.1.
28. Id. Regulations, Chapter III, Articles 12.1 to 12.6.
29. Id. Chapter VII, Article 18.1.
30. Id. Chapter VII, Article 18.1.
31. Id. Chapter VII, Article 18.2.
32. Id. Chapter VII, Article 18.4.
33. Tax rates in some sectors such as those involving the exploitation of natural resources can be taxed at substantially higher rates up to 50%. Law on Foreign Investment, Law 118, Chapter IX, Article 36.1 (4).
34. Foreign Investment Law, Chapter XII, Articles 37.1 and 37.2.
35. Id. Chapter XII Articles 38.1 and 38 .2.
36. Id. Chapter XII Article 39.
37. Id. Chapter XII Article 42.
38. Id. Chapter XII, Article 40.
39. Id. Chapter XII, Article 43.1
40. Id. Chapter XII, Article 43.2.
41. Id. Chapter XII Article 41.
42. Id. Chapter X, Article 26.1
43. Id. Article 26.2.
44. Id. Chapter IX, Article 25.1.
45. Id. Chapter IX, Article 25.2.
46. Id. Chapter XI Article 27.
47. Id. Chapter XI Article 30.1.
48. Id. Chapter XI, Article 31.1.
49. Id. Chapter XI, Article 31.2.
50. Id.
51. Id. Chapter XI, Articles 30.2, 31.2.
52. Id. Chapter XI, Article 30.1.
53. Id. Chapter XI, Article 30.4. An indication of how this might work comes from a recent interview by Mariel Zone chief executive Ana Teresa Igarza who said that workers at Mariel will receive 80% of what employers pay the agency, and employers will freely negotiate salaries with the agency, without having to adhere to any fixed tariffs.
54. Id. Chapter XI Article28.2.
55. Id.
56. Id. Chapter XI, Article 29.1
57. Id. Chapter XI, Article 32.
58. Id. Chapter XI, Article 33.
59. Id. Chapter XIII.
60. Id. Chapter XVII.
61. Id.
62. Id. Chapter XVII, Special Dispositions.
63. Id. Chapter III, Article 6.2
64. Id. Chapter III, Article 7.
65. Id. Chapter III, Article 8.