The draft of the Law on Foreign Investment which currently is being studied by deputies to the National People’s Assembly prior to its discussion on Saturday, March 29, stands out for providing a necessary tool to the Cuban legal framework to face the challenges a changing economy is bringing about.
The text sheds vices contained in the current Law 77, which dates from 1995, and focuses its articles in several important aspects: the guarantees to investors, the plurality of possible sectors and taxation of different forms of participation of foreign capital.
In neither case it specifies that foreign investment has to come from natural or legal persons with a nationality other than the Cuban, in this, in Chapter II (section m, Article 2), the Act says that the foreign investor is a “natural or legal person with residency and capital abroad.” This definition explicitly includes Cubans living abroad who may participate in the economic partnerships with the same regulations that the Act provides for citizens of other nationalities.
However, when talking about the “national investor ” is defined only as ” legal person ” which excludes participation in company with foreign capital of Cubans living on the island and legally acquired means to do so. With the rise of the private sector, this limitation becomes a brake but the rules of the Act could protect capital partnership with the non-state sector.
The bill aims to facilitate the participation of foreign capital, clearing the ghosts of authoritarianism and the absence of guarantees. It supports three forms of investment as well as the law in force, but , correspondingly with changes and reforms in the Cuban economic system adds the Special Development Zone as a new economic space in which investors may have additional advantages.
Investments may be authorized in all sectors, with the exception of health and education services and the armed forces. For the first two, this limitation comes from the universal and free right guaranteed by the Cuban state, and is consistent with the political will to maintain a socialist project in basic services.
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Of particular relevance is the possibility to participate in the public services sector. Unlike the 1995 Act, the Council of State is the designated organ to authorize investment for the exploration or exploitation of non-renewable natural resources or when they are directed to the management of public services such as transport, communications, water supply, electricity, public works or operation of a public good.
This addition leaves some doubts. Investment for the “management” of the above services is authorized. It is unclear whether the words “management” is limited to the form of “international economic association contract.” If so, they are not allowing monetary stakes in the development of these services, only the provision of advice and management, which could be castrating the evolution of very needy and in deficit sectors. In any case the foreign party could bring “know how” and new models of exploitation.
By limiting the direct capital investment in the development of communications companies doesn’t favor an alternative to telephone or Internet service, or the possibility of investing in the implementation of sustainable sources of electricity generation, such as wind or solar, where there are significant progress that Cuba could have exploited.
Although the bill eliminates many of the red tape of the previous one, it is still trapped in inherited defects of a cumbersome and complex institutional system. Approval of investment in any of its forms will be within “sixty calendar days” which in practice could be waiting up to three months. This time is too long in the dynamics of movement of international capital. Associations of this type in Spain take about 40 days and in the United States just a week.
Among other limitations of the project is the continuation of an employing agency that will manage the recruitment of staff for the various licensed business modalities. Free contract, except in exceptional circumstances and with special permission is prohibited. In fact, in Chapter X, “the labor system ” (Article 30, paragraph 3) reads: ” the services of Cuban personnel or alien permanent resident in the Republic of Cuba ( … ) are provided through a contract that the company subscribes an employing entity proposed by the Ministry of Foreign Trade and Investment and authorized by the Ministry of Labor and Social Security. ” I mean, four entities to hire a worker.
This is a negative factor for several reasons: competitiveness and loyalty to the employer is reduced, it can create unnecessary delays in the recruitment of staff, promotes cronyism over professionalism, not allowing an employer to manage its own workforce under no only with the same qualification but with the dynamic of team building; vitiates the candidate selection process and generates unnecessary bureaucracy.
The most revolutionary aspect is in taxation. The 1995 Act provided for the payment of taxes on profits, management workforce, tariffs and customs duties, vehicle ownership, document requests, and a total of seven different taxes plus other obligations.
This bill exempts companies from paying taxes on profits during the first eight years of its establishment. In those cases in which the profits are reinvested in the country, they are also exempt from tax. The sales tax has a fifty percent bonus in the tax rate but also will not have to be paid during the first year of operation of the company, so does the tax on services.
The corporate income tax is set at fifteen percent on net and exempts completely personal income tax payments and the use of the labor force. Additional advantages, during the amortization period or during the investment process the employer will not be taxed by customs duties or have to pay property tax for local development.
The text under discussion is consistent with the will to change and the gradual changes taking place in the economy according to the updated model. The Guidelines of the Economic and Social Policy of the Party and the Revolution advice Cuba to review and adapt the legal framework to adjust to these changes. In this sense the text removed all references from the previous one of 1995 to the so-called “Free Zones” and emphasizes in spaces enabled as “Special Development Zone”
Of course, eyes are set on the provision the newly opened Special Development Zone of Mariel and many investors, especially in Brazil, have shown interest. These areas, with specific incentives could become a source of employment and resources for the public and in lucrative and attractive projects for potential entrepreneurs.
But the bill goes much further. The text under discussion makes clear that the priority is to stabilize the foreign investment that is ensuring its permanence, protecting its capital and eliminating unnecessary taxes. All prior tax apparatus is dismantled and the advantages offered promote an ideal area for investment and accelerate the amortization thereof.
The Act does not limit future investment by nationality, what defines is the origin of the capital. It allows the participation of Cubans living abroad, as natural and legal persons, which unfortunately is not the case for natural Cuban residents in the island
It evidently focuses on national macroeconomic, favoring investment in development areas and activities that result in substantial benefits for both parties. It would have been interesting to take into account the non-state sector which more than 400,000 Cubans benefit and that is undoubtedly the fastest growing business segment in recent years. The possibility of non-state or even individual capital partnerships with legal resident on the island is a negative point in the proposed text.
Just as one of its transitional provisions still speaks that to proceed to payments in pesos they must be obtained before such amounts in convertible pesos. However, and as further evidence that there is a systemic approach to reform and an explicit intention of providing legality to them, the bill provides that it will only keep “its validity until there is in the country the monetary unification “. That is another thing, in the eyes of analysts, that builds confidence in the irreversibility of the changes.
It is not specified in the text the possible participation of cooperatives, either state or private, but is not denied either. In law what the law does not prohibit is implicitly allowed. Hopefully the regulations to adopt are more specific regarding aspects that in the future law are too general.
The coming Act is a text that allows optimism. It is not marked by an eminently lucrative desire, evident in Act 77 of 1995. This law is written for the future, to ensure foreign investment as part of a developing economy. The guarantees offered and the tax benefits are highly tempting and open opportunities in virtually all economic sectors.
Cuba is adjusting to an increasingly closer dynamics of a developing country. The need for foreign investment does not only involve the injection of foreign exchange to the economy; it is a source, beyond of employment , of professional development, access to new technologies and markets, and is , in fact, a driving force of social change.
However, this effort is limited by existing extraterritorial laws in the United States and directly affecting future investors. Opposing the will of the Cuban government to open spaces for collaboration is the stubbornness of an unjust embargo. These laws prevent U.S. citizens from investing in Cuba, even if they are of Cuban origin. United States, because of its proximity and historical ties with the Cuban nation is called to be the quintessential logic investor. The embargo also acts, more than ever, against the interests of American businessmen themselves.
Some of the ideas outlined here may change in the final version, but nothing prevents us to state that from Saturday Cuba will have a law that places it closer to the world and is part of a real desire for change and consolidation of its socio economic project. Another step towards the future….
