â€œLa Mayor de las Antillasâ€ better known as Cuba, has been the center of many controversial opinions through the years. Its unique system, which generally fails to provide clear and direct information to interested parties, offers, nonetheless, interesting opportunities to those who know where to look.
One essential starting point to better understand this complex reality is the issue of reforms.
Unlike other socialist states, reforms have been amongst the major Leitmotivs of the longÂ revolutionary experience.
Some of the most recognized analysts of the countryâ€™s economic and political history haveÂ identified a constant alternation of â€œidealisticâ€ and â€œpragmaticâ€ phases. The former stageÂ characterized by a strong anti-market cognition reached its peak in the Island during the late 60s.Â In these years, also known as the â€Guevarist yearsâ€ an intent to create and consolidate a radicalÂ socialist model was made by, however, maintaining a detachment from the Soviet agenda.
Needless to say the sustainability of such system was short lived.
Following the fall of the Soviet Union and the eventual decline of most socialist governments, Cuba decided for a structural shift with the intent to launch market-oriented mechanisms.
Since then, a significant number of investment-friendly measures have been adopted, ranging from internal norms – such as the legalizations of US dollars possession and the development of the touristic sector – all the way to international relations matters – such as the historical diplomatic normalization with both the Catholic Church and the United States, which since now has not been considerably altered by the Obama-Trump transition.
Raul Castroâ€™s definitive elevation to presidency in 2008 led to a series of major economic reforms and a significant social reorientation of the Island. In 2010 a thorough debate was launched throughout the country on the â€œdos and donâ€™tsâ€ to ensure future developments. These discussions incited the creation of what are now known as the â€œLineamientos de PolÃtica EconÃ³mica y SocialEconomic and Social policy guidelinesâ€: about three hundred articles guideline which attempts to identify and methodize a set of requirements necessary for change and to be implemented with a certain urgency.
The Policies were then submitted to the VI CCP Congress in April 2011 which through different amendments altered the 68% of the original 291 guidelines increasing them to 313: 92% of which were purely economic policies and the remaining 8% of social character.
Most of the alterations were mainly editorial thus maintaining intact the center points of the Policy. The reforms can be split into three main categories:Â 1)Â administrative and management; 2)Â nonstructural and 3)Â structural/systemic. The update of the economic model was an obvious attempt to create a system in which traditional centralized planning and market economy elements coexist.
Some examples include:
- Workforce: More than 300 private activities have been legalized thus allowing severalÂ employees outside of public sector to have a legitimate and (often) more remunerativeÂ source of income. Nowadays, if one was to add up the half million cuentapropistas thatÂ exert within small private activities (examples), with the six hundred thousand farmers,Â owners or users of their land, operating individually or in cooperatives; we would alreadyÂ count more than a million workers active in the legitimate private sector. In addition it isÂ essential to consider â€œlos que resuelvenâ€ or in other words: those who, in a way orÂ another, are able to make a living, within the ambiguous, informal and very widespreadÂ area of semi-legality. Whether full time or part time one of the best examples of suchÂ activities are the so called GESPIGovernment employees with significant private income. These are public officials who manage to make anÂ income, greater than the state salary, from a separate and private activity. Therefore,Â according these statistics, it is possible to approximate that about two million CubansÂ (corresponding to a 40% of the total workforce) operate within this, widely defined,Â private sector.
- Housing market: After several decades the housing market has finally been reactivatedÂ for both Cuban citizens and foreign residents; obviously, this comes with specificÂ conditions. House owners are now limited to a maximum of two properties, one in urbanÂ areas and one in the countryside. This legislation was followed by the (much needed)Â removal of the tortuous and in many ways incomprehensible system of “permutas”: oneÂ of the main sources of corruption in the country. The new market has been, since,Â generating a significant influx of capital from abroad (mainly the USA) and thanks to theÂ unbroken family ties with the Diaspora. In this regard it is worth commenting on one ofÂ the major paradoxes of the Cuban situation i.e. : despite the unfriendly statementsÂ (euphemistically speaking) of both Cuban and American politicians, the flow of incomeÂ towards the families who remained in the Island has represented over time the mainÂ source of currency for the Country (currently representing over two billion dollars aÂ year). Ironically, if it wasnâ€™t for this the difficult economic situation could have struckÂ Cuba much more harshly.
- Cooperatives: A particular emphasis on Cooperatives should be made when it comes toÂ Cuban investments. Cooperatives in fact, are meant to be one of the keystones of the new economic-productive system. For the first time along with agricultural also nonagriculturalÂ cooperatives are permitted, mainly for services. Although the approvalÂ process remains slow and bureaucratic, and the final say is in the hands of the Council ofÂ Ministers, Cuba appears to be extremely interested in the assistance and advice of theÂ foreign cooperative systems.
We now come to the to the most relevant subject of this report i.e. foreign investment and itsÂ current legal and de facto situation. In the early 1990s, at the lowest point of the economic crisis which followed the fall of the Socialist Camp, the Cuban government adopted the first on theÂ prospect of finding support both in Europe and Canada to promote economic recovery.
Subsequently, in the period that saw the growth of the so known â€œbig economies of the SecondÂ World”, Cuba adopted a southward policy which included the strengthening of relationsAssistance, collaboration and investmentÂ withÂ different Latin American states and China.These socio-political and (by consequence) economic approaches were characterized by differentÂ levels of dependence with the States they were dealing with. One of the most distinguished beingÂ the relation between La Isla and chavist Venezuela. Despite the two states maintaining aÂ sentiment of fraternity, the crisis in Venezuela is still undergoing and has caused a focusÂ deflection of the Cuban executive. Indeed the magnifying crisis has led to a need to create aÂ favorable climate for foreign investments, regardless of their origin.These circumstances gave rise to various actions favoring the (partial but significant) opening ofÂ the Republic to the world, namely: 1)Â Diplomatic normalization with the United States, 2)Â LawÂ nÂ° 118, and 3)Â the creation of the economic development zone (ZED) around the port of Mariel.
Law nÂ° 118: The New Foreign Direct Investment Law
Law 118 begins by defining the role that FI is expected to play in the economic development ofÂ the Island:
- Diversification and expansion of export markets
- Access to advanced technologies
- Import substitution
- Obtaining foreign financing
- Creating new sources of employment
- Integration of efficient management methods, bound to the development of the productive chains of value,
- Change of the energy matrix of the country orienting it towards renewable sources.
This list highlights the island’s main goal i.e. to rebalance the scale trade and payments, whoseÂ current situation urges an increase in exports and, above all curb imports.
Law 118, as its predecessor, Law 77, underlines the several opportunities for foreign directÂ investments. In fact, all sectors of the islandâ€™s economy are open to FDI including militaryâ€™sÂ business enterprises but excluding health, education services and armed forces.
FDI firms will benefit from an eight-year exemption tax from profit which will be then followedÂ by a 15 percent tax on all net taxable income. Here I would like to draw the attention to one ofÂ the most concrete points highlighting a shift in the overall attitude regarding foreign investments.Â Although this argument will be addressed later in this report it is important to highlight how theÂ new law cuts by a non-insignificant 50 percent taxes on the income. Furthermore, reinvestedÂ income can be completely exempt if so allowed by the relevant authorities. In connection toÂ wage taxes the old 14 percent of social security contribution remains, however the 11 percentÂ wage tax has been removed.
Law 118 institutes three different types of FDI structures
- Empresa mixta (Joint Venture)
These are joint stock companies whose share-holders are a mix of foreign and national investors.Â Unsurprisingly the drafting of a public deed is required, to which Articles of Incorporation,Â Authorization and Association Agreement are attached. Joint Ventures acquire legal personalityÂ exclusively upon being registered in the Business Register. Joint ventures can create offices,Â representations, branch offices and subsidiaries both in the Country and abroad. Investors willÂ enjoy full protection against expropriation â€œexcept for reasons of public utility or socialÂ interestsâ€. In such cases, nonetheless, shareowners will be indemnified and will enjoy the rightÂ to appeal to a bilaterally agreed international investment dispute entity.
- Contrato de asociaciÃ³n econÃ³mica internacional
These constitute agreements between one or more national investor along with one or more foreign investor. The main purpose of such contracts is to allow the performance of acts associated with international economic association without, however, having to establish a separate legal person. Following article 13.2 of Law 118, these agreements include by general rule AIE as well as risk contracts for the exploration of non-renewable natural resources,Â construction, agricultural production; hotel, production and services management, and contractsÂ for the provision of professional services.
- Empresa de capital totalmente extranjero
These are entities built upon completely foreign capital. In this case, foreign investors are theÂ sole managers of the institution and will enjoy full rights (and liabilities) linked to theÂ obligations set forth in the Authorization Act. Additionally, following the registration of theÂ entity within the Register of Commerce, investors may establish themselves within CubanÂ territory as: a) natural persons, acting on their own behalf; (b) legal persons, by setting up aÂ Cuban subsidiary office of the foreign entity they own, by public deed, in the form of aÂ corporation with registered shares; or (c) by establishing a branch of a foreign entity. It isÂ essential to point out that foreign capital companies which have been incorporated as subsidiariesÂ may create different types of structures connected to the central entity. These include offices,Â representations, branches and subsidiaries either within national territory or abroad.
In all three cases FDI firms are free to import and export directly i.e. without having to passÂ through a state owned wholesale company. Additionally all profits and dividends can be freelyÂ transferred abroad in convertible pesos.
A tedious approval process
None of these opportunities can really be exploited without a given approval process. Given theÂ nature and history of the island we can only expect that this process is not really a “piece ofÂ cakeâ€. As its predecessor, law 118 demands for a formal approval by the Cuban government onÂ each potential investment. Joint Ventures must be authorized by the highest ranked positionholdersÂ i.e. either by the Council of Ministers or the Council of State. To do so, the foreignÂ investor must formulate its application along with its partner state owned enterprise and theÂ relevant ministry. The request must then be presented to the MINCEX and the BusinessÂ Evaluation Commission. Once this first step is completed MINCEX must consult with allÂ relevant agencies and institutions to the transactionE.g. Central Bank, Minister of Labor and Environment, Ministry of Finance and Prices etc..Â If MINCEX is then approving, this willÂ draw a recommendation to the CECMExecutive Committee of the Council of Ministers, an institution which was formerly chaired by elÂ Comandante en Jefe. According to legal experts familiar with these procedures, the last stepÂ simply consists in CECM accepting the recommendations brought forward by MINCEX. TheÂ process is then officialized by the registration of the Joint Venture by the Chamber ofÂ Commerce. Article 47, nonetheless, introduces an element of discretion, which should be kept inÂ mind.
“The Ministry of Finance and the Ministry of Finance Prices, after hearing the opinion of theÂ Ministry of Foreign Trade and of the Foreign Investments, considering the benefits and theÂ amount of investments, the recovery of capital, the indications provided by the Council ofÂ Ministers for the priority sectors of the economy, as well as the benefits they can fall back on theÂ national economy, may grant full or partial exemptions, temporarily or permanently, or grantÂ other tax benefits in compliance with the provisions of the current tax legislation for one anyÂ form of foreign investment recognized in the Law.”
Despite the overt discretionary language utilized in this article, Law 118 has set time limits (asÂ appropriate) for obtaining a definitive response from the competent authorities. This and theÂ system of â€œventanilla unicaâ€A single office which is in charge of all bureaucratic procedures for the ZED Mariel already constitutes a remarkable progress whenÂ compared to previous legislations. Step by step we should hope for a decentralization of theÂ whole process in order to promote desirable levels of FDI in the country.
We have already established that the general goal is to create an investment friendlyÂ environment, and what better way than through the alteration of tax policies.
The current law regulating taxes is the Ley Tributaria n. 11323 July 2012.Â This piece of regulation lists allÂ the taxes and contributions foreign investors would be subject to once having established aÂ business in national territory. However, the special adjustments established by Law 118 prevailÂ over the common regime. Such favorable conditions are magnified when considering terms ofÂ investment within the Economic Development Zone of Mariel.
For the sake of clarity, the table below will draw a direct comparison between two types ofÂ foreign investments under Law 118 namely: 1)Â regular investments throughout Cuban territoryÂ and 2)Â those within the Economic Development Zone of Mariel.
|Type of tax||Cuban territory||ZED Mariel|
|Tax on utilities||0% for 8 years andÂ exceptionally (i.e. whenÂ investments are considered ofÂ particular interest for theÂ country) for a longer period.Â Subsequently the tax is 15%.Â It can be increased by 50%Â (50% by 15%) in case ofÂ exploitation of naturalÂ resources. It is 0% onÂ reinvested earnings.||0% for 10 years and exceptionally forÂ a longer period. Subsequently it isÂ 12%. Also in this case there isÂ exemption for reinvested profits.|
|Tax to the contribution of socialÂ development||Exemption during theÂ recovery period ofÂ investment.||Total exemption|
|Tax on sales and services||0% during the first year ofÂ operation followed by aÂ deduction of 50% on salesÂ applied to wholesale andÂ services.||0% during the first year of operation.Â Subsequently it is 1%. They areÂ exempted from this tax contracts forÂ international economic association forÂ management hotel, production orÂ service and the provision of servicesÂ professional.|
|Custom duties||Exemption during theÂ investment phase||Exemption for machinery, equipmentÂ and instruments intended to be usedÂ within the Zone.|
|Tax for use or exploitation of naturalÂ resources and preservation of theÂ environment||50% deduction during theÂ recovery period investment||50% deduction during the recoveryÂ period investment|
|Tax on income obtained fromÂ dividends or profits||Tax exemption||Tax exemption|
|Tax on utilization of workforce||Tax exemption||Tax exemption|
Opportunities for foreign investment
In 2014 an appeal to international companies was issued to invest over 8 billion dollars inÂ specified development projects. The â€œPortfolio of Opportunities for Foreign Investmentâ€ offeredÂ insights in of the current and (expected) future conditions of the islandâ€™s economy. One of theÂ documentâ€™s implied roles is that of underlining how the Cuban authorities appear to be preparedÂ to drastically reopen the economy to international capital.
The document provides incredibly detailed data of current production potential and deficits asÂ well as setting out clear development priorities such a : conventional and renewable energyÂ sources; tourism and agriculture.
However, the way in which this list of priorities has been concluded is not a secret. Tourism isÂ the main source of hard-currency earnings. In terms of agriculture the island keeps spendingÂ large amounts of its scarce foreign exchange on food imports thus creating an imminent foodÂ security crisis. And finally, domestic energy production remains vital, mostly as a consequenceÂ of its energy dependency on a troubling Venezuela.
Zona Especial de Desarrollo de Mariel
This has already repeatedly surfaced throughout our presentation. ZED is constituted by a largeÂ territory (465.4 square kilometers) around the port of Mariel, located 45 kilometers west ofÂ Havana. This port represents one of the few limited locations in the island where diverseÂ international parties possess an interest or at least exercise an active role in the zone ofÂ development. In fact, both Cuba and Brazil have invested about a billion dollars in ZED. theÂ port is managed by the PSA International consortium of Singapore. The masterplan for theÂ urbanization of the area and commercial connections was elaborated by the French BouyguesÂ complying to modern standards. The port is intended to become one of the three main containerÂ ports of Central America.
The main sectors within which it is expected to increase productive effort to achieve marketÂ expansion include: biotechnology, pharmaceutical, renewable energy, agro-food industry,Â tourism and real estate, packaging, agriculture, industry in general, telecommunications andÂ computer technology.Besides technical details it is necessary to underline the strategic value and systemic nature ofÂ this project. It is reasonable to assume that the Brazilian commitment would not make muchÂ sense if concrete expectations of a future and complete normalization with other activeÂ businesses in the area, starting by the United States of America were not on the table.A simple look at the map will suffice to understand the importance of Cuba’s logistics within theÂ continental American market. The island dominates, as a result of its central position, the routesÂ of the entire area, including the southern part of the United States, the Gulf of Mexico, theÂ Caribbean, the entire Mesoamerican Arc and the coast of South America.
The same favorable conditions Spanish sovereigns attempted to exploit during as they were inÂ control of the island. At the time of the Empire, the fleets who departed from the IberianÂ Peninsula met in Havana before navigating to other ports of the Subcontinent.
What is intend to be emphasized by this point is that Cuba is destined to reacquire sooner or laterÂ this logistics centrality, engraved in its geography and in its history.There will come a time when producing and storing in Cuba will be return to be a great andÂ significant advantage for commercial purposes in the entirety of the American continent, and notÂ only.
|↑1||Economic and Social policy guidelines|
|↑2||Government employees with significant private income|
|↑3||Assistance, collaboration and investment|
|↑4||E.g. Central Bank, Minister of Labor and Environment, Ministry of Finance and Prices etc.|
|↑5||Executive Committee of the Council of Ministers|
|↑6||A single office which is in charge of all bureaucratic procedures|
|↑7||23 July 2012|