Invest in Cuba. Regulations.

DIRECT FOREIGN INVESTMENT

The study of the Cuban experience of the first sixty years of the 20th century shows that the total deregulation of the economy and of the investment process did not bring about the required conciliation between national interests and those of foreign investors. Economic policies and strategies were required, supported by adequate instruments to implement them that would better guide the investment flows.

Toward 1925, 75% of the main productions and basic services (communications, power generation, oil refining) were carried out by foreign enterprises. The banking system was controlled by U.S. and English banks. A total of 80% of the best cultivated lands were in the hands of sugar and cattle corporations from the United States, and this country controlled 75% of Cuban foreign trade.

A few years later, the U.S. enterprises displaced the companies from other countries, and 95% of the accumulated foreign investment corresponded to them. Economic control of society went hand in hand with political control.

During the decade of the fifties wide facilities were created with the purpose of undertaking a tourist development plan, and credits were granted with national re-sources to encourage foreign companies to build hotels in Cuba.

In 1959 foreign investments in Cuba came to an end. The companies were nationalized and agreements were signed with almost all countries whose enterprises or citizens had been affected with the purpose of granting due compensation. Although the Cuban government proposed a plan to compensate the U.S. companies and citizens, it has not been possible to discuss that plan – or any other – since the U.S. administrations have refused to do so and have forbidden the affected enterprises and individuals to negotiate directly with Cuba.

In 1988 a new stage opened when the first joint venture was created between a Cuban enterprise and a Spanish company with the purpose of building a hotel in the tourist resort of Varadero on the basis of Decree-Law No. 50 of 1982.

When the Cuban constitution was reformed in 1992, new articles were introduced where the Cuban state acknowledged the right and guarantees to foreign investments. Later, in 1995, Law No. 77 of Foreign Investment was approved – a clear, transparent and modern legislation that included the experiences of previous years and updated the legal bases upon which foreign investments had been operating.

Evidently the multiplying effect of foreign investments in the national economy reaches far beyond the cold analysis of their number and the total capital invested so far.

Between 1988 and 1999, 497 international economic associations were created in Cuba, of which 374 remain active.

INTERNATIONAL ECONOMIC ASSOCIATIONS ACTIVE EACH YEAR

The new stage of foreign investments, which started with tourism, has extended to 32 economic sectors and branches, with partners from 46 countries. The most recent destinations of those investments included in 1998, as part of the new enterprises, the creation of Energas (a Cuban-Canadian company) for power generation, using the gas found in the oil wells as fuel.

The boot form was also started with the creation of the first company totally owned by foreign capital, to construct and operate a power generation plant in the Isle of Youth.

In the financial branch the first joint venture was also created between Caja de Madrid and Banco Popular de Ahorro.

...essential is the concept of foreign investment as a complement to the country´ s development effort, aimed at those areas where the need of introducing technologies, capital or markets makes us adopt this formula, ensuring its implementation solely when the country cannot guarantee this development with its owns means, resources and new opportunities. It is the concept that is essential.

Carlos Lage Dávila, February 12, 2000

ASSOCIATIONS BY MAIN SECTORS

The country’s basic infrastructure in terms of power generation and distribution, oil extraction, prospection and refining, and communications, has remained and even developed supported by foreign investment.

Likewise, the production of export items, among them tobacco, rum and nickel plus cobalt – the latter with production levels never before attained by the country – have been favored by foreign investment in these branches.

Among the most relevant of the 58 international economic associations created in 1999 are Habanos S.A. for the commercialization of Cuban tobacco; Aguas de La Habana, to guarantee water supply to the capital of the country; BKDOSA, for the development of the national mechanical industry, as well as three associations that will undertake the production of the toilet paper factories in Cárdenas, province of Matanzas, and Santa Cruz del Norte, east of Havana province, as well as the fine paper factory in Jatibonico, in the center of the country.

ASSOCIATIONS BY COUNTRY OF ORIGIN OF THE MAIN INVESTORS

Direct investments, in which the foreign investor participates effectively in the management of a joint venture of a company totally of foreign capital, and those which are contributions in contracts of international economic association; and investments in shares or other titles-values, both public and private, that do not qualify as direct investments.

The largest number of associations for the construction of hotel installations in the tourist sector (8) was reached in 1999. As mentioned above, there are 19 international hotel chains already operating in the country. This development in tourism corresponds to the country’s relevant position regarding the number of visitors to the Caribbean.

Foreign investment in Cuba has reached a point of ripening with results that show an increase by 26% with regard to 1998 as to total sales, by 25% as to exports and by 27% concerning the country’s direct income.

At the beginning of the year 2000 the largest part of the businesses being established are in the fields of such productive branches as the iron, steel and mechanical industries and the basic industry, among them “ off shore” oil prospection. It is foreseen to continue the investment in tourism granting a priority to zones with less development in these sectors and second beach lines.

Business with Latin American and Caribbean countries continues to increase, based upon contracts with partner organizations from the region. There is also an increase in the investment projects with foreign banks.

LEGAL FRAMEWORK

The authorization of investments in Cuba is a faculty of the State. Two organs are empowered to grant authorizations: the Executive Committee of the Council of Ministers and a Government Commission appointed by that organ, according to the case.

These investments may adopt the form of joint venture, contract of international economic association and companies totally of foreign capital, where the investor is acknowledged full conduction of the company and enjoyment of all rights, as well as the responsibility for all the obligations stipulated in the authorization.

The procedure to obtain the authorization results from a previous negotiation between the national investor and the foreign investor, in the case of a joint venture of a contract of international economic association, or between the foreign investor and the ministry in charge of the corresponding branch, sub-branch or economic activity in which the investment is to be carried out, which is the case of a company totally of foreign capital. Both parties, the national and the foreign investor, will submit the corresponding application to the Ministry for Foreign Investment and Economic Collaboration.

Law No. 77 declares all economic sectors open to foreign investment except health and education services to the population, and the armed forces except their entrepreneurial system, which may be considered as a national investor.

The shares of the contributions to the social capital are determined by agreement of the parties. The Law does not establish a maximum limit to the participation of the foreign investor. Property rights over real estate, buildings and others will be included as a contribution of the Cuban side.

With regard to the tax and custom duties system, the following is established:

a) 30% of income tax and 50% when natural resources, whether or not renewable, are exploited.

b) 11% for the use of labor force and 14% as a contribution to social security, which applies to the total wages and other income that may be received by workers of the entity except those granted them as economic stimulation.

Foreign investors who are partners of these companies will be exempted from tax payment on personal income obtained from business profits, but not the remaining foreign personnel working in these companies.

Special facilities may also be granted with regard to the customs regime. Payment of taxes, custom duties and other imposable custom duties will be made in free convertible currency.

The export and import regime, according to Law No. 77/95, may be directly established concerning the export and import of everything required to its purposes, with-out need of any intermediary.

The Law of Investments grants particular importance to the subject of guaranties. In a restricted way it establishes that foreign investments may not be expropriated except for reasons of public or social interest declared by the Government, according to the Constitution of the Republic of Cuba, the legislation in force and the international agreements on reciprocal promotion and protection of investments. If an expropriation takes place, compensation will previously be made in free convertible currency for the trade value of those investments.

In case the enterprise or association contract is extinguished, the sum to be received by the investor will also be paid in free convertible currency; the liquidation sum will be agreed upon by the parties or determined by an organization of acknowledged international prestige.

Furthermore, the investor may sell his participation at any time either to the State or to a third party, once the parties have agreed to it and with the due governmental authorization. In all these cases, as well as in the net profits or dividends obtained from the exploitation of the investment, he will have the right to freely transfer abroad the sum received without payment of taxes or other duty related to that transfer.

Other more specific aspects add to the above mentioned bases, principles and procedures, which, grouped by regimes, deal with banking, labor, tax and other aspects, such as:

- The collections and payments are made in free convertible currency; only exceptionally are certain collections and payments authorized in the national currency.

- Engagement of Cuban personnel is made through an employment entity which will generally be the Cuban institution or entity participating in the joint venture. Only exceptionally will special labor regulations be authorized for that personnel, or it will be directly engaged by the joint venture, always complying with the labor legislation in force.

- Regarding the Financial Registration and Information Regime, it establishes the obligation of presenting an annual report to the Ministry for Foreign Investment and Economic Cooperation.

- The main feature of the regime of dispute solution is that the parts determine the methods, jurisdiction and scope. Only when conflicts arise between entities with foreign capital participation and state enterprises and other national organizations will they be subject to the economic branch of popular courts.

In addition to the attractive aspects offered by this legal framework, the following are comparative advantages to be found in Cuba: the availability of qualified labor force ready to assimilate new technologies at short term, of an adequate infrastructure, an outstanding part of which is the 95% of electrification of the national territory, social stability, a safe climate offered to foreign personnel, the future possibility of integrating Cuba to the region, its geographical location in the center of an expanding market and of relevant trade routes, and the signing of Agreements of Reciprocal Promotion and Protection of Investments with 45 countries. Particularly important in the Law are the chapters dealing with investments in duty free zones and industrial parks, as well as in real estate.

FREE ZONES AND INDUSTRIAL PARKS

After approval of Law No. 77 of Foreign Investment on June 22, 1996, Decree Law 165 “On Free Zones and Industrial Parks” was issued establishing the main regulations for the performance of this activity.

Cuban legislation defines Free Zones as an area within the national territory, duly limited, without a re-siding population, of free import and export of goods, not linked to the customs boundaries. Industrial, trade, agriculture, technological and service activities will be al-lowed in this area under application of a special regime.

The Special Regime is the group of regulations relative to the customs, banking, tax, labor, migratory and public order systems, less burdensome and rigid than the ordinary regulations, as shown below:

Customs regime:

- It rules the total exception of custom duties and other duties to be collected by customs for the introduction of goods destined to the development of the authorized activities;

Tax regime:

- For concessionaires and operators of productive activities there is total exemption of income taxes and taxes for the use of labor force, for a period of 12 years, and a bonus of 50% for another 5 years.

- In the case of operators of trade and service activities, the total exemption of the above mentioned taxes will be for 5 years, and the 50% bonus for another 3 years.

- More favorable exemptions may be granted after particular analysis of each case, and the terms may be extended.

Concessionary:

Promotes and develops with his own resources the necessary infrastructure for the operation of the duty free zone and assumes or delegates its management.

Operator:

Is authorized to establish himself in the duty free zone in order to carry out production, trade or service activity.

Banking and financial regime:

- The possibility exists of establishing banking and financial services if the license is previously obtained from Banco Central de Cuba;

- The capital obtained from operations may be freely transferred abroad; and

Labor regime:

- The Ministry of Labor and Social Security will determine the minimum salaries.

- The concessionary of mixed capital may act as employing entity to engage his workers and those required by the operator. The concessionary of wholly foreign capital will engage the workers through an entity proposed by the Ministry for Foreign Investment and approved by the Ministry of Labor and Social Security.

Other incentives of the Cuban legislation are the following:

- It creates a system that allows the investor to perform any application or handling before state entities or institutions through a sole point or Central Office at the Free Zone.

- It allows the operator to allocate up to 25% of the goods resulting from his activities in the domestic market.

- For reasons of availability of labor force, transportation or handling of raw materials, the operator may be authorized to perform specific activities outside the duty free zone area.

- Both concessionaires and operators may purchase goods and services offered by the country’s enterprises outside the area where they are established. In this regard, a program of cooperation between the industries located in the duty free zone and the national industry is being drawn up.

These regulations are applicable to concessionaries and operators of free zones as incentives for investment. Until December 1999, 294 operators had been authorized for trade, service and productive activities. Among the main countries were Panama, Spain and Italy.

FREE ZONE OPERATORS

MAIN DESTINATIONS OF EXPORTS FROM THE CUBAN FREE ZONES

Mexico, England, Dominican Republic, Costa Rica, Italy, Nicaragua, Spain, Russia, France, Switzerland and Jamaica.

The capital invested by foreign operators totals around 11 million dollars, mainly produced by urbanization and infrastructure, construction and mounting, design and engineering, machinery and equipment, research and development as well as transportation equipment services.

Up to now the free zone with the greatest growth has been the one in Wajay (900 meters from “ José Martí” International Airport in Ciudad de La Habana) followed by the one in Berroa and then Mariel.