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
Basic Industry
87
Tourism
65
Construction
31
Light
Industry
27
Agriculture
20
Iron,
Steel and
Mechanical
Industry 20
Food Industry
18
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
Spain
87
Canada
72
Italy
57
France
16
England
13
Mexico
13
Venezuela
12
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
