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ABOUT FOREIGN INVESTMENT IN CUBA


INTRODUCTION

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 lan, 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.

 

POLICY AND LEGAL FRAMEWORK


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.

From 1991 to 1994, foreign investment was accelerated as one of the important steps taken by the Cuban authorities to recover from the serious impact to the Cuban economy caused by the disappearance of the Soviet Union and the economic links with other Socialist countries in the framework of the Council of Mutual Economic Aid (COMECON). This impact resulted in the loss of 35% of Cuba's GDP in the first three years of the nineties with strong economic and social effects. From 1997 on, foreign investment further expanded and more complex deals were agreed with important partners in newly opened sectors.

Today, investors from 46 countries operate in almost 400 ventures in 32 sectors of the Cuban economy; 52 % of those investors are from European Union countries: 24% from Spain, almost 15% from Italy, 4% from France, 3.5% from the United Kingdom. Tourism, Oil and Gas, Mining,Energy and Telecoms are the main sectors of investment. Thus, foreign direct investment, focused on the search for new external markets, competitive technologies and financing (mainly long term) has played an important role in the country's economic recovery.

Cuba is located in a region whose share in world investment flows is rapidly growing. This, together with the country's potential and prospects for attachment to the Latin American integration process, makes hundreds of business people contact the Economic Office of the Cuban Embassy in London in search for information about investment opportunities.

Foreign investment is not associated to a privatisation process in Cuba; it is rather focused on specific objectives that complement national development efforts. Hence it is important to note what those objectives are and and the space they offer for foreign capital involvement.

In 1992, the National Assembly of the People's Power (Cuba's Parliament) approved a number of ammendments to the Constitution of the Republic with a view to recognising forms of ownership other than the State ownership.Joint ventures were legalised and FDI-associated aspects defined. The latter include: the recognition by the Cuban State of the assets of legally constituted joint ventures and economic partnerships, and their use, enjoyment and disposal shall be governed by the provisions of the law and treaties, as well as by their own by-laws and rules.

A new Foreign Investment Legislation (Law No.77) was passed in 1995. This legislation is in line with international practice. Some of the regulations thereof are:

- Foreign investment in Cuba may adopt the form of: a Joint Company, an Economic Association Contract or a Wholly-owned Foreign Company -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 authorisation

- The authorisation of investments in Cuba is a faculty of the State. There are two organs empowered to grant authorisations: the Executive Committee of the Council of Ministers and a Government Commission appointed by that Council, according to the case.

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 Cooperation (MINVEC) to examine and channel the proposal for final approval. Once the required economic and legal documentation on the proposed business has been prepared and submitted to MINVEC, the decision denying or approving such foreign investment is handed down within a period of 90 calendar days.

- Some of the guarantees granted to investors, as provided for in the Law include:full protection and security; their asset cannot be expropriated, save cases of extreme social interest, in which case prior compensation to be paid; tax-free freely transfer of their dividends; right to sell or transfer, subject to prior authorisation by the Government, their shares.

- Foreign investors can directly export and import whatever is necessary for their purposes.

- A special taxation regime provides for:

. the application of a 30% net profit tax and,

. the application of a 11% payroll tax and 14% as a employer's contribution to social security which apply to the total wages and other income that may be received by workers of the entity except those granted as economic stimulation.

- Authorisation for the establishment of duty free zones and industrial parks in properly delimited regions within the Cuban territory.

- Foreign investment in Cuba has increased.Today almost 400 joint ventures are operating in the country , with a strong presence in sectors such as mining, oil prospecting and extraction, tourism, industries and telecommunication. Lately other ventures and negotiations have expanded in new sectors, such as power generation by natural gas, expansion of the cities domestic gas supplies, etc.

- Investors from more than 40 countries have placed their capital in Cuba. Outstanding among them are: Spain, Canada, Italy, France and the United Kingdom.

The Economic Office of the Cuban Embassy in London can help with the general and specific information that may be necessary to participate in the Cuban foreign investment procedure: including the organisation of contacts, meetings or other arrangements with Cuban officials or possible counterparts which could facilitate British investment.

 

CUBA'S COMPARATIVE ADVANTAGES FOR FOREIGN INVESTMENT


Cuba's comparative advantages for foreign investment include the following:

- A highly skilled labor capable of assimilating, in a short period of time, any new technology;

Adequate infrastructure; 95% of the national territory is electrified; additionally, 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.

- Social stability and safety climate for foreign investors;

- Bilateral agreements on promotion and reciprocal protection of investments entered into with more than 50 countries, and 5 agreements for the avoidance of double taxation, while others are being negotiated.

FREE ZONES AND INDUSTRIAL PARKS


After approval of Law No.77 of Foreign Investment, Decree Law No. 165 on Free Zones and Industrial Parks was issued on June 22, 1996. This legislation defines Free Zones as areas within the national territory, duly limited, without a resident population , of free import and export of goods, not linked to the customs boundaries. Industrial, trade, agriculture, technological and services activities will be allowed in this area under application of a special regime.

This special regime is concerned with regulations relative to the customs, banking, tax, labour, migratory and public order systems, less burdensome and strict 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.

There are 3 zones operating: Berroa and Wajay, both in the City of Havana, and Mariel in the Province of Havana, with 365 authorised operators.

 

THE MINISTRY FOR FOREIGN INVESTMENT AND ECONOMIC COOPERATION

 

The Ministry for Foreign Investment and Economic Cooperation (MINVEC) is the Central Administration Agency of the Cuban Estate responsible for governing and controlling the foreign investment process and the development of Free Zones and Industrial Parks. It is also in charge of preparing the relevant legislation in this field.

Its main functions include:

- Promotion of inward and outward foreign investment;

- Guiding the negotiation process for the establishment of economic associations or any other forms of foreign investment;

- Assestment of compliance with the bases and principles set forth for economic associations between Cuban and foreign entities;

- Implementation of the economic cooperation policy; governing and controlling the development of the technical assistence provided to and by the country;

- Preparation, negotiation and signing of agreements and conventions entered into with official foreign institutions dealing with foreign investment.

 

THE INVESTMENT PROMOTION CENTRE

 

The Ministry for Foreign Investment has, since 1994, its own Investment Promotion Centre (CPI) which is responsible for promoting the existing business opportunities for foreign capital involvement in Cuba, as well as overseas investment by Cuban companies.

Main services provided by CPI include:

- Provision of up-to-date information on the country, foreign investment regulations, and opportunities for foreign investment involvement in the domestic economy;

- To arrange meetings with would-be Cuban partners for foreign investors interested in investing in Cuba;

- To prepare for business delegations the required program of meetings with Cuban agencies and entities, as well as to organise tours to places of business interest;

- Provision of information on investment-aid programmes that may favor investment flows into Cuba;

- Organising investment seminars, lectures, meetings, events and fora, both in Cuba and abroad;

- Making consultations within Cuba or from abroad in connection with the feasibility of any investment project in particular;

- Provision of up-to-date information to the business press and international institutions that contribute to promote investment;

- Overseas promotion of investment by Cuban companies with comparative advantages.

To render such services, CPI relies on a highly qualified staff composed of updated experts with broad knowledge and skills on business promotion techniques used at international level and for the carrying out of opportunity-prefeasibility studies. This group of experts works jointly with national organisations and entities in defining projects for foreign capital involvement.

CPI is a member of the Geneva-based World Association of Investment Promotion Agencies (WAIPA), under the auspices of UN

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