December 23, 2014
Cuba passed a foreign investment law earlier this year, and the relaxation of some - very few - restrictions on travel and commerce between the U.S. and Cuba, coupled with the resumption of diplomatic ties as perhaps a prelude to dropping the embargo, has brought the law back to the consciousness of those in the investment sector.
The law's effect has been to draw interest from industrialized countries like Germany to potentially new streams of investment, and as a survey of the law revealed, it has much to recommend it.
Minister of State for Investment Khaalis Rolle told Guardian Business recently that while Cuba had passed the law, he still felt that from an investment standpoint "[The Bahamas has] the current advantage, because we do have a stable track record of investment".
Nonetheless, Rolle pointed out that there are still areas in which Cuba can improve its new law, and that The Bahamas as a competing jurisdiction must still be concerned about the eventual impact of that law, and must determine how to mitigate and minimize that impact.
Firstly, the new law opens up investment in all sectors of Cuba's economy, including utilities, administrative concessions, real estate (purchase, sale and leasing of houses and offices), hotel management and professional services, while abolishing duty-free zones and industrial parks. The law also provides for investments in stocks and other securities or bonds, public or private, that do not fit the definition of direct investment.
Only three forms of foreign investment are allowed: joint venture, international economic association contract or totally foreign capital company. The international economic association contracts cover contracts for hotel, production or service management and contracts for the provision of professional services.
The law cuts tax on profits from 30 percent to 15 percent for most industries and eliminates the prior 25 percent tax on labor costs. The law also allows 100 percent foreign ownership, which, though previously legal, was never allowed in practice, and investors in joint ventures get an eight-year exemption from all taxes on profits, and investments in real estate can be in private housing.
The law also provides for stricter environmental controls: individuals or corporations responsible for environmental damage will be required to reestablish the previous environmental situation, repair the damage or pay the corresponding indemnification, as appropriate.
In terms of guarantees, foreign investors may transfer abroad the net profits or dividends derived from their investments, as well as the proceeds resulting from the liquidation or sale of shares, in convertible currency free from taxes, withholding or deductions. Foreign temporary residents who render services to a joint venture, the parties to an international economic association contract or a totally foreign capital company are entitled to transfer abroad 66 percent of their earned income.
Dealing with labor force concerns, the new law provides for the labor force needed by joint ventures and fully owned companies to be selected and provided by a government employment agency, which charges a fee for such services and pays the employee's salary in Cuban pesos (CUP) while charging the investors in convertible currency (CUC). This salary is negotiated with the foreign investor on the basis of the minimum pay equivalent to the national average salary, which currently amounts to 456.00 CUP (1 CUC=25 CUP; 1 CUC=$1).
No foreign investor can hire labor directly except for certain top management or technical positions to be held by nonpermanent residents, which is provided for explicitly in the authorization.
One of the areas the new law is particularly of note is the establishment of a special taxation system. Exemptions abound.
Joint ventures and national and foreign investors who are parties to an international economic association contract are subject to tax obligations and exemptions, including: exemption from payment of income taxes on net profits for business for foreign investors, exemption from payment of profits taxes during eight years following the establishment of the enterprise (which period may be extended by the Council of Ministers).
Other exemptions include an exemption from payment of net profits taxes and other taxes authorized by the relevant authority for reinvestment in the country, exemption from payment of wholesale and service taxes during the first year of operation of the investment, exemption from payment of taxes for the sales of goods and services in the case of contracts for hotel, production and service management and for the provision of professional services and exemption from payment of labor taxes.
Investors are also exempt - in certain circumstances - from paying customs taxes (tariffs) for the importation of equipment, machinery and other assets during the investment process, according to provisions established by the Ministry of Finance and Prices.
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