News and Facts about Cuba

Investing In Cuba – Balancing The Risk

Investing In Cuba: Balancing The Risk
By VW Staff on May 12, 2016 4:04 pm in Business
K. M. Paparelli
Weber, Crabb & Wein
May 11, 2016


There is no doubt that Cuba is working hard to attract foreign
investors. In 2014 its foreign investing laws were completely reformed
to accommodate this, however, it may be too early to determine whether
these reforms actually reduce risk. For foreign investors ready
to make the move challenges abound. The focus of this paper is to
explore the potential risks investors may face pursuing opportunities in

Investing In Cuba: Balancing The Risk

Change is on the Horizon

Cuba has been in an accelerated state of adapting and adjusting since
2011. Zamora, 2015a, p. 138) The entire economic landscape is currently
under reconstruction with diversification of international trade,
domestic restrictions being lifted, and Cuban nationals being encouraged
to develop entrepreneurial ventures. (Piccone & Trinkunas 2014, p. 1-2)
Cuban Entrepreneurs, who comprise eleven percent of the local labor
force, are being trained, in part, through the work of Proyecto Cuba
Emprende, a run by the Catholic Church of Cuba dedicated to
equipping Cuban entrepreneurs. Since 2012, there have already been
nearly 2000 graduates.

Reforming Foreign Investing Laws

In April of 2014 the Cuban Legislature adopted Law No. 118, known as the
Foreign Act, to strengthen guarantees for investors and offer
increased tax incentives in the form of credits and exemptions that
allow for flexibility in procedures. (Cuban Law No. 118, 2014)
The Foreign Investment Act also reformed foreign direct investment with
diversification of markets, access to advanced technology, and a
substitution of importation, giving priority to . (Law No.
118, Ch. XVII, art. 61) The law promises greater protection against
expropriation, repatriation of dividends and profits free from taxes in
convertible currency and tax incentives including reduced profit tax,
exemption from income tax and the elimination of the labor tax. (Law No.
118, Ch. III, art. 3, art. 4.1 & art 9.1)

Modes of International Investing in Cuba

The Cuban State encourages three modes of international investing
including: (1) International Economic Association Contracts (IEA); (2)
full foreign capital company; and (3) joint ventures consisting of both
Cuban and foreign shareholders. (Law No. 118, Ch. V, art. 12.) Matias F.
Travieso-Diaz and Charles P. Trumbull IV (2003) described the IEA as an
entity that: “[D]oes not require the establishment of a legal entity
separate from the contracting investors. IEAs are normally established
because the contracting parties can meet a common objective through
cooperation.”(p. 182)

A full foreign capital company is still disfavored by the Cuban State
and rarely seen in operation, however, when it does happen it is
established through registration with the Chamber of Commerce and
authorized by the Cuban government. (Travieso-Diaz & Trumbull IV, pg.
182) That leaves the joint venture, the most favored choice of the Cuban
State. (Travieso-Diaz & Trumbull IV, p. 182)

The Joint Venture

Joint Ventures accounted for an estimated $1.9 billion in exports in
Cuba in 2008, with eighty percent coming from a very small number of
firms including Sherritt International, Habanos, Havana Club rum, Rio
Zaza, & BM and Sol Meliá according to Richard Feinberg in his 2013
report Foreign Investment in the New Cuban .xi

Further, the report stated Cuba has added $3.5 billion to savings and
investments from foreign direct investments in the last two decades.
(Feinberg, 2013) Popular joint ventures between the Cuban government and
foreign investors usually include: natural resource exploration,
construction, agriculture production, administration and
professional service areas. (Miranda Diaz, 2015) xii However, foreign
direct investments accounted for only seven percent of Cuba’s domestic
output in 2013 and joint ventures employed less than one percent (or
34,000 workers) of the active labor force. (Feinberg, 2013)

These figures may bolster investor confidence, however, it is important
to remember that these are joint ventures with the Cuban State. Disputes
between partners and judicial resolution can prove to be tenuous.
(Paparelli, 2015) The only private Cuban citizens who may incorporate
businesses or form joint ventures are those seeking self-employment such
as taxicab services, restaurants, and similar small businesses, or
cooperatives consisting of associations of self-employed persons such as
taxi drivers. (Feinberg, 2013)

For investors interested in forming a joint venture Chapter V, Article
14.1 of the Foreign Investment Act provides the following guidance: (1)
start with a company incorporated with nominal shares; (2) the
proportion of shares need to be agreed upon by the shareholders; (3)
offices may be maintained in Cuba or abroad; (4) a document created by a
notary deed must include the social rules; (5) an inscription in the
Cuban commercial registry is required and; (6) any changes to the
shareholders require State approval. (Law No. 118, 2014) xiii According
to Cuban attorney Miranda Diaz (2015), controlling ownership in a Cuban
joint venture can be negotiated at the time of contracting.

Import and Export

In an effort to encourage foreign import and export, Cuba has recently
allowed the building of the Mariel Port and Free-Trade Zone by
Odebrecht, a Brazilian construction company. (Morris, 2014) xiv This
joint venture with Brazilian bank, BNDES, is believed to be “the largest
infrastructure investment since 1990.” (Morris, 2014) said
of the Port: “This container terminal, and the powerful infrastructure
accompanying it, are a concrete example of the optimism and confidence
with which we Cubans see a socialist and prosperous future.” (George,
2014)xv Chapter X, Article 26.1 of the Foreign Investing Act
specifically provides that, “Joint ventures, national and foreign
investors which are parties to international economic association
agreements and totally foreign capital companies shall be entitled, in
accordance with the provisions set for such purposes, to directly export
and import whatever is needed for their operation.”

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Source: Investing In Cuba: Balancing The Risk –

Source: Investing In Cuba: Balancing The Risk –

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