(Adds details from text of proposed law)
By Marc Frank
HAVANA, March 26 Cuba's communist government has
drawn up a new foreign investment law that will cut the profits
tax in half and exempt investors from paying it for eight years
in an attempt to attract desperately needed capital into the
The National Assembly will meet on Saturday to approve the
legislation that Cuba promises will offer investment security to
foreigners and help further integrate the Caribbean island in
the global economy.
But the proposed law appears to withhold many of the tax
benefits from companies that are 100 percent foreign-owned,
instead reserving those incentives for joint ventures with the
Cuban state and between foreign and Cuban companies.
The proposed law includes a clause that bans expropriations
except in cases of public interest previously established by the
government, in which case investors would be compensated.
The new investment law continues the structural economic
reforms under way in Cuba since President Raul Castro took over
from his ailing brother Fidel in 2008. It has been anticipated
since 2011, when Cuba enacted a 300-point overhaul of its
domestic economy to encourage more private enterprise.
The law aims to address the lengthy and sometimes murky
process to approve foreign investment deals and improve
investment guarantees, two major concerns of potential investors
and foreign governments.
It would also guarantee the free transfer of profits or
dividends outside of Cuba without paying additional tax, and
allows investment in any sector of the economy except education
Details of the proposed law were published on Wednesday in
state-run media, and Reuters later reviewed a copy of the
complete draft. The National Assembly was expected to approve
the draft with little change.
Cuba is cut off from U.S. investment by a comprehensive
trade embargo and has failed to meet its investment targets for
each of the past five years.
Major foreign companies doing business in Cuba include
Canada's Sherritt International, which has a joint
venture with the Cuban state to mine nickel, and Spanish hotel
group Melia Hotels International, among others.
Such companies will enjoy the new lower tax rates but not
the 8-year tax holiday granted to new investors.
Cuba is promising legal protections to persuade foreign
investors to risk their capital in the Soviet-style economy, and
new incentives such as the dramatically lowered tax.
"The Cuban government has a major credibility gap to
overcome with foreign investors. Investors will want evidence,
not just legislation, that Cuba is prepared to allow investors
to make money, employ Cubans they select and not move the goal
posts when success seems to be too rewarding," said Paul Hare, a
former British ambassador to Cuba who now teaches at Boston
Under the current foreign investment law, which went into
effect in 1995, all tax breaks are negotiated and foreign firms
pay a 30 percent profits tax and 20 percent labor tax. The labor
tax was already being gradually reduced and now will be
However, foreign ventures that mine natural resources,
including oil, can be subject to a higher profits tax of up to
22.5 percent, depending on how those ventures are negotiated
with the state.
Investors will still have to hire labor through state-run
companies, a major complaint of foreign firms.
"The policy's impact will be known once Cuba starts
negotiating deals with potential partners, but the new law's
incentives and flexibility seem to be designed to bring in the
capital needed to lift the economy and make the reforms
succeed," said Phil Peters, who runs the Virginia-based Cuba
Research Center. "Agriculture, sugar, and renewable energy are
key sectors to watch for signs of a new attitude toward foreign
Under Castro's reforms, Cuba has proposed moving 20 percent
of the state labor force to a non-state sector made up of farms,
small businesses, cooperatives and joint ventures.
Greater foreign investment flows would "increase exports,
the effective substitution of imports, (spur) high-technology
and local development projects, as well as contribute to the
creation of new jobs," according to the 300-point plan in 2011.
Yet to date the reforms have not led to fast growth. The
economy is expected to expand 2.2 percent this year, compared
with 2.7 percent in 2013.
The current law and new law allow for 100 percent
foreign-owned companies and do not explicitly exclude Cubans who
are citizens of other countries, but in practice Cuba has in
most cases insisted on 51 percent ownership of joint ventures
and has not allowed Cubans abroad or its own citizens to invest,
except in small businesses.
There are currently around 200 joint ventures and other
projects involving foreign investment in Cuba, compared with
more than 400 some 12 years ago and the economy is considered
one of the least investor friendly in the world.
(Additional reporting by Nelson Acosta and Rosa Tania Valdes;
Editing by Daniel Trotta and Kieran Murray)