The Cuba Conundrum- How Will US Companies Fare Doing Business in a Communist Country?- Part I

Cuba has been in the news a lot lately. I’ve just returned from ten days in Havana so I could see it first hand both as a person who writes on business and human rights and as an attorney who consults occasionally on corporate issues. The first part of the trip was with the International Law Section of the Florida Bar. The second was with a group of art lovers. I plan to write two or three blog posts about the prospects of doing business in Cuba if and when the embargo is lifted. Because I do some consulting work, I want to make clear that these views are my own as an academic and should not be attributed to anyone else.

In this post I will just briefly list some basic facts about Cuba and foreign investment. Next week I will talk a bit more about investment, introduce the Cuban legal system, and talk about some of the business and compliance challenges. That's the subject of my research this summer. The following week I will address human rights in Cuba and how various governments and businesses are addressing those issues, the subject of another article I am working on. 

Some Cuba basics:

• The island has 11 million people
• The average monthly wage is $25-45 per month
• The government is just starting to develop a comprehensive tax code
• The government is now allowing the sale of private property but the concept of mortgages is undeveloped
• 86% of people work for the government in some form but the government is now allowing “self employment” and cooperatives (small private businesses such as agricultural farms, salons, and restaurants)
• 5% of population has access to internet or a cell phone
• The government is seeking foreign investment- except in health, education, or military sectors
• Cuba is not an OECD member state. It does sit on the UN Human Rights Council
• The GDP is 62.7 billion
• The literacy rate is 99.8% and the country scores high on the human development index
• The country is in the middle of the pack in terms of the Corruption Perception Index, which measures bribery
• There are now over 60 bilateral investment treaties in place but they are not all in force
• Most lawyers and law firms work for the Cuban government

There are now three possible methods of international investment:

1)  International Economic Association Contract (AEI). 49% of the companies in the 2015 registry are AEIs. This is a contract that does not create a new company and there is no sharing of profits. Certain changes of parties require government approval;

2) Full Foreign Capital Company. This is almost never approved but the foreign company has total control of the enterprise; and

3)  Joint venture with the Cuban government. These are 45% of the companies in the 2015 registry. Often the hotels and other EU businesses are JVs with the government.

In the preamble to Cuba’s 2014 Laws on Foreign Investment (LFI), the Cuban National Assembly makes clear that the underlying basis for the law is: “Cuba's need to provide greater incentives to attract foreign capital, new technologies, and know-how to increase domestic production and better position Cuba to export to international markets.”  The new law halves the profits tax from 30 to 15% and exempts investors from paying it for eight years. But the new law also appears to withhold many of the tax benefits from companies that are 100% foreign-owned.

Although Cuba changed its law last year, many people believe that Cuba is not ready for investment. Clearly rule of law concerns and the lack of infrastructure are real barriers. I’ll give more of my opinion on compliance and investment challenges and opportunities next week.