Cuba passes law to lure foreign investment

April 24, 2014
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HAVANA, Cuba – Cuba’s parliament unanimously approved a new law on foreign investment Saturday aimed at boosting sputtering economic growth on the communist-ruled island.

President Raúl Castro, who was scheduled to speak to the assembly, has called the bill “crucial” to the Cuban economy, which has so far failed to show gains from his gradual reforms of the Soviet-style system.

The new legislation will go into effect 90 days after it is published.

Although the text has not been made public, officials have said it would offer foreign investors tax breaks and guarantees against expropriation, a persistent fear after the widespread government takeovers in the 1960s.

“The new Foreign Investment Law is the last chance for the reforms to reach the growth goals planned,” said Cuban economist Pavel Vidal of the Universidad Javeriana in Calí, Colombia.

Cuba’s vice president in charge of the economy, Marino Murillo, assured the assembly that bringing in foreign investment if done right “is not giving away the country in pieces.”

“It’s necessary to reach GDP growth rates on the order of seven percent [a year] and 20 percent rates of investment” for the economy to take off, he said.

Despite reforms pushed by Castro opening up the economy to private enterprise on a small scale, the island’s economy grew barely 2.7 percent in 2013, well short of a 3.6 percent target and similar to the anemic growth of recent years.

The new law will replace rules on foreign investment that have been in effect since 1995, passed by Fidel Castro amid a severe economic crisis that followed the Soviet Union’s collapse.

The rules come amid worries about the uncertain political situation in Venezuela, a close ally that replaced Moscow as Havana’s economic lifeline.

Targeting foreign investment

Three months ago, authorities inaugurated a new megaport in Mariél, 80 kilometers (50 miles) west of Havana, that the government envisions as a hub for Caribbean trade.

The port will have a free trade zone that the government is marketing to foreign investors.

In February, Castro said Cuba faced an “imperative need” to find fresh sources of capital, to make up for budget shortfalls in areas like agriculture.

Economists say that to achieve the government’s goal of six to eight percent GDP growth, investments in the economy will have to increase by 25 to 35 percent a year, many times more than the 4.4 percent in 2013.

Cuba does not have access to multilateral sources of credit like the World Bank or the Inter-American Development Bank, nor sources for emergency funding like the International Monetary Fund.

So to attract capital to Cuba, which has been under a U.S. embargo for half a century, the new law offers foreign investors an eight-year tax exemption on earnings.

After eight years, investors will pay a 15 percent tax on earnings, half the current rate, but can continue to enjoy the full exemption if they reinvest their earnings in Cuba, according to the Juventud Rebelde newspaper.

Natural resource investments, however, can still be taxed at rates of up to 50 percent.

Investments will be protected against expropriation “except for reasons of public utility or social interest,” and in those cases will by compensated by mutual agreement, the newspaper said.

Foreign companies will be barred from hiring their own workers, and instead must go through Cuban employment agencies as they do now.

The law opens the door to investments by Cuban exiles, most of whom live in Miami, without putting out the welcome mat.

“Cuba will not go looking for foreign investment in Miami. The law doesn’t prohibit it, the policy does not promote it,” Foreign Trade and Foreign Investment Minister Rodrigo Malmierca said Friday.

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