An Overview of the Realities of Doing Business in Cuba

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By Paige Zandri
| Business and Entrepreneurship

Cuba

In March 2016, the United States announced its decision to improve trade relations with Cuba. With this came renewed hope in the island country for American business. However, it is important to note that the embargo has not yet been lifted. It has been relaxed. Similar trade policies have allowed American businesses like Tyson Foods to expand operations to Cuba since the year 2000. Presently, here is what American businesses should know as the world contemplates what could become the economic rebirth of Cuba.

How Far Americans Can Go With Business, Banking, and Travel in Cuba

Amendments to the Cuban Asset Control Regulations (CACR), a document by the Department of Treasury which details regulations between the U.S. and Cuba, are particularly notable with respect to 1) business and physical presence, 2) financial transactions, and 3) travel of U.S. subjects in Cuba. These amendments became effective March 16, 2016. Here is what businesses should keep in mind under each of these umbrellas as they start thinking about doing business in Cuba.

Business

Under the CACR, the authorized categories of U.S. business in Cuba are exports, mail or parcel transmission services, cargo transport services, travel and courier services, telecommunication and Internet-based services. To facilitate these authorized business categories, U.S. subjects may operate through subsidiaries, branches, offices, joint ventures, franchises and agency. This means U.S. businesses can own or lease real estate in Cuba, whether for business or to accommodate employees, as long as the arrangement is incidental to the business in the authorized category. Furthermore, persons engaged in humanitarian activities are also authorized to establish a physical presence. Outside of these categories, the U.S. may grant a specific license following a written request from the applicant. U.S. businesses such as MasterCard, Airbnb and Netflix are already on board.

Banking

Pursuant to a general license now available, banking institutions, registered brokers, dealers in securities, and U.S. money transmitters are now permitted to process authorized remittances to and from Cuba, and the transactions may be in USD. U.S. banks are also authorized to operate accounts in Cuba. 

Travel

A general license to travel has only been authorized for 12 categories of activity, which include professional research and professional meetings. Only a full-time schedule of activities consistent with the terms of the travel license is permitted. Specific licenses may also be granted on a case-by-case basis.

The Cuban Perspective on American Business

What Business Vehicles are Available to U.S. Persons?

There are three business structures in Cuba: joint ventures, International Economic Associations (IEC), or wholly foreign capital companies. As a state-driven economy, joint ventures in Cuba are commonly arrangements between the government and investors. Therefore, American businesses should note that investments with a “Cuba Inc.” company would likely list the Cuban government as a national participant. 

Is Expropriation of U.S. Investment Assets Still a Concern?

Despite Cuba's expropriation of U.S. assets around 1960 (which still awaits resolution), current Cuban foreign investment rules assure full protection to all foreign investments, unless for reasons of public utility or social interest. In the event of an expropriation of a Cuba Inc.’s assets, the rules promise due compensation for the commercial value of the assets according to parties' mutual agreement or as set by an independent appraiser.

Hiring Employees in Cuba

Foreign investors in Cuba must procure their employees (Cuban citizens and permanent residents) through an employment entity nominated by the Cuban government. In other words, investors must hire through the Cuban government. Direct hiring is prohibited unless specific approval is granted. The main exception to this rule is hiring board members, top executives, and special technical positions.

Cuba's Tax Treatment of Foreign Investors

The tax climate in Cuba is largely foreign investment-friendly by design. The net incomes of joint ventures and foreign participants in IECs are generally taxed at 15%. However, income tax on profits of joint ventures and foreign participants in IECs does not apply until 8 years after establishment, subject to extension. There is also an opportunity for continuous tax exemption on income authorized for re-investment. Foreign investors are further exempted from property taxes for local development during the investment recovery period. Custom taxes and taxes on imports of machinery are also exempt.

For wholly foreign capital companies, however, these tax benefits are absent.

In addition to enjoying a 50% sales tax discount, non-Cuban shareholders of a Cuba Inc. are further exempt from tax on personal income, dividends, and profits. 

It is however critical to note that Cuba currently remains on the list of countries for which the U.S. denies a tax credit. Consequently, tax payments made by U.S. persons in Cuba do not receive a corresponding foreign tax credit in the U.S. Therefore, regardless of whether a Cuba Inc. pays any taxes in Cuba, it would remain responsible for its full U.S. tax liability.

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American businesses looking to expand operations to Cuba ought to be mindful of the tax, business, and travel ramifications discussed above. With the relaxed embargo on Cuba, agricultural exports, transport, IT, and telecommunication sectors are prime candidates for expansion into Cuba. Western Union and AT&T have forged ahead by launching Cuban operations. But current and prospective participants must be conversant with the current rules in navigating the US-Cuba business terrain. While many predict that US-Cuba diplomatic relations will continue to improve, businesses in other sectors should brace up for the possibilities that loom ahead. 

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