Cuba, present and future: main legislative reforms adopted in 2020

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October 2020 NEW LEGISLATION Introduction

Introduction 1. Exports As soon as COVID-19 appeared in the world, the The aim is to reduce t he ba la nce of trade deficit Cuban G overnme nt a pprove d a Plan for the and to attract foreign currency by stimulating Preve ntion and Cont rol of Coronavirus, cov ering and giving priority to export s and t heir linkage all sectors of society. with farmers and the domestic industry. Similarly, Cuba ha s bee n working on t he post- 2. Foreign investment COVID-19 recovery phase, as well as on the Guide lines for the 2021 Economic Plan and State Cuba seek s to incre ase foreign direc t inve stm ent Budget, whic h are part of the country's overall to: 1) develop tourism facilities, 2) pre pare the strat egy. According to the Specia l Tabloid: Cuba industry to me et domestic dem and, and 3) and its Ec onom ic and Soc ial Cha lle nge: “In order modernize the infrastructure and develop to achieve an economic rec overy and to face a technological capacity. long-term situa tion of world crisis in an To this e nd, a more flexible and expeditious organized m anner, it is e ssent ial to have an procedure for investment approval is essential. economic and socia l strate gy that contains the key actions on which efforts should be focused.” 3. Non-state forms of management Principles underlying the strategy One of the pillars of t he plan lie s in the dy nam ic and se lf-sustaining role for the economy of non- The two principle s underlying t his rec overy state form s of manageme nt (private sect or), i.e. strategy are: self-employed workers and cooperatives. 1. Regulating the market 4. Capturing new sources of foreign a) Regulat ing the marke t prim arily through indirect methods. currency to the country b) Implementing key area s, especia lly in One of the effect s of the slum p in tourism as a term s of form s of manage ment and result of the Covid-19 global pande mic is the lack ownership, restructuring t he Stat e of foreign curre ncy inflow, which is lea ding to a business sector, the priv ate sect or and the complex situation. relationship between the two. In orde r to remedy this situation, mea sures are c) Taking advant age of the complementarity being implemented to restructure t he economy's between economic actors. foreign curre ncy fina ncing sy stem , moving towards a system tha t ensure s that businesses 2. Encouraging competitiveness and innovation are enc ourage d to obtain fore ign currency. In a) Defending dome stic production and addition, t he m easures a re inte nde d to st imulate banishing the import mentality. foreign excha nge savings through import substitution. b) Prov iding the Stat e busine ss sector wit h greater managerial autonomy. Current situation c) Dynam izing role of dome stic dem and for During 2020, a serie s of legislative mea sures the economy. relat ed to the four are as ide ntified a bov e have been enact ed to boost the Cuba n economy. These d) Enhancing state-owned companies. measure s are a nalyze d in great er de tail in the Pillars of the strategy following pages. These principle s have materialized in a serie s of legislative reforms of whic h we have ident ified four major areas, each with its own objectives.

2 Key legislative reforms in 2020

3 NEW LEGISLATION Key legislative reforms (1/2)

TITLE OBJECT NARRATIVE

► Allows self-employed workers to sell their products and services to both Cuban and foreign natural and legal persons. Decree Law Commercial 383/2019 relations with ► Grants the Ministry of Labor and Social Security the responsibility of 1 regulating the scope and name of the activities as well as making the Council of self-employed necessary adjustments. State workers ► Regulates two control mechanisms: the Central Bank of Cuba on unusual transactions and municipal authorities on prices.

Resolution Imports and ► Establishes the terms and conditions for the private sector (cooperatives 315/2020 exports by non- and self-employed workers) to carry out imports and exports through 2 Ministry of State forms of authorized entities. Foreign management Trade ► Regulates the procedure for both imports and exports.

► Regulates payments by Cuban and foreign legal entities to self-employed Resolution Payments to workers and cooperatives. 280/2019 self-employed 3 ► Payments to self-employed workers and cooperatives are made in CUC

Central Bank workers and and CUP. A maximum of 500 CUP or 20 CUC can be paid in cash. STATE FORMS OF MANAGEMENT OF FORMS STATE - of Cuba cooperatives ► In the case of farmers with land tenure, agricultural cooperatives, and

credit and service cooperatives, payment remains in CUP. NON

Resolution Contractual ► Allows Cuban legal entities to hire products and services from self- 236/2019 e relations with employed workers. 4 Ministry of self-employed Economy and ► Regulates the contractual relations governing these relations as well as workers Planning the forms of payment (in CUP or CUC, or in both currencies).

Resolution ► Expands the scope of import activities through authorized entities with Cuban and foreign natural and legal persons, foreign branches and 300/2020 Imports by legal representative offices, diplomatic missions, consular offices and 5 Ministry of entities international organizations accredited in Cuba, except for state-owned Foreign companies and corporations of 100% Cuban capital.

IMPORTS Trade ► Regulates the import process and its phases.

► Provides for implementing a deduction on profit tax, or, if applicable, on personal income tax, based on the percentage increase of sales for Resolution export or to ZED Mariel. Includes a reduction of 5%-10% on profit tax for 222/2020 Tax incentives companies that are first-time exporters and have no previous records on 6 Ministry of for exports this type of transaction. Finance and ► Includes a 5% deduction for companies that do not produce goods or EXPORTS Prices provide exportable services, provided that exported goods or services grow with respect to the previous year.

4 NEW LEGISLATION Key legislative reforms (2/2)

NORM OBJECT NARRATIVE

► Changes the mechanism for transferring and using foreign currency by different actors of the economy by granting state-owned entities greater autonomy in capturing and using foreign currency. Resolution Regulation on 115/2020 ► State-owned companies will no longer need to wait for authorization the liquidity from the central government to use foreign currencies backed by CL Ministry of 7 allocation (liquidity capacity) as long as they have revenues originating in such Economy and system currencies. Planning ► Sets certain limits for the use of foreign currencies obtained from CL- backed transactions. Amounts exceeding such limits will be transferred to the central authorities.

► Establishes the liberty to import freely convertible currency (FCC) by natural persons although there is an obligation to declare cash amounts greater than US$5,000 or its equivalent in other foreign currencies to Resolution Imports and the General Customs of the Republic. 124/2020 exports in FCC ► Establishes a freely exportable limit of US$5,000 or its equivalent in 8 Central Bank by natural other FCC. The Central Bank of Cuba may authorize the export of larger of Cuba persons amounts.

► Cases in which the lawful origin of funds is not declared or proven shall be penalized with confiscation, without prejudice to any possible further

civil and criminal actions. CAPTURING FOREIGN CURRENCY FOREIGN CAPTURING

► Allows foreign legal entities based in Cuba to make payments for retail Resolution purchases and import activities in FCC from the accounts in foreign Payments in 125/2020 currency of which they are holders. FCC by foreign 9 Central Bank legal entities ► These entities may request the issuance of magnetic cards associated of Cuba with the accounts they hold in order to pay for the transactions indicated above.

► Regulates the One-Stop Shop, which is designed to encourage foreign investment and to speed up the procedures related to it. Functions: 1) promoting foreign investment opportunities, 2) providing Regulation on Decree guidance and assistance to companies in the steps prior to and after the One-Stop 15/2020 their establishment in Cuba, 3) processing and managing the Shop for 10 Council of documentation that investors require both before and after their Foreign Ministers establishment in Cuba, 4) shortening processing times for the Investment establishment of investors, 5) centralizing the required permits and licenses, 6) creating a computer system to report on the state of the procedures conducted through the One-Stop Shop, 7) processing fees FOREIGN INVESTMENT FOREIGN for services rendered.

5 Regulation of non-state forms of management

6 NEW LEGISLATION Regulation of non-state forms of management

1. Regulation regarding self-employed 3. Accepting offer: Private businesses identify the best option of offers submitted in order to proceed workers with the sales contract. One of the pillars of the new strategy are the non-state 4. Selling price: Customers and authorized entities forms of management. This year saw the approval of the agree on the market price. regulation for selling products, importing and exporting, and the forms of payment. 5. Deductions to selling price: Authorized entities deduct from the sales price local transportation, 1.1 Scope of action for self-employed insurance, customs operations costs and other workers expenses incurred until delivery to the customer. Decree Law 383/2019 of the Council of State and 6. Payments: After deducting expenses, authorized Resolution 236/2019 of the Ministry of Economy and entities transfer 80% of the amount in foreign Planning provide self-employed workers with the ability currency and 20% in CUC. to market their products and services to both Cuban and foreign natural persons and companies. 1.2.2 Importing process

Payments by these entities are channeled through their 1. Applying for import: Private businesses submit current accounts in Cuban banks. import applications to authorized entities. The Ministry of Labor and Social Security is responsible 2. Agreeing on offer: By authorized entities. for regulating the scope and name of the self-employed activities as well as making the necessary adjustments. 3. Selecting final offer: By private businesses. Control mechanisms include the Central Bank of Cuba in 4. Purchase price: Local transportation, insurance, charge of controlling unusual transactions, while the customs operations costs and other expenses municipal administrations have the power to set fixed or incurred until delivery to the customer are added to ceiling prices. the agreed price. 1.2. Exports and imports 1.3. Forms of payment Resolution 315/2020 establishes the terms and In connection with payment by Cuban and foreign conditions for the private sector (cooperatives and self- legal entities, Resolution 280/2019 of the Central employed workers) to be able to export goods and Bank of Cuba makes a distinction between: services as well as import raw materials or goods, although always through authorized export and import 1. Payments to self-employed workers and other entities. non-state forms of management: In CUC and CUP. Maximum allowable cash payments: 500 1.2.1 Exporting process CUP or 20 CUC. 1. Applying for export: Authorized entities and private 2. Payments to farmers with land tenure, businesses agree on the specific conditions of each agricultural cooperatives and credit and service export. cooperatives: In CUP.

2. Agreeing on offer: Authorized entities receive offers from foreign customers and are then submitted to the private businesses.

7 Export incentives

8 NEW LEGISLATION Export incentives

2. Tax incentives for exports 2.4. Requirements to qualify for Resolution 222/2020 of the Ministry of Finance and deductions Prices includes a number of tax incentives that are 1. Increasing production and sales for import or to ZED intended to serve as a stimulus to increase exports, Mariel. reduce Cuba's trade deficit and attract foreign currency. 2. Decreasing or not deteriorating the proportion of 2.1. Deduction on increased company imports of exported products. exports 3. Collecting payment on exports within the fiscal year. 1. Increase in exports: Provides the right to implement a deduction on profit tax based on the percentage 2.5. Discount percentages according to increase of sales for export or to the ZED Mariel by: the actor 1) state-owned companies, 2) companies with 100% Cuban capital, 3) joint ventures, 4) International Economic Association Contracts (IEAC). State-owned and 2. New exporters: Includes a 10% deduction on profit 100% Cuban capital tax for companies that are first-time exporters and Percentage increase Deduction have no previous records on this type of Up to 5% 10% transaction. 5%–10% 15% 2.2 Deduction on increased sales from 5%–10% 25% self-employed workers and cooperatives More than 20% 40% 1. Increase in exports: Provides a deduction on personal income tax in the case of self-employed JVs and IEACs workers and cooperatives, based on the percentage increase in sales of products for export or to ZED Percentage increase Deduction Mariel. Up to 10% 10% 2. New exporters: Provides a 5% deduction on personal 10%–15% 20% income tax for self-employed workers carrying out More than 15% 30% export activities for the first time.

2.3 Companies that do not produce Self-employed workers and goods or provide exportable services natural persons Percentage increase Deduction Provides a 5% deduction to companies that do not Up to 5% 5% produce goods or provide exportable services provided that the goods or services exported grow with respect 5%–10% 10% to the previous year. More than 10% 15%

Cooperatives Percentage increase Deduction Up to 5% 5% 5%–10% 10% 5%–10% 15% More than 20% 20%

9 Promoting foreign currency capture and expanding the scope of foreign currency imports

10 NEW LEGISLATION Promoting foreign currency capture and expanding the scope of foreign currency imports (1/2)

3. Liquidity allocation system The percentage withheld is automatically credited by the Central Bank to a CL account held for such purposes. In all Resolution 115/2020 of the Ministry of Economy and other cases, the parties transfer the amounts pertaining to Planning provides for the decentralization of the CL to each other's accounts. mechanism for the allocation and use of foreign currency by the different actors of the economy, State-owned export entities and joint ventures may granting greater autonomy in the use of foreign allocate foreign currency backed by their CL accounts or currency by state-owned companies and joint make CL-backed prepayments to other entities to finance ventures. productions that are purchased by the grantor of foreign When making payments in foreign currencies, said currency liquidity. Loans granted by state-owned export companies will no longer require an authorization companies and joint ventures will be amortized with own from the central government as long as they have resources backed by foreign currency liquidity (CL). revenues generated in such currencies. 3.1.4 State-ownedcompanies The mechanism used is the "CL" (liquidity capacity), which is the authorization to use such currencies in State-owned export companies pay the following with transactions. Although the revenues obtained are accrued foreign currency backed by CL: 1) import credited to an account in Cuban convertible pesos, expenses, 2) debts, and 3) locally purchased products that they are backed by foreign currency and may be used replace imports (up to a certain percentage of the invoice to carry out imports, make payments, or repay debts. amount, agreed by the parties).

3.1.2 Sources Basic services such as electricity, water and sewage, Unlike the centralized allocation of CL prior to communications, employee transportation, fuel, among Resolution 115, foreign currency liquidity or CL has others, are exempt. more than one source: 3.1.5 Joint ventures 1. Exports, including online sales In local sales, joint ventures collect, backed by CL, the 2. Sales to ZED Mariel-based entities foreign currency component of their invoices, except if the 3. Sales of goods and services in foreign currency buyer is another joint venture, in which case the full amount of the invoice is collected backed by CL. 4. Sales of certain goods and services to joint ventures Joint ventures pay for the purchase of all products and services purchased locally with CL, except for basic 5. International collaboration projects services such as electricity, communications, water and 6. Sales to exporters of goods and services who sewage, employee transportation, fuel, and other services substitute imports specified by the Ministry of Economy and Planning.

7. Centralized allocation for productions intended for the budgeted sector 3.1.3 Rules Export revenues are collected by state-owned export companies and JVs in Cuban convertible pesos (CUC). These companies are entitled to retain a percentage of such revenues represented by CL and the rest is transferred to the central authorities. Authorized percentages are as follows:

• Export entities of goods and services: 80%

• Export entities of professional services: 60%.

11 NEW LEGISLATION Promoting foreign currency capture and expanding the scope of foreign currency imports (2/2)

4. Import and export of FCC by 4.4 Payment regime for foreign legal natural persons entitiesbased in Cuba Resolution 124/2020 of the Central Bank of Cuba Resolution 125/2020 of the Central Bank of Cuba relaxes the terms and limits through which natural regulates payment terms for any foreign legal entity persons may import FCC with the purpose of established in Cuba. capturing foreign currency for the country. 4.4.1 Object 4.1. Import of FCC 1. Payment in FCC: Provides for the possibility of making 1. Liberty to import FCC by natural persons: payments for retail purchases and import transactions Natural persons are free to import foreign in foreign currency through the accounts they hold. currency. 2. Magnetic cards: These entities may request the 2. Obligation to make cash declaration: Natural issuance of magnetic cards associated with the persons carrying cash amounts of more than accounts they hold. US$5,000 or its equivalent in other foreign currency are required to declare it to the General 5. Expansion of the number of entities Customs of the Republic. with the ability to import

4.2 Export of FCC Resolution 300/2020 of the Ministry of Foreign Trade expands the scope of imports through designated import 1. Export limit: Natural persons may export up to entities. This will make it possible to ensure production US$5,000 or its equivalent in other foreign and increase the sale of products in foreign currency. currency. This resolution authorizes national entities, foreign 2. Export of larger amounts: The Central Bank of branches and representative offices, diplomatic missions, Cuba may authorize the export of larger amounts consular offices and international organizations accredited upon presentation of documents proving their in Cuba to make imports, with the exception of state- lawful acquisition. owned companies and corporations with 100% Cuban capital. 3. Temporary residents in the country: Any person receiving income in foreign currency may make 5.1 Importing process bank transfers of amounts greater than US$5,000 upon submitting the authorization of 1. Applying for import to importing entity: based on the the Central Bank of Cuba or document confirming specific circumstances. the legal import of such funds. 2. Agreeing on offer by importing entities.

4.3 Customs control 3. Selecting final offer: all expenses related to handling and transportation until delivery to the customer. 1. Additional information: The General Customs of the Republic may request additional information 4. Payment in FCC as agreed with the importing entity: on the origin or destination of the funds in case of customers use the legal payment mechanisms. repeated imports or exports.

2. Penalties: Natural persons who fail to declare or prove the lawful origin of the funds will be penalized with confiscation without prejudice to any potential further civil and criminal action.

12 Regulation on the One-Stop Shop for foreign investment

13 NEW LEGISLATION Regulation on the One-Stop Shop for foreign investment

6. One-Stop Shop for foreign 7. Announced legislation investment The following are some measures that have been Decree 15/2020 of the Council of Ministers contains announced but not yet approved. the regulations for a single agency or body that seeks to turn external partnerships into a strategic factor in 7.1 Currency unification the country's development, as well as to focus current Currency unification in Cuba entails the elimination of efforts on shortening the approval timeframes for the current monetary duality. foreign investment projects and speed up the process by rationalizing the parties involved. The main objective is to provide the conditions for increased efficiency, improved measurement of This agency operates under the supervision of the economic events, and stimulus to sectors that produce Ministry of Foreign Trade and Foreign Investment and goods and services for export and for substituting is composed of representatives of the bodies and imports. agencies of the State's Central Administration. This measure seeks to restore the value of the Cuban 6.1 Functions peso and its functions as currency, i.e., as a unit of account, a medium of exchange and a store of value. 1. Promoting foreign investment opportunities The currency unification will be accompanied by a wage 2. Providing guidance and assistance to companies in and price reform. the steps prior to and after their establishment in 7.2 Micro, small, and medium the country businesses 3. Processing and managing the documentation that investors require both before and after their One of the objectives of the National Economic and establishment in Cuba Social Development Plan is to promote private initiative. In this regard, there are announcements 4. Shortening processing times for the establishment about the possibility of setting up micro, small and of investors medium-sized businesses, which may be private, 5. Consolidating required permits and licenses mixed and state-owned. The indicators regarding the number of employees, sales volumes and other 6. Creating a computer system to report on the state factors will be defined in the coming months. of the procedures carried out through the One-stop Shop 7.3 Developing self-employment and

7. Processing fees for services rendered cooperatives According to the above, progress will continue to be 6.2 Processing time made in making self-employment more flexible with 1. Permits, licenses and authorizations: 15 days the announced elimination of the restrictive list of allowed commercial activities and the applicable tax 2. Certificate of microlocation and registration with system, with a view to expanding the potential of the the National Registry of Builders, Designers and country's entrepreneurs. Consultants of the Republic of Cuba: 20 days In addition, cooperatives will be extended to all 3. Issuance of Technical Approval for Construction: sectors, giving priority to the establishment of new 30-90 days cooperatives in key sectors of the economy. To this end, current restrictions regarding the number of members and territorial scope will be eliminated.

14 Building a better world for companies Building a better in Cuba working world for companies in Cuba

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Luke Ingles Claudia Udaquiola Rafael Conde Director of Transaction Manager of Transaction Advisory Senior Consultant of Advisory Services in EY Cuba Services in EY Cuba Transaction Advisory Services in EY Cuba Contact details Contact details [email protected] Contact details [email protected] [email protected]

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