Cuba cuts taxes in appeal to foreign investors

Cuba's government has drawn up a new foreign investment law that will cut a profits tax in half and exempt investors from paying it for eight years in an attempt to attract desperately needed capital to the country’s floundering economy.

The National Assembly met Saturday to approve the legislation, which Cuba promises will offer investment security to foreigners and help further integrate the Caribbean island in the global economy.

The law would 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.

Cuba is cut off from U.S. investment by a comprehensive trade embargo, while the island nation has failed to meet its own investment targets for each of the past five years. The new investment law has been anticipated since 2011, when Cuba enacted a 300-point overhaul of its domestic economy.

President Raul Castro's government 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 University.

The new law "would apply (to investors) ... a tax of 15 percent on taxable net profits," after which all profit could be repatriated, Juventud Rebelde – Cuba’s official newspaper – reported.

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 eliminated completely, according to a version of the draft law published by the Miami-based Web site Progreso Semanal.

Investors will still have to hire labor through state-run companies, a major complaint, though the hiring halls will no longer operate for profit, Juventud Rebelde reported, indicating more money will flow back to workers and their wages may be easier to negotiate.

Under the structural reforms enacted by Castro since taking over from his ailing brother Fidel in 2008, 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.

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.

Wire services