Cuba's legal framework for foreign investment, particularly in energy...
Cuba is at a crucial moment in its economic development, and foreign investment has become a key driver of the country’s growth. Especially in the energy sector, where opportunities are vast, current legislation aims to attract foreign capital and foster collaboration with local partners. This article explores the legal regime for foreign investment in Cuba, overviewing the modalities and guarantees that make the energy sector an attractive destination for investors.
In March 2014, Cuba enacted Law 118 on Foreign Investment, along with its ancillary regulations. During its ten years of application, this legislation has been adjusted to streamline authorization procedures and promote investment development in the country.
The law establishes three types of vehicles to invest in Cuba: (i) an international economic association contract (in the energy sector, risk contracts for the exploration of non-renewable natural resources stand out), (ii) a full foreign capital company, and (iii) a joint venture company («JVC», identified in Cuba as Empresa Mixta). The latter has been the most widely used structure for investing in Cuba. Its main characteristic is that at least one Cuban company (so far always state-owned) must be a shareholder of the JVC. The foreign investor should provide the JVC with the financing and the technology to develop the Project.
One of the standout features of Law 118, in addition to significant tax benefits and incentives (see Fig. 1), is the provision of legal guarantees to foreign investors. These include: (i) non-expropriation principle (except in cases of public utility or social interest, previously declared in accordance with the law, and ensuring payment of economic compensation based on their commercial value, in freely convertible currency), (ii) continuity of granted benefits (throughout the entire authorized period), (iii) repatriation of dividends, as well as liquidation, sale of shares or expropiation proceeds (in freely convertible currency, without paying taxes or related charges), (iv) divestment (by transferring part or all of the stake with prior government authorization), (v) protection against extraterritorial application of laws from other countries.
In addition, Cuba is part of a broad network of international treaties to protect investors. In this regard, Cuba signed (i) bilateral agreements for the promotion and protection of investment with more than 60 foreign states, and (ii) bilateral treaties for the avoidance of double taxation with 12 foreign states. Regarding international arbitration, Cuba signed the 1958 New York Convention and the 1961 Geneva Convention, the two major international legal instruments relating to international commercial arbitration, which constitute an external source of law for arbitration in Cuba. Under the principles and rules established by Cuban law on the validity and direct and preferential application of international agreements, these have priority over domestic law in the event of contradictions and discrepancies between them, except when the public policy exception applies.
Cuba views foreign investment as essential for its economic development and, therefore, publishes an annual Portfolio of Foreign Investment Opportunities, which outlines the priority sectors and business opportunities available to potential investors. Among the prioritized sectors are energy development, particularly renewable energy, as well as hydrocarbon exploration and exploitation.
The basic legal regime for hydrocarbons in Cuba is made up, in addition to the Constitution of the Republic, of two legislative texts (the Fuel Minerals Law of 1938 and the Electricity System Law of 1975) which have become obsolete and whose provisions are hardly applicable today. In practice, they have little relevance for foreign investment projects. In essence, these regulations created an energy monopoly in Cuba -the state-owned company «Unión Nacional Eléctrica» (UNE)-that is currently controlled by the Cuban State Ministry of Energy and Mines (“MINEM”), and which is the only authorised buyer of all electricity produced within Cuban territory, whether by Cuban or foreign producers.
Another relevant piece, «Unión Cuba Petróleo» (CUPET), is the Cuban state-owned oil company responsible for the country's oil and gas industry. In addition to operating a chain of retail gas stations, CUPET is engaged in refining and distributing the country's petroleum products. It is also involved in the exploration and development of new oil fields, including the extraction of crude oil deposits. Both UNE and CUPET are working to increase oil and gas projects in Cuba. These Cuban companies are major players in the energy market and it is common for them to participate in oil and gas projects to be developed in Cuba.
MINEM, UNE and CUPET may issue resolutions, guidelines and regulations that may be applicable to energy projects on a case-by-case basis. These include Resolution 386/2008, which classifies oil and gas resources and reserves, Resolutions 166 and 167 both of 2018, which establish the documentation for carrying out oil and gas exploration and exploitation activities, and the procedures for initiating drilling, respectively, and Resolution 191/2018, which regulates the administrative procedures for obtaining qualification from the Cuban government as a foreign company interested in oil and gas exploration and production in Cuba.
Although MINEM is the governing body for the energy sector, the importance and impact of this activity on the country's development means that the approval for projects related to non-renewable natural resource exploration and exploitation falls to the Council of State. However, international economic risk association contracts are approved and authorized by the Council of Ministers, as are projects related to renewable energy sources.
Environmental regulations require special attention in energy sector investments. Thus, the recent Law 150/2022, ‘On the System of Natural Resources and the Environment’, establishes the obligation of projects in this sector to undergo an environmental impact assessment by the Ministry of Science, Technology and Environment; and to take out civil liability insurance to cover possible accidental damage to the environment, human health or property.
While the legal regime for foreign investment in Cuba is promising, investor success is bolstered by solid legal backing. Working with a law firm that understands the market is key to maximizing opportunities in this dynamic sector and contributing to the growth of the Cuban economy.
