Legal Issues for Future Hospitality Business in Cuba

Introduction

This paper examines the legal issues and how they influence the future prospects for investors in Cuba’s hospitality business. As discussed in the essay, investors wishing to carry out operations in Cuba must consider the relevant issues that relate to at least four critical areas including finance, personnel, government partnership, and dispute resolution. This study highlights the legal issues that could potentially shape the future of the hotel industry in the country by drawing from two major sources. Most of the other resources used in the research are recent – not older than 5 years – and have a direct relation to the current topic of interest.

This note is organized in a way that it tackles a number of key issues specific to the hospitality industry by analyzing the opportunities and growth prospects to provide a general outlook of the Cuban hospitality business environment. From there, the obstacles and challenges in the industry are discussed in brief after which the paper analyzes the legal issues in the industry from the laws and governance issues that need resolution, to the codes and regulations. In this way, it is possible to make recommendations on holistically addressing the future growth opportunities that stand to result from the lifting of the embargo and ending the isolation, in a manner that is both fruitful and effective for the two countries and the international market.

Historical Background

The history of trade between Cuba and the United States dates back to long in the pre-1960 when the United States held major interests in Cuba. However, with the emergence of the Cold War, the Red Scare, and America’s general disregard for communism, this relationship was strained and eventually severed when the United States imposed the trade embargo on Cuba. The embargo and isolation between the two nations were mainly spurred by Cuba’s alliance with the then USSR and other communist countries and events such as the Cuban Missile Crisis. Since then, the two countries have largely remained isolated, the negligible geographical distance between them notwithstanding. In 2015, however, United States President Barrack Obama and Cuban President Raul Castro re-opened diplomatic relations. America still maintains its economic, commercial, and financial embargo. Such restrictions have continued to inhibit free political, economic, and cultural interaction between the two countries.

But while the United States has maintained the blockade with Cuba for over 50 years, the rest of the world continued to interact freely with the country, yet the once vibrant hospitality industry dwindled. The hospitality industry is hailed as one of the industries with the most potential for uplifting and upholding Cuba’s economy. The industry also holds the largest upside for private sector investors looking to tap into the full potential of the business. Determining the legal issues that the hospitality industry faces and analyzing them in the context of their potential impact for the future of the business are fundamental in providing parties involved with insight into the potential future economic benefits for both Cuba, America, and the international markets2. The legal frameworks and subsequent challenges for the industry are deeply embedded in the historically tumultuous relations between the two countries.

In hindsight, many authors have provided roadmaps on the possible ways in which the normal relationship between the two nations can be resumed even before the diplomatic changes took effect. These recommendations have also incorporated possible frameworks for building bridges, especially in the Cuban tourism industry. Needless to say, the prospects of the renewed diplomatic relations between the two countries will do little to cushion the hurdles for foreign hospitality and tourism businesses looking to tap into the Cuban market.

Hospitality and Tourism Industry Outlook: Growth and Opportunities

In part, Cuba’s potential for growth can be attributed to the fact that the country is still in the early stages of exploration and development. The country has focused on developing foreign investment and its tourism industry since the 1990s. Currently, tourism is the country’s largest foreign exchange earner after the export of technical and professional services. In 2013, Cuba earned an excess of 1.8 billion CUC from both the domestic and international tourism industry. The country’s hotels and private accommodations (known as casas particulares) offer a wide variety of facilities ranging from pools, hot tubs, spas, dining to massage services, and private chauffeurs. There have been plans to increase the hotel capacity by creating up to 78,000 rooms by 2020. In an attempt to attract more tourists, the country has been diversifying its appeal to various markets. For instance, six golf courses were constructed in an effort to bring in more U.S visitors, high-income tourists from Japan and China, and boost the spending by regular visitors.

The Chamber of Commerce has attempted to appeal to more foreign investors by offering joint venture projects in the past. Melia Hotels International which is a Spanish hotel chain is the largest in the country. The hotel lists 28 Cuban properties owned by either the government or Cuba has lots of opportunities for hospitality with a growing tourism demand. The country is the third most popular tourist destination in the Caribbean after the Dominican Republic and Puerto Rico. The prospective opening of the United States market could lead to significant growth for the hospitality and tourism industry in Cuba. Regardless of the embargo, it remains to be seen whether U.S companies will successfully set up and operate within the legally and politically inhibitive framework of the Cuban market. It is however safe to say that as long as the relationship is built on a foundation of mutual economic benefit, the Cuban legislative framework will evolve to accommodate the new businesses for economic prosperity.

Similarly, the enthusiasm by American businesses and professionals to re-enter the Cuban market will significantly prop development in the country when the opportunity comes. In the same manner, Cuba has a highly literate and educated population that is both enterprising and accommodating to new opportunities. Altogether, these factors play a major role in posing Cuba as a hub of opportunities for the hospitality industry with an enormous potential for future growth and development.

Challenges and Legal Issues

Despite Cuba’s outstanding potential, a majority of foreign companies seeking to do business in the country are still confronted with five major challenges. These challenges include the dual currency system; Cuba’s credit situation; the rampant corruption among the Cuban government officials; infrastructure; and government regulations. Government regulations as a challenge is a broad area and will form the basis of the legal issues as it is closely related to the Foreign Investment Law No. 118; which in turn relates to all the five challenges in the Cuban business environment.

To begin with, Cuba currently operates two different types of currencies in its monetary system: the Cuban Convertible peso (CUC) and the Cuban peso (CUP or Peso).5 This system has been criticized as being inefficient and divisive and will likely trouble corporations looking to invest the same way it is both confusing and frustrating to tourists. Secondly, Cuba’s credit crisis and its poor loan system have resulted from its ban from the International Monetary Fund (IMF), World Bank, and Inter-America Bank due to the embargo. The poor structuring of the system has led to transactions being carried out mostly in cash, making it worrisome for foreign investors. The lack of security in the international banking market has deterred foreign investors from conducting business in Cuba.

Thirdly, Cuba, like Brazil, Russia, India, and China (BRIC), has a strong and far-reaching grasp on all industries in the country. BRIC countries are among the most corrupt in the world and Cuba is no stranger to issues of bribery and corruption in the whole government. This situation has kept investors at bay and the prospect of working with state-owned enterprises (SOE) would frustrate foreigners looking for investment opportunities especially in the hospitality industry. Lastly, thriving infrastructure is fundamental to the success of any hospitality industry and Cuba’s infrastructure is dated and decaying. There is a serious need for improvement for tourism and investment to expand into the hinterlands, which will also ensure wealth is distributed throughout the country. Critical areas that will need upgrades include airports, roads, buildings, telecommunications, and internet access.

Cuba has long ranked as one of the world’s most repressive environments for information and communication technologies (ICTs). High prices, exceptionally slow connectivity, and extensive government regulation have resulted in a pronounced lack of access to applications and services other than email. Most users can access only a government-controlled intranet rather than the global internet, with hourly connection costs amounting to 10 percent of the minimum monthly wage. The Cuban government has made commendable steps in expanding the opportunity for international corporations looking to invest in the country through the passage of Foreign Investment Law 118 (hereinafter Law 118). Although the Cuban government has taken several measures to integrate into the current international market, there are several hurdles that still hinder the full success of these efforts. Nowhere is this more evident than in the hospitality industry. The hold that the government has on private institutions is a major and the sector as a whole is the cause of concern. As it is presently constituted, a Cuban citizen is not permitted to start a corporation and as such, any foreign investor looking to do business in the country has to almost deal exclusively with the government. Law 118 permits for three business models namely: joint ventures; international economic association agreements; or capital companies that are completely foreign.

While this law does not in any way explicitly state that hotels will only have the option of international economic association agreements as an avenue of entry, it is the only clause of the three agreeable models that contain the terms “Hotel” and “Service Management.” This particular model is primarily targeted towards improving the general quality of the service industry by allowing internationally acclaimed institutions to expand into the local market. Consequently, this arrangement helps the country to create a name for itself in the international hospitality markets.9 In the agreement, the foreign investor acts as a representative of the national investor in the global market.

Pertinent to Law 118, as opposed to sharing profits, foreign investors shall be paid depending on the manner in which they perform. All terms considered including the management agreement, the relationship between the national and foreign investor is seemingly that of a principle and agent respectively. This arrangement is not particularly favorable for foreign investors who would under normal circumstances prefer to have total control and operation/management rights over their businesses. While this model has its fair share of drawbacks, it is clearly the model of choice for investors presently operating in Cuba. Notably, investors that choose this model are accorded several tax exemptions compared to those that operate using the totally foreign capital institution. Even as the prospects of the possible entry of American investors into the Cuban market are increasingly clear, there is a general fear from local people over possible cultural erosion from these foreigners.

Foreign investors entering the Cuban market also have to contend with the strong labor force and the government’s control of the labor. A corporation set up in the country, more particularly the hospitality industry, would not only have to contend with the dual currency issue but also have no autonomy over the hiring, firing, and compensation of its employees. The system curtails the existence of a proper employer-employee relationship from the very onset, which could affect productivity and employee contentment. New corporations will have to deal with a unionized workforce, making it impracticable for American hospitality corporations to hire American nationals to work in Cuba. Besides the cost implications, the primal reason why this arrangement would not work is that the Cuban law requires that foreign business have a direct and positive impact on Cuba and its nationals.

Another significant consideration in the Law 118 is the tax considerations. As compared to law 77, Law 118 completely eliminates the labor tax requirement. The old tax law required investors to part with a 11% and an additional 14% for Social Security contributions, bringing the total labor force tax to a combined 25%. The revocation of the tax is more so beneficial to potential investors in the tourism and hospitality industry which employs about 63% pf the total labor force. Similarly, foreign investors are exempted from paying income tax on their net profits under Law 118’s Article 35. This should be a generous attraction for foreign investors entering the country’s hospitality industry as it allows the corporations to receive all their earnings and dividends which would otherwise be reduced by tax. The income tax exemption should be an attractive offer to expediate and multiply investment in the country if the investors can overcome the current fear and insecurity of doing business in Cuba. In the same manner, Law 118 sets the profits tax of net profits at 15%, which is a 50% reduction from the previously existing regulation. This is in addition to a an initial eight-year exemption period. These provisions combine to present a better return on investment for hoteliers and other service providers in the industry.

In a nutshell, although Cuba has a great potential for future growth in the hospitality industry, its is not possible to immediately gauge the probability of success. The opacity of the country’s economy and political atmosphere makes it difficult to assess success or failure of its foreign investments. However, Melia Hotels International serves as a prospective yardstick of successful foreign corporation in the country with four brands operating under joint ventures and international economic association agreements. In an example of foreign companies running into legal headwinds in Cuba, a suit filed before a U.S labor court alleged abuses in a Cuban shipping and repair company where three Cuban laborers were allegedly forced to work virtual slaves with tedious tasks in the shipyard.17 The defendant was a foreign company that was operating in Cuba through a contract with the government. Another case of a foreign business gone bad was with Tokmakjian Group, a Canadian company that deals in transportation services and engine repairs. The foreign entity was convicted in a Cuban court on accounts of corruption resulting in jail terms for its top management.

Conclusion

Tourism and hospitality industry opportunities are vital to the improvement of Cuba’s economy and its relationship with America. The hospitality industry in particular is the most critical area in bringing Cuba back into the worldwide business community and developing the nation. Notwithstanding the numerous issues to be resolved, it is obvious that Cuba offers extraordinary potential for future development of global hospitality and the travel industry organizations. Foreign investors must, notwithstanding, think about the legal issues for organizations and determine whether the conditions set by the Cuban government are favorable for their setting and operation. It is envisioned that business regulations will advance as private investors negotiate agreements to give an alluring economic turn of events, however, there is currently no history of steady business development in Cuba. Some of the legal establishments such as the tax provisions in Law 118 are favorable for future growth prospects.

U.S. organizations who wish to do business in Cuba have drastically expanded their activities since the ongoing relations by the two nations’ heads toward setting up normalized relations. Meetings between invested individuals are regular, including lawyers, agents, and developers, in spite of the fact that there is a lack of such private meetings in Cuba. Possibilities for participating in the hospitality and tourism industry businesses in Cuba keep on improving, however, the result is not yet clear. There is a great deal of limitations most of which are based on the legal frameworks that will hamper the hospitality industry from realizing its maximum potential in Cuba. America needs to venture out progressively in restoring the relationship and permitting the hotel businesses the capacity to work in Cuba. Many restrictions have to be relaxed and sanctions lifted through executive order. Ultimately, there is both extraordinary potential and serious pitfalls for entrepreneurs willing to take the risk.