Cuba allows private businesses to incorporate, limits size to 100 employees

CUBA STANDARD — After a decade of announcements and high expectations for a key reform measure, the Cuban government allowed the incorporation of small and medium-size private businesses, while setting limits for their size.

Businesses of up to 100 employees can now incorporate as a “Sociedad de Responsabilidad Limitada” (SRL), with one or several partners who contribute to the company’s capital.

The measure comes less than a month after unprecedented street protests, which erupted partly in response to the country’s dire economic situation.

“The economic reform train is picking up steam,” economist Rafael Betancourt wrote in a column published by independent news site OnCuba. “This time, with hurry after a long pause, and we hope that nothing and no one will stop it.”

Former President Raúl Castro coined the slogan “without hurry, but without pause” in describing Cuba’s reform process.

In an ordinary session on Aug. 6, the Council of State passed eight decree-laws, most importantly Decree-Law 46 “On Micro, Small and Midsize Enterprises” that sets the parameters of incorporation for private businesses. The maximum size of medium enterprises is 100 employees; there are apparently no limitations in terms of revenues.

Decree-Law 46, published in the Gaceta Oficial Aug. 19 and effective Sept. 19, outlines that incorporated businesses can export and import goods and services only through state intermediaries, have access to “any legal source of financing”, compensate employees as they wish while respecting minimum wage rules, and do business outside their province of origin. Following the catalogue of activities prohibited for self-employment, most professional activities such as medicine, law, or engineering remain off limits for private businesses. The law-decree divides businesses into micro enterprises of up to 10 employees, small enterprises of up to 35 employees, and midsize enterprises of up to 100 employees. The law posits a “Consejo Nacional de Actores Económicos” as the regulatory agency for businesses, saying the Consejo will also be in charge of promoting and helping them. The Economy Ministry is in charge of processing applications.

Decree-Law 46 does not set a limit to the number of partners in a small or medium-size enterprise (SME), but partners must be permanent residents of Cuba, and natural persons cannot be partners in more than one business. Elected officials and government officials are excluded from being partners.

The Economy Ministry will “evaluate” the law after two years and may make “needed modifications”.

Potential and limitations

The new regulations are hoped to trigger a wave of startups, as incorporation allows entrepreneurs to transcend the limbo of “self-employment”, which had been the sole legal category for private business. Also, the limitation to 100 employees lifts some of the cloud of uncertainty; Cuba’s new constitution prohibits the “undue accumulation of wealth”, but business owners were uncertain where they would cross that “undue” line.

Cuban economist Pedro Monreal expects the creation of some 14,000 businesses in response to the measure. However, he also points out that access to funding is the weak link in Cuba’s apparent plan to promote private-sector growth.

“With a financing gap, small and midsize businesses will not take off,” the economist who works for the United Nations warned in a tweet.

The law mentions the planned creation of “funding sources” for businesses, but Cuban state coffers are too strained to provide any meaningful financial boost to private businesses, for now.

Cuban officials have recently raised the possibility for Cubans living abroad to invest in private businesses in the island, but there is no mention of that option in the new law-decree.

“In this country, there is a foreign investment law that regulates this,” said Economy Minister Alejandro Gil on state TV. “There is no prohibition whatsoever in the design we have produced for a private or state SME to associate with foreign investment and establish a mixed enterprise with Cuban and foreign capital.”

For now, the restriction that partners have to be permanent residents of Cuba obviously limits direct investment opportunities in newly incorporated private businesses. However, Gil added that the creation of joint ventures with new Cuban SMEs will be “evaluated” once companies have actually incorporated.

SRL vs SA

The law presents the SRL as the sole legal option, leaving the more flexible “Sociedad Anónima” (SA) off the table, Monreal points out.

Under the Cuban SRL structure, partners are liable with their personal assets for the company’s obligations, if fraud has been committed or if other partners, third persons or the state have been damaged. In a feature that dis-incentivizes investment, each partner has just one vote, no matter what share their capital contribution represents.

According to Decree-Law 49, partners have to pay a personal income tax between 3% and 20%, depending on income levels.

Bankruptcy proceedings are not outlined by the new regulations, and Cuba has yet to establish a bankruptcy law.

The incorporation process

Officials have said the application process for incorporation — expected to be launched by the Economy Ministry in late September — should not take longer than 25 days.

In order to avoid bottlenecks, the Economy Ministry will first prioritize companies that produce or process food, value-added manufacturers, companies in technology parks, and companies that tie into local development projects and that use domestic materials.

Cooperatives

Council of State session on Aug. 6 — a key moment in Cuba’s economic reforms.

Another decree-law sets the terms for the creation and dissolution of non-agricultural cooperatives. The new regulation puts these relatively new cooperatives on a permanent footing, lifting dozens of taxi, construction and manufacturing enterprises out of the “experimental” limbo in which they had lingered for years.

The new rules set the minimum number of members at three, require members to be permanent residents of Cuba, restrict them to being members in only one cooperative, and allow co-ops to create subsidiaries and do business in provinces beyond their home base.

That measure was preceded by the Council of Ministers’ approval in June for the creation of an “Institute of Cooperative Development and Promotion”, and temporarily allowing the creation of cooperative holdings that unite smaller cooperatives under one corporate roof.

A comprehensive cooperative law is still pending, and there are no cooperative banks that could lend to co-ops.

Self-employment

Self-employment (“trabajo por cuenta propia”) — before allowing incorporation of SMEs the only legal category for private activities — is the subject of another three decree-laws. The decrees create a new “Processing Office” (Oficina de Trámites) for self-employment applicants. Reverting its previous approach that was based on a list of permitted activities, the government in February vastly expanded permitted private-sector activities by replacing the permitted list with a list of prohibited activities. Even so, most professional activities — such as lawyers, doctors, architects or engineers — remain excluded from private-sector activities.

Providing short-term relief for existing and new businesses, the government on July 31 temporarily lifted import duties for intermediate goods, machinery and raw materials private businesses can now purchase abroad through a state intermediary.

Agriculture and food

Another recent package of measures opened up new spaces for private activities in agriculture and food distribution. All private actors are now allowed to participate in food distribution and sales, and they can now rent trucks, warehouse, retail, workshop and office space, fridges and freezers, and scales. All farmers and middlemen can now sell directly to private businesses such as restaurants and hotels.

In an effort “to recognize the real costs for producers”, the Finance Ministry also eliminated centrally-set maximum food prices and retail price increases, allowing them to be negotiated between producers and consumers.

The end of food price restrictions is a key part of agricultural reforms begun in May, which allow farmers to sell on their own the production that exceeds state quota.

If state distributor Acopio — which is due some 70% of the harvest — pays late or fails to pick up the goods, farmers can now seek alternative distribution channels for the state quota, too.

In addition, electricity and water tariffs are now steeply discounted for farmers.

Finally, the government now promotes the creation of new farmers’ markets that allow for digital payment and offer a wider array of food.

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