Cuba Finally Opens To Foreign Investment (Sort Of)

Cuba is about to open itself up to foreign investment for the first time in half a century as part of a slew of reforms promoted by President Raúl Castro. The legislation, which will be voted on in parliament on Saturday, touches on all sectors of the economy except for two: education and health care.

Local media unveiled details of the bill on Wednesday. According to the website for the newspaper Juventud Rebelde, or "Rebel Youth," the proposed law says that foreign investment will be tax-free and enjoy full judicial protection. That means companies that invest in Cuba will not be expropriated or nationalized by the Cuban government at a later date. However, the bill makes an exception "for social interest or public usefulness,” in which cases the owners of the affected company would be properly compensated.

This is the latest step in the slow transformation of the Cuban communist economic model that Castro began five years ago to fix the country's troubled finances and integrate the island with the international economy.

Foreign investment will be authorized in so-called mixed companies, formed through associations of Cuban companies and businesses that are either fully foreign-owned or funded exclusively with foreign capital. The sectors that will be most affected by the reform are expected to be natural resources, hotels, agriculture and construction.

These new partnerships will enjoy a special fiscal policy, which exempts foreign partners from paying income taxes. Mixed companies will also be exempt from paying taxes for eight years after their inception.

However, it is still unclear how effective the bill will be in enticing foreign investors. Jason Poblete, a Washington, D.C.-based attorney and partner in law firm Poblete Tamargo who works with U.S. clients on claims against Cuba, told CNBC the country still lacks two key factors to investing: the rule of law, and protection of property rights.

“You need a stable legal system that protects investor rights and has a path to resolve disputes,” he said.

Another provision that may undermine the law's effectiveness is the provision saying that Cuban exiles may invest, but Cubans living in Cuba cannot. “This clause creates second-class economic citizenship compared to the ‘evil exiles’,” said Ted Henken, professor of Latin American studies at Baruch College.

Henken said the clause could have been designed with an ulterior motive: While Cuba may allow exiles to invest, U.S. law prohibits its citizens from doing any business in Cuba. “The provision could incentivize Cuban exiles to lobby the U.S. for an end to the embargo,” he said.