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Cuba sets new regulations to encourage foreign investment

| News | Cuban Desk

Adargelio Garrido analyzes the new initiatives of the island to constitute an economically efficient legal product

When it becomes necessary to obtain financing from third parties, the financier usually requires additional guarantees, whether personal or real collateral. The personal guarantees are represented by the figure of the guarantor, and the real collateral include the chattel mortgage or pledge. On the other hand, the guarantee trust constitutes an economically efficient legal product which offers an alternative guarantee to obtain financing.

Mortgaging or pledging an asset, or establishing a guarantee trust regime, as mechanisms to meet certain financial resource needs of companies, were not within the reach of the different forms of foreign investment in Cuba (Joint Venture, Totally Foreign Company and International Economic Association Agreement). In the case of the pledge and the mortgage, although both figures are recognized by Cuban regulations, their use by any of the forms of foreign investment was not a practice. However, the absence of these guarantees has just been amended with the recent Decree-Laws Nos. 14 and 15, both of 24th September 2020, which will come into force from the coming 23rd November.

Decree Law No. 15 "ON PLEDGES AND CHATTELL MORTGAGES", updates and extends the pledge based concept provided for in the Cuban Civil Code (Law 59 of 16 July 1987); among other aspects, it incorporates the procedure to be followed in the event of non-compliance with the use of the goods and rights received in pledge. Similarly, with respect to chattel mortgages, it adds to Article 288 of the Civil Code the principle that the right to a mortgage entitles the mortgagee to exercise preferential credit to any other creditor, charged to the value of the property received from the debtor. The article only mentioned that air, naval and real estate mortgages are governed by special provisions. On the other hand, Decree-Law No. 14 also amends Article 486 of Law No. 7 " Law on Civil, Administrative and Labour Procedures", of 19th August 1977, by incorporating the guarantees derived from contracts, within the titles of liquid, overdue and enforceable credits, and, furthermore, modifies Decree-Law No. 226 "Of the Commercial Registry", of 6th December 2001, by including the pledge within the circumstances to be registered in the Commercial Registry.

In direct relation to foreign investment, Decree-Law No. 14 provides that any form of foreign investment can constitute mortgages on real estate or other real rights they hold, in order to guarantee compliance with contractual credit obligations, including owners in real estate developments. To this end, it establishes the requirement that foreign investment forms may pledge their assets and rights only with the prior authorisation of the Council of Ministers.

Finally, Decree-Law No. 14 establishes that the legal regime for real estate mortgages is that established in the Mortgage Law of the Overseas Provinces of 14th July 1893 and its Regulations, its complementary legal rules and the Decree-Law itself. The Mortgage Act draws attention to the fact that in the 1970s the summary procedure for collecting mortgage loans was abolished, as it was considered contrary to the principles of the socialist system. It is evident that the changes which have been taking place in Cuba for several years, including the opening to foreign investment, have forced the recognition of the validity of this regulation.

On the other hand, Decree Law No. 15 "OF THE GUARANTEE TRUSTEE", describes this legal figure as "a financial intermediation operation formalized by means of a written agreement, by virtue of which a natural or legal person called the trustor, transfers the custody of goods and rights to an entity, which acts as trustee, to ensure the compliance of an obligation for its benefit or that of a third party, called the beneficiary or trustee".

Decree Law No. 15 establishes the legal regime of the guarantee trust, based on the obligation that only those entities that have been expressly authorized, by means of a license issued by the Central Bank of Cuba, may act as trustees. The trustees can only accept the constitution of a trust, after carrying out the pertinent procedures to determine the origin and beneficiary of the funds, as well as the assessment of the associated risks, particularly those related to money laundering, financing of terrorism, proliferation of weapons and movement of illicit capital.

Once the agreement is in force, the custody of the assets in trust is transferred to the trustee, who must act diligently in order to comply with the agreement between the parties, exercising the corresponding actions for the defence of the assets in trust, both before third parties and before the beneficiary. Once the agreement is concluded, the goods and rights subject to the agreement which remain in the custody of the trustee are delivered to the corresponding party, as agreed.

In the case of any of the modalities of foreign investment, when it is intended to constitute in trust assets or rights of a business instituted under the same, the prior approval of the Council of State or the Council of Ministers is also required.

It is evident that both regulations are aimed at facilitating foreign investment in Cuba, by establishing guarantees of international use, so that the different forms of investment can obtain financial resources from third parties, in order to carry out their projects. However, it is indisputable that the Cuban government preserves the right to certain assets which may be given as guarantees, on the basis of the obligation to obtain prior authorisation from the Council of State or the Council of Ministers.

For more information you can contact: 

Adargelio Garrido | Of Counsel of Andersen

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