Do MIPYMEs open the Cuban economy to private investment?
One step forward, two steps back
A necessary step, but in itself insufficient
On August 19, 2021, the Official Gazette of the Republic of Cuba published a series of decrees issued by the Government headed by Miguel Díaz-Canel Bermúdez, which aim to regulate the opening of the Cuban economy to private management, specifically with regard to micro, small and medium-sized enterprises or " SMEs". In short, these are measures that modify the regulations on self-employment and implement, for the first time in the economic history of the regime, the possibility of setting up 100% private companies.
The main rule of the package is Decree Law 46/2021, on micro, small and medium-sized enterprises. This decree introduces in the Cuban non-state sector the new figure of Limited Liability Companies or "SRL", to provide legal personality to those private business projects based in Cuba, which are classified as " MIPYMEs".
How does the decree law legally regulate MIPYMEs?
First, MIPYMEs are defined as companies whose maximum number of employees reaches 100 workers. It is noteworthy that despite using a universal terminology such as Small and Medium Enterprises ("PYME" in Spanish, or "SME" in English), the requirements to be met in order to be considered as such are significantly different from the usual ones in the rest of the legal systems.
Requirements and legal form
For the purposes of the Decree Law, micro-enterprises will be those with between 1 and 10 employees, small enterprises will be those with between 11 and 35 employees, and medium-sized enterprises with between 36 and 100 employees. However, no economic criteria are established, as is customary in other legal systems, to determine the size of the company, and the maximum number of workers is half of the number usually contemplated.
As regards the legal structure, it is decided to provide MSMEs with their own legal personality in the form of a Limited Liability Company or LLC. The regulation of these SRLs, however, is similar to the way they are regulated in other countries.
Limited Liability Companies (SRL) or Limited Liability Companies (SL) in Spanish law, and their variants Società di Responsabilità Limitata (S.r.l. ) in Italy, Société à responsabilité limitée (SARL) in France, or the German Gesellschaft mit beschränkter Haftung (GmBh), are all figures of the continental commercial and corporate law system, but are also reflected in Anglo-Saxon law, with the Private Limited Company (Pvt Ltd) in the United Kingdom or the Limited Liability Company (LLC) in the United States.
This is a legal concept that has become a classic (due to its uniformity and expansion), although it is relatively recent (1892). Thus, it is not surprising to observe common features between Cuban and foreign regulations, the former including many of the characteristics of the latter.
Share capital
Cuban LLCs do not have a minimum capital stock, according to Article 23.2 of Decree Law 46/2021, which leads to the inevitable conclusion that it is possible to incorporate a company with a capital of 1 peso. In this, it is similar to the French SARL, which does not impose a minimum capital, and to the Italian subtype "S.r.l. de capital mínimo o simplificada", which can be incorporated with a minimum share capital of 1 euro. In Spain, however, a significantly higher minimum capital of at least €3,000.00 is still maintained, although not exorbitant, since it represents 3.2 times the minimum interprofessional wage (SMI). In Spain, moreover, the SRL can be incorporated without the obligation of actually depositing the said amount, the mere declaration of the partners being sufficient.
However, the choice of a small or low amount of capital stock can give rise to a number of problems[1].
The capital stock of the Cuban LLC will be divided into shares, the transfer of which is subject to the preemptive right of the other partners, if any.
Although the capital stock can be formed by monetary or non-monetary contributions (susceptible of economic valuation), its disbursement, in any case, is obligatory at the moment of incorporation.
The increase and reduction of capital stock is regulated, as in Spanish law, by linking it to resolutions of the General Shareholders' Meeting, although the lack of regulation regarding the Issue Premiums (a financial element that is so important in the entrepreneurial sector or Startups), or even regarding the cases of mandatory reduction of the Capital Stock (a legal assumption so relevant in the assessment of the liability of the administrator), is noteworthy.
The Articles of Incorporation
The Articles of Incorporation must have the usual content: corporate name of the MIPYME, domicile, corporate purpose, capital, shareholdings, administrative body, etc. It should be noted that Article 31.g) of Decree Law 46/2021 introduces a completely new body in the usual regulation of companies in other jurisdictions, the control and supervision body. This body is regulated in Section Four of the regulations, Articles 82 and following, and is a kind of auditing body that supervises and controls the activity of the administrator. This is not an insignificant measure, since it actually doubles the company's management tasks and considerably dilutes the liability in the event of negligent management of the company.
Life cycle of the company
On this point we find an almost perfect parallelism with Spanish legislation.
The situation of the company in formation and the irregular company is precisely regulated, generating the usual joint and several liabilities among partners. The causes of extinction or dissolution of the LLC are the usual ones in the rest of the legal systems, as well as those related to the distribution of dividends, etc.
The rights and obligations of the partners are also the usual ones, as well as the adoption of resolutions in the General Meeting by means of a system of majorities, normally simple and that sometimes will have to be reinforced.
Is it possible to incorporate a single-member MIPYME?
Yes, the law allows the incorporation of a Sole Proprietorship Limited Liability Company, whose sole shareholder may be either a natural person or a legal entity, although it is linked to whether the company is state-owned, mixed or private.
As in Spain, for example, the sole proprietorship of the company may be original or supervening, but in any case, the circumstance of sole proprietorship must be stated from the moment it occurs.
Then, can any person be a partner of an MIPYME?
No. The regulation takes necessary steps in the economic opening of the island, but it does not abandon the state control of the economy and its development.
According to Article 48 of Decree Law 46/2021, natural persons residing in Cuba, over 18 years of age, may be partners of an LLC in the case of private MSMEs. Only in state-owned or mixed MIPYMEs may there be partners who are legal persons, and therefore, subject to the scrutiny and authorization of ministerial and governmental bodies.
In addition, Article 49, which regulates incompatibilities, clearly states that one cannot be a partner in several companies if one is a natural person.
In short, genuine private initiative is limited to (1) Cubans who are (2) natural persons (3) residents in Cuba, and (4) may be partners in only one company.
None of these limits is present in the regulations on SMEs in any of the countries mentioned above, nor in the rest of the states of the European Union, or in the countries of the Organization for Economic Cooperation and Development (OECD), which brings together the most developed countries and currently has 38 member countries (there are also Latin American countries, such as Mexico, Chile, Colombia or Costa Rica).
The state or mixed initiative, as has been traditional in Cuba, is broader, admitting legal entities and non-residents, but remains under the absolute control of the government.
Does this regulation open the Cuban economy to foreign investment?
No. But it does intend to encourage indirect investment, since most Cubans living on the island do not have sufficient economic resources or means of their own to undertake, nor can they turn to entities in search of financing, since they do not offer it. The solution within their reach will be, as always, to turn to relatives, friends or partners abroad.
Let us remember that the state or mixed initiative does not have these limitations. In fact, one of the problems in foreign investments in Cuba is the high amount that must be disbursed to invest in a mixed company. The possibility of creating mixed MIPYMEs could be an attempt by the regime to attract foreign investment in more moderate amounts, while maintaining control, since it is the Ministry of Foreign Trade and Investment (MINCEX) who must approve joint venture projects. We will have to observe the plans of MINCEX in view of this new possibility to discover the real intentions of the regime.
Well, once again it will be the Cubans living abroad who will have to put up the money for the private initiative of the MIPYMEs, either directly if they have a residence in Cuba, or indirectly through their relatives living on the island.
Does the incorporation of the MIPYMEs go through any filter of the State?
Of course it does. The incorporation is registered in the Companies House, but it is not registered with said public registry, but with the Ministry of Economy and Planning.
The partners or a representative of the partners must submit the request for the creation of a MIPYME to the aforementioned Ministry. At this point the regulation becomes vague and diffuse, because although it seems to be understood that the Ministry will know the activity to be developed by the company, at no time does it indicate the documentation that must be submitted to this Ministry in order to obtain the approval.
It will certainly be necessary to submit the Articles of Incorporation, identification documents of the partners, etc.
What criteria are followed to approve or deny the incorporation?
Decree Law 46/2021 does not regulate when the Ministry of Economy and Planning must approve or deny the request for the creation of a MIPYME. It is understood that the requirements of the law regarding partners, administrators, capital stock, etc. must be complied with. What generates more doubts is the viability or legality of the intended corporate purpose.
In the same regulatory package for MIPYMEs, Decree 49 was published, which regulates the activities that may be developed in the private sector. Again, it is understood that if the activity intended for the corporate purpose of the MSME is not included among those "prohibited" in Decree 49, the ministry should allow it to be carried out. But this list is limited to the most traditional activities of the economy, which are already carried out by the self-employed, and which by themselves cannot generate the wealth that the State does not achieve even if it has a State monopoly over the rest of the economic activities.
The vague and non-transparent regulations, as well as the same criteria for the approval of MIPYMEs, will allow the government to enter into an unimaginable casuistry of denials, and what is more worrisome, it will be impossible to appeal.
Apart from possible arbitrary denials, what are the risks that entrepreneurs take when setting up a MIPYME?
Overall, the risks are extraordinary and very diversified. They range from the absence of a body of ordinary and specialized laws on corporate and commercial matters, to the lack of experience and business customs settled in time, since in the last 60 years there has been no private activity of any commercial nature by Cuban citizens, since the regime completely ostracized the previous entrepreneurial culture that gave so many examples of the know-how of Cubans, with Cuban-born companies that currently dominate or compete for the dominance of entire market sectors, such as Bacardi in spirits and distilled beverages.
Likewise, the complete dysfunction of the Cuban judicial system, which lacks independent and impartial judges who apply the law exclusively, does not have judges specialized in commercial matters, does not allow the use of alternative, reliable and effective methods of dispute resolution, nor does it have the indispensable assistance of independent legal operators, since lawyers are forced to practice law collectively, to the detriment of their clients and the entire system of rights. The legal uncertainty is therefore complete.
With respect, specifically, to MIPYMEs, there are serious problems of omission in Cuban regulations.
What would happen, for example, in the event of insolvency[2] of the MIPYME? The only thing that the law regulates is that partners of MIPYMEs may not distribute dividends, and if they had done so, they must return them.
When the insolvency is temporary or temporary, it is possible that the business project is still viable, being then essential to reorganize costs, to redirect the activity, to look for financing and to restructure the debts of the company. For the latter, the company can file for insolvency proceedings, which is a legal procedure that exists in most countries for legal entities (and even individuals) to resolve an extraordinary debt situation.
When the insolvency is permanent, it is known as bankruptcy, and implies the definitive impossibility for a company, be it small or large, to meet its debts.
The fact that nothing similar is regulated for MIPYMEs in the decree law is worrisome, because the consequences of bankruptcy or bankruptcy are the liquidation of the company to execute all its assets in favor of all its creditors, which may imply the extinction of the company. And, in case the assets of the company are not sufficient, if it is considered that the insolvency has been culpable and that the administrator or the partners have had some responsibility, they will have to respond with their personal assets.
The creditor of a MIPYME could be not only another natural person (a relative of the partner who has lent money, a friend, a "partner" or investor, Cuban or not), but also a legal person, such as a State enterprise, a bank (State-owned or controlled by the State, since they all are), or, in the end, the State itself for non-payment of taxes and social contributions, etc. In these cases, it is necessary to provide legal protection not only for the creditor who has made an investment with its capital, but also for the very survival of the MIPYME, providing all the possibilities of enforced collection against the debtor's assets (not against the debtor's person) through the courts.
And it is essential, especially in the case of debts owed to the State, that the State does not end up imposing a "debt prison", or that the State aggressively pursues, automatically and without any judicial procedure, all the present and future assets of the manager and partners of the MYPIME, until it is compensated.
Although it may seem redundant, it goes without saying that Article 11 of the UN International Covenant on Civil and Political Rights states that "no one shall be imprisoned merely on the ground of inability to fulfill a contractual obligation".
It is not only a silence of Decree Law 46/2021, but also a silence of the Cuban Legal System in general. The Commercial Code of the Republic of Cubais limited to classifying the types of bankruptcy, without regulating a bankruptcy procedure for the case in which it occurs. There is also no bankruptcy law. In short, the situation of insolvency is not regulated, neither in the MYPIME nor in supplementary rules.
Another very worrisome omission is the liability of partners and those who hold positions of managerial responsibility in MIPYMEs. Joint and several liability is regulated in cases of irregular MIPYME or MIPYME in formation, but what happens when the MIPYME commits a crime? There is absolute silence as to what may be unfair administration. The Cuban Code of Commerce, which speaks in terms of a joint stock company, because of the date in which it was enacted (1885), if it applies at all, is completely and absolutely out of date.
Furthermore, there is an important conflict of responsibilities between the management body and the control and supervision body. Are both bodies jointly and severally liable for negligence?
The Cuban corporate and commercial legal system is a house that starts with the roof, it lacks sufficient foundations to dispense with a sufficiently detailed regulation. This is a situation of deep legal insecurity, especially for investors, businessmen and even young entrepreneurs, who have more knowledge, are used to or aspire to develop their activity in predictable and safe legal systems.
Is there a tax regime for MIPYMEs?
Yes, it is something that the Cuban State could never forget. The regulatory package includes Decree Law 49/2021, which amends Law 113 on the Tax System. And Decree Law 48/2021 establishes a special Social Security regime for self-employed workers, MIPYMEs and non-agricultural cooperatives.
This is a rather curious tax system, as it introduces a specific variation for MIPYME partners in the Personal Income Tax (IIP). This is due to the fact that, unlike in the rest of the systems, in Cuba individuals do not make an annual declaration of their income or personal income; it is the payer itself (the State) who settles the taxes when the monthly salary payment is made. When the partners of a MIPYME are not paid by the State, an ad hoc system must be established for the liquidation of their taxes.
In addition to this variation of the IIP, there is Sales Tax, Service Tax, Labor Force Tax, Document Tax, and a whole tax system that requires a detailed analysis.
What conclusions can we draw from this new economic measure?
In the absence its implementation and testing, the creation of the figure of the MIPYME is a small step forward, at least legally, as opposed to the absolute stateization of the economy, with previous exclusive participation of (large) foreign investors through joint ventures.
However, two steps backward are taken. The creation of MIPYMEs does not completely and sufficiently free private entrepreneurial initiative in Cuba. Only resident Cubans can undertake entrepreneurship, their entrepreneurship is necessarily limited in size, entrepreneurship is ambiguously subject to the unregulated approval of state bodies and entities, the ability to undertake is restricted to a single project or enterprise, the permitted economic activities are regulated, legal instruments are not provided to resolve a situation of insolvency, which is extremely frequent, even more so in novice environments, etc.
MIPYMEs are like an exclusive party to which you receive an invitation: you want to go, you prepare yourself according to the etiquette indicated to you, you arrive on time and show up with your ticket, but... you are not entirely sure if they are going to let you in, you do not know the host (you have only heard that he is the owner of everything there), nor the rest of the guests, you do not know all the rules of the party, nor how to leave if you do not feel comfortable, or what could happen to you if you run out of money.
In short, the MIPYMEs regulations do not provide the necessary legal certainty for Cuban entrepreneurs to join (nor their relatives, friends, Cuban or foreign investors), it is not enough to build an inclusive entrepreneurial ecosystem, in which all Cubans participate, nor does it provide a protective legal environment, which truly favors entrepreneurship and the prosperity of Cubans and the country.
How can Gowper help?
At Gowper we have an international business law practice area, staffed by lawyers with proven experience in the European Union and internationally. Our firm is committed to corporate social responsibility policies, corporate and business ethics, prevention of money laundering and terrorist financing, and the promotion of democratic values and the rule of law enshrined in the Universal Declaration of Human Rights (UDHR) and all international human rights instruments.
So, for Cuba, we wish what a universal Cuban, José Martí, asked for, that "the first law of the republic be the cult of the Cubans to the full dignity of the human being". And for that dignity to be full, it is necessary, among many freedoms and rights, the authentic economic freedom and the freedom to do business.
For this reason, at Gowper, we are committed to empower Cuban entrepreneurs, providing them with legal knowledge and legal tools that will be useful to create an inclusive, transparent, ethical, and free entrepreneurial ecosystem. And also, to inform entrepreneurs and investors who are interested in doing business in Cuba about the legal actuality, the legal challenges, the uncertainty and the great legal and ethical risks of doing business with the regime, and that only in a pluralistic, multi-party Cuba, subject to the rule of democratic law, will they be able to prosper and genuinely serve the progress of Cubans.
At Gowper we do not and will not support business with the dictatorial regime in Cuba. Our support will focus exclusively on 100% private entrepreneurship, with the goal of helping economic empowerment to precipitate democratic change on the island.
Authors:
Reimel Ariosa Méndez
Julio Rodríguez Pellitero
©2021 Gowper® All rights reserved.
[1] From the loss of financing capacity: a company with a low share capital is the object of distrust on the part of the banks in the event of a loan during the life of the company, which is why they usually require the partners to provide a guarantee or personal surety; to the neutralization of the principle of limitation of the partners' liability: the creation of a company with insufficient funds could be considered a mismanagement on the part of the partners, if the funds did not allow the operation of the company, and may cause the creditors to attack the personal assets of the partners, rather than those of the company.
[2] Insolvency is a legal condition in which a company finds itself when it is temporarily or permanently unable to pay its debts. This situation occurs when current assets are less than current liabilities.