Expropriation law in Cuba, private properties for foreign investors

Expropriation law in Cuba, private properties for foreign investors

HAVANA, March 30th The publication of the draft Law on Expropriation for reasons of public utility or social interest —on the website of the Ministry of Finance and Prices (MFP)— suggests that the regulations could be approved in April 2022 during what seems to be a marathon session of the National Assembly of People’s Power. This is despite the fact that the rule is not contemplated in the legislative schedule that was updated in December 2021.

Expropriation —or forced expropriation, as it is also known— as the possibility that States, represented by their Administrations, have to take ownership of an asset or real right from an individual in exchange for a compensatory payment for the loss.

This institution is not exclusive to Cuba. Forced expropriation is recognized by many legal systems in the world, including some of the most liberal and protective of private property. In the Cuban case, forced expropriation has a long history and before the publication of the project, its use was regulated in the Magna Carta and in other procedural norms.

The 2019 Constitution established expropriation in article 58, and declared that a subsequent law would determine “public utility” and “state interest”, the only reasons recognized by the constitutional text to justify expropriation.

The project fulfills this task and is integrated into other legal regulations that establish similar guidelines —such as the 2014 Foreign Investment Law (updated in 2020) and the Administrative Process Law, in force since January 1, 2022—.

But beyond the fact that forced expropriation is an institution that has been present for a long time in the Cuban legal system, what are the outstanding elements of the project published by the MFP?

1. Differentiated treatment of the property of Cubans and foreigners

The project follows the constitutional logic and recognizes that all assets, both Cuban and those derived from foreign investment, can be expropriated. The power to expropriate property and rights of foreign investors is not new in Cuban law either.

The Foreign Investment Law makes it possible to expropriate assets resulting from an investment with foreign capital when the requirements of “public utility” and “state interest” declared in the Constitution meet. However, the law establishes regulations that claim to be guaranteed, such as the fact that the Council of Ministers must approve these expropriations.

In this sense, the project tries to offer greater guarantees to foreign investors in the event of a possible expropriation. With this desire, it establishes a differentiated treatment between national and foreign property.

The text recognizes that the appraisal of the assets to be expropriated and the determination of the compensation that the expropriated deserves are the responsibility of MFP officials and must correspond to the real value of the assets in the market.

It also contemplates that, if any foreigner does not agree with the value of the indemnity, he may —it is a provision established in the Foreign Investment Law— go to an “organization of international prestige in the valuation of businesses, authorized by the Ministry of Finance and Prices and contracted for this purpose by agreement of the parties involved in the expropriation process.

It also establishes that, if “there is no agreement between them regarding the selection of the aforementioned organization, at their choice, a draw will be held to determine it or they will go to court.”

However, when it comes to the expropriation of assets belonging to Cubans or permanent residents in the archipelago, the only alternative for the expropriated party to oppose the offer of compensation is to formulate “arguments that he deems pertinent, [including] his own valuation according to the methods that it deems most appropriate, and evidence that it deems appropriate in justification of its allegations.

The project establishes that, if a home is expropriated, “the current regulatory provisions will be used to determine the [minimum] reference value for the application of the property transfer tax.

The current regulations for these purposes date from 2017 and establish minimum values ​​for properties that depend on the useful surface of the home and its location. However, these are reference values ​​that do not always reflect the reality of the market; much less current inflationary values.

To give you an idea: according to the current referential index, a two-bedroom apartment in the capital’s Vedado has a minimum value of 216,000.00 CUP. That value, according to the representative rate of the informal foreign exchange market, is equivalent to approximately 2097.00 USD.

Then, the text of the law regulates, that would be the initial value that the authorities would use to establish the minimum and the average of the compensation quota corresponding to a property with those characteristics.

The project recognizes that, in the case of homes acquired through purchase and sale 12 months prior to the start of expropriation, the price declared in the public deed will be considered as the value of the property.

To calculate the amount that the owner can receive as compensation, it would be necessary to add to that value the cost of the investments that he would have made to improve the property after it was acquired and an additional 5% of the determined value.

It should be clarified that the project reproduces an obligation contained in the Administrative Process Law, which establishes that, if the property to be expropriated is a permanent residence, the authorities are obliged to deliver another with similar conditions.

The delivery of a new property may also imply the payment in money of the difference between the values ​​of the delivered and the expropriated.

If a foreign investor is expropriated, they will receive their compensation in freely convertible currency; meanwhile, it is assumed from the project, the compensation of Cuban owners will be paid in national currency.

2. The assumptions of «public utility» and «social interest»

One of the fundamental changes of the bill is that it recognizes some situations in which it will be assumed that there is a “public utility” or “social interest” and, therefore, an expropriation will be carried out.

Prior to the project, “public utility” and “social interest” were determined on a discretionary basis by the authorities interested in a property, and assessed by the courts in the event of litigation.

In this sense, within the situations described in article 17 of the project, two stand out for their importance in the Cuban context.

First: the project recognizes that, to ensure “internal order or the interest of guaranteeing national defense and security”, the authorities may expropriate. What has been a constant in several regulations derived from the 2019 Constitution is imposed again: the use of undefined and malleable concepts such as “national security” and “internal order” to justify the limitation of rights.

This practice is not exclusive to Cuba either; but given the lack of real checks and balances, transparency in the work of the Administration and the court system, and the accumulation in a small group of people of all state faculties, the use of these concepts in regulations (“national security” and «internal order») only increases the risk of lack of citizen protection.

The second situation that the text recognizes as validating expropriation is the establishment or expansion of special zones of economic development or tourist interest.

The project establishes what is of “social interest” or “public utility”. Thus, it supports an economic strategy that several specialists consider unwise: the unrestricted commitment to increasing real estate investment, especially in the tourism sector.

Cuban economist Pedro Monreal pointed out that real estate investment in Cuba is overdrawn without technical foundations and that the investment pyramid is out of adjustment. However, the authorities of the archipelago have not stopped supporting this economic strategy, even when its promotion is to the detriment of other investments in essential public services such as health and education, or in transcendental economic sectors in the face of the food crisis, such as farming.

According to the project, it is presumed that the expropriations are justified in those spaces declared areas of tourist interest. However, before the publication of the text, movements by the Cuban authorities to relocate many of the residents of “El Ramón”, a hamlet in Antilla, Holguín, were denounced through social networks.

The justification for displacing the neighbors was the construction of several hotels since they wanted to take advantage of the benefits of the site declared an area of ​​special significance for tourism. Forced expropriation is the legal figure that allows the authorities to promote relocation.

By declaring the expansion of tourist areas as an indisputable cause of expropriation, the project recognizes that the expansion of the Cuban hotel plant is useful and of social interest. Thus, it prevents citizens from discussing whether it is really in the interest of the community or useful for society to bet on this economic strategy at the expense of the private property of many Cubans.

3. Transfer of expropriated property to private.

The expansion of tourist areas as a justification for the expropriation acquires greater scope because the project considers that the expropriated property may not only be transferred to the State, but also to individuals. This provision is not exclusive to Cuba either, but in the island’s situation, it has a relevance that is not appreciated in different contexts.

In other parts of the world, the Administrations approve that an individual carry out public services and for this, they grant him concessions. With the concessions, the public or private asset is transferred to an individual after being expropriated so that he can carry out work for the benefit of the community

However, in Cuba concessions are a mystery. Bidding processes —if they exist— are not publicized and the community has no way of discussing the need or legitimacy of awarding a concession to a particular individual.

By considering the expansion of areas of tourist interest as a justification for expropriation, the project will open up the possibility of delivering goods to individuals (Cubans or foreigners) without any rule controlling the process or determining whether the construction of hotels managed by individuals will be turned into utility public interest for Cubans.