On September 18, 2015, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) amended the Cuban Assets Control Regulations, 31 C.F.R. part 515 (CACR). The amendments are broad in their scope covering matters such as travel, telecommunications and Internet-based services, and commercial and financial transactions, establishing a physical presence in Cuba, remittances, civil aviation safety and other areas.
According to OFAC, the amendments are intended to expand the engagement and empowerment of the Cuban people by further relaxing U.S. sanctions. See Publication, September 18, 2015, U.S. Department of the Treasury, Office of Foreign Assets Control. The amendments took effect on September 21, 2015, when they were published in the Federal Register. OFAC has also updated its Frequently Asked Questions regarding the CACR amendments.
Simultaneously, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) has amended the Export Administration Regulations (EAR) regarding license exceptions and the BIS licensing policy on Cuba.
The amendments to the CACR and the EAR that have been announced are numerous and some will be discussed in future Phillips Lytle International Client E-Alerts. The “physical presence” amendment to the CACR may offer significant new opportunities to U.S. companies seeking greater access to the Cuban market for those transactions that are currently authorized and is further explained here.
Physical Presence in Cuba
To enhance and better facilitate authorized business opportunities for U.S. entities, OFAC is issuing a series of general licenses – authorizations that do not require an application and approval of a specific license from OFAC to conduct an authorized transaction or series of transactions. One of the general licenses authorizes U.S. entities to establish a physical presence in Cuba to engage in authorized transactions (or those exempt from the CACR prohibitions), including: leasing office, warehouse, classroom or retail outlet space, and securing goods and services related to doing so, including paying rent and other expenses associated with the leased premises, and marketing related to the physical presence.
In addition, U.S. entities are now authorized to employ both Cuban nationals and persons subject to U.S. jurisdiction, mainly U.S. citizens, in Cuba. In a note, the amended regulations state that employment of persons subject to U.S. jurisdiction are authorized to “engage in all transactions necessary to establish domicile in Cuba, including accessing U.S. assets, for the duration of their employment.” See 31 C.F.R. part 515.573.
The physical presence in Cuba must be related to the export of goods that are authorized under part 515.533 or 515.559 of the CACR. These sections govern exports from the U.S. to Cuba, the reexport of 100% U.S.-origin items to Cuba, and the negotiation of executory contracts, as well as certain exports and imports by U.S.-owned or -controlled foreign firms, respectively. Accordingly, the physical presence must be established to facilitate the export of items such as agricultural products and materials for construction or renovation of privately-owned buildings, currently authorized for export under prior amendments to the CACR.
Also authorized for a physical presence in Cuba are: news bureaus; entities providing mail or parcel transmission services or certain cargo transportation services; telecommunications or internet-based service providers; entities organizing or conducting educational activities; religious organizations; and carrier and certain travel service providers.
Notably, the amended regulation requires a physical presence in Cuba; however, it does not require a full-time presence or prohibit a “virtual office” arrangement that is frequently used by companies entering new markets. Likewise, the amended regulation does not prohibit subleases or a physical presence through a joint venture. Therefore, the “physical presence” authorization may be used under a variety of arrangements, although prior consultation with OFAC may be prudent.
In addition to authorization for a physical presence in Cuba, OFAC is issuing a general license for travel that is incident to the export or re-export of authorized items for conducting “market research, commercial marketing, sales negotiation, accompanied delivery, installation, or servicing in Cuba,” as long as the travel does not allow for recreational time in the schedule.
Therefore, U.S. persons remain prohibited from spending the weekend in Cuba exploring the countryside or strolling the Malecón prior to a trade show, scheduled sales and business meetings, or the installation of exported parts and equipment.