Cuba will impose new income tax on players who sign Major League Baseball contracts

The Cuban government will impose a new tax on Cuban baseball players who sign Major League contracts, but the tax rate will be much less than such athletes will pay in the United States.

The tax rate that Cuba will impose on players who sign contracts to play outside the island will be 4 percent, according to the 2019 budget law published over the weekend in Cuba’s Gaceta Oficial.

Under an agreement announced in December among Major League Baseball, the MLB Players Association and the Cuban Baseball Federation (FCB), Cuban players may now be contracted directly in Cuba and go to the United States as free agents. Negotiators said the deal was designed to cut down on illegal trafficking of Cuban stars with MLB and sometimes perilous sea crossings to third countries.

In the talks between the MLB, MLB Players Association and the FCB, the taxation of players was discussed at length and MLB negotiators were told the Cuban tax would be in the 3-4 percent range.

Current U.S. regulations allow non-immigrant Cubans to be employed in the United States, open U.S. bank accounts and pay for their expenses with the salary or other compensation they earn “provided that the national of Cuba is not subject to any special tax assessments by the Cuban government in connection with the receipt of salary or other compensation.”

“That means that if the Cuban government taxed them at a special rate, they couldn’t be paid by our clubs,” said a source familiar with the negotiations.

Although the 4 percent tax on income obtained abroad had been mentioned in a 2012 tax law, it had not been implemented until now.

Since general wages in Cuba are low, about $30 per month, the government had held off on implementing income taxes for the general population. But artists, Cubans who have private businesses, those who work in cooperatives and those working for companies that paid additional bonuses have been subject to income taxes.

This group has been charged at a rate of 50 percent for income in excess of $2,083, although certain deductions are allowed.

The law also stipulates that athletes who receive monetary bonuses or a stimulus from the state after winning medals in international competitions should pay taxes on these earnings, but each year the National Assembly has exempted them from making the payments.

During a National Assembly session at the end of the year, Minister of Finance and Prices Lina Pedraza said that the “collection of personal income tax will be assessed on athletes who are hired abroad,” without giving details about the rate.

Although the Pedraza announcement was published by official Cuban media, the National Institute of Sports, Physical Education and Recreation (INDER) had publicly questioned the information.

“It is false that the Cuban government will impose any rate on the salary of the player who signs in the MLB. What leader or entity of the Island has said such a thing? “ the weekly JIT, INDER’s official publication, said in response to a tweet by Florida Republican Sen. Marco Rubio.

Rubio has been an outspoken critic of the new agreement allowing any Cuban player 25 years or older with at least six years of professional playing experience in Cuba to be released from a contract with the FCB, come into the United States as a free agent and sign with any MLB club. Younger “amateur” players also could be released with the permission of the FCB.

Rubio has called the agreement a farce and has objected to it in part because he says “the regime will impose a new income tax on the players earnings, even though the income is being earned by playing in the U.S.”

The senator also has challenged the legality of the agreement with the FCB because he says the Cuban federation is not independent of the Cuban government.

But during the Obama administration, the U.S. Office of Foreign Assets Control said that MLB needed no special license to negotiate an agreement with the FCB because the federation is independent of the Cuban government in the way the U.S. Olympic Committee is independent of the U.S. government. The FCB organizes Cuban teams for the Caribbean Series and the Olympics.

The FCB posted on Twitter that it is recognized as a non-governmental organization by international sports associations. But in Cuba NGOs answer to state entities. In this case, FCB responds to INDER. Before heading the FCB, Higinio Vélez served as the head of INDER’s National Baseball Commission.

Antonio Castro, son of the late Fidel Castro, is vice president of the FCB.

Rubio said he is working to get the agreement overturned, and Trump administration officials said the Obama-era permission to negotiate an agreement is under review.

The MLB has received no new information from the Trump administration since the agreement was announced, said the source who spoke on condition of anonymity. The document was widely circulated among administration officials and the White House the week before it was announced.

For U.S. tax purposes, these athletes will be considered “foreign aliens.” Generally, foreigners who work in the U.S. pay a federal tax of 30 percent on their income. This rate would be different if the Cuban baseball players apply for a residence through the Cuban Adjustment Act, which is still in force.

It’s not clear whether the Cuban players will need to pay U.S. taxes on their bonuses. Dominican players signed in the Dominican Republic, for example, don’t pay U.S. taxes on their bonuses and Cuban players signing in Cuba might be treated the same way.

Foreign baseball stars playing in the Major Leagues often have tax advisers with them when they negotiate their contracts to make sure they are getting the most advantageous tax situation.

At any rate, it will be a while before any Cuban player will be signed to an MLB contract.

The earliest the FCB could release a younger “amateur” player would be July 2, and for Cuban players who are 25 years or older, the first time they would be eligible to sign MLB contracts would be in November during the free agency period for foreign players following the next World Series.

Under the agreement, Major League clubs will pay the FCB a one-time release fee of between 15 and 20 percent of the total Major League contract. That fee would be in addition to a player’s contract, so if a Cuban player signed a $1 million contract, $1 million would go directly to the player and an additional $150,000-$200,000 would be paid to the FCB by the MLB club as the release fee. That’s similar to arrangements with other international baseball federations.

If the agreement had been in effect when the Los Angeles Dodgers signed Cuban star Yasiel Puig (who now plays for the Cincinnati Reds) for $42 million, the FCB would have received around a $7 million release fee. Additionally, the government would have received nearly $1.7 million based on the new 4 percent income tax.

But due to the deteriorated state of Cuban baseball and the fact that many Cuban stars are already playing in the Major League, baseball experts doubt that many Cuban players would be able to obtain such multimillion-dollar contracts.

On a Minor League contract, the FCB would receive 25 percent of the signing bonus for a Cuban player.

Since the agreement was only announced Dec. 19, some MLB clubs aren’t sure exactly how it will work.

“We don’t have any idea when or how we can have our scouts in Cuba,” said an employee of one MLB club. “I imagine these are things that will be answered in the coming weeks and months.”

Last weekend, the FCB launched an offensive to garner support for the agreement, pointing out that the players can travel to the U.S. with their families. For many years, players who left the country to play in other leagues were considered defectors by the government and could spend decades without seeing their families in Cuba.

“Restoring the Latin American Stadium [a Havana stadium] has been achieved step by step over the last few years,” the FCB posted on Twitter. “How much more can we improve our other parks, after a few years of implementing the agreement between FCB and MLB?”

Under the agreement, the release fees are supposed to be used by the FCB for baseball purposes.

In another entry, the FCB posted: “The money received by the FCB for the release fee will not affect a player’s salary. Does anyone want to oppose this step in the right direction?”

Follow Mimi Whitefield on Twitter: @HeraldMimi

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Mimi Whitefield has covered Latin America and the Caribbean for more than two decades. The Miami Herald’s former Rio de Janeiro bureau chief and a 2017 winner of the Maria Moors Cabot Prize, she now focuses on Cuba coverage.