Contributed By OMG
In the Dominican Republic, businesses do generally adopt a corporate form. The types of legal entities that can be incorporated in the Dominican Republic, according to Law No 479-08 of Companies and Individual Enterprises, are the following: (i) companies in collective name, (ii) limited partnerships (simple or by shares), (iii) limited liability companies, (iv) corporations and (v) simplified corporations. The law also recognises accidental companies, which do not have legal personality. Additionally, most foreign legal entities are recognised and operate in the Dominican Republic through the incorporation of a Dominican branch.
Once incorporated under Dominican law and/or established in the country through a Dominican branch, legal entities will be considered as a separate entity for accounting and tax purposes. The Dominican Republic has mainly a territorial system of taxation with some exceptions. All income from a Dominican source is taxed (those obtained in the realisation of commercial, industrial, agricultural, mining and similar activities in the country, and those derived from capital, property or rights located, placed or used economically in the Dominican Republic). In addition, foreign financial income (such as dividends, interest, bonds and similar) is subject to income tax payment in the Dominican Republic.
Not applicable in this jurisdiction.
A company may be considered domiciled in the Dominican Republic when it is incorporated under the laws of the Dominican Republic and when it has the headquarters of its business or its effective centre of management in the country.
In order to be considered as an incorporated business in the Dominican Republic, legal entities must register before the Mercantile Registry in the corresponding Chamber of Commerce, and before the National Taxpayer Registry of the Dominican Tax Administration (Dirección General de Impuestos Internos, or DGII). During the registry process in the DGII, the entity will have to provide its incorporation documents in which the corresponding jurisdiction is clearly stated.
In regard to individuals, the main link with the Dominican tax system is "residence", which results from the application of a quantitative rule of permanence in the country ("the 182-day rule"). However, for tax purposes, the effective domicile of the taxpayer could be determined from certain assumptions of the obliged taxpayer in the Dominican Republic, such as place of effective management, and/or of the taxable event (qualitative elements).
Incorporated businesses pay a 27% income tax rate applicable over the net taxable income. Individual income is taxed using a progressive scale that ranges from 15% to 25% of such income. Dividends are subject to a final withholding tax of 10% at the source of payment.
Capital gains, which derive from the sale of assets (real estate property or shares), are included in the corporate income tax rate, and the tax base is the difference of the price and the acquisition cost (adjusted for inflation).
Corporations are subject to tax over assets, which rate is 1% calculated on the total amount of taxable assets of the taxpayer’s. The amount settled for this tax will be considered a credit against the income tax declared that tax year. If the amount paid for income tax is equal to or greater than the tax over assets to be paid, the payment obligation of the tax over assets shall be considered extinguished.
The trade of goods and services is subject to value added tax (VAT), with a standard rate of 18%. Some special goods (dairy products, chocolate, coffee, sugar, among others of high consumption) have been taxed at a reduced rate of 16%.
The excise tax rate is a consumption tax considered for luxury goods (alcohol, tobacco, vehicles, among others) as well as some services (such as telecommunications and insurances), and will vary depending on the acquired goods and services. In addition, a rate of 0.15% is withheld by financial intermediation entities on the value of each cheque or any nature, paid through cheques and electronic transfers.
Transactions involving the acquisition of real estate property will be subject to a transfer tax of 3% of the transaction price.
Dominican legal entities are subject to a 1% tax over their authorised capital payable at the time of incorporation, and the difference from it, of any capital increase made afterwards.
Taxable profits of an incorporated business in the Dominican Republic will be determined based on the financial result of the entity as well as on certain positive or negative tax adjustments that should be considered in accordance with current tax regulations. Some positive tax adjustments are non-deductible tax items, excess depreciation, adjustments for control of previous years, excess provision for uncollectible accounts, excess donations to public good entities, loss of non-compensable capital for the year, exchange difference, positive adjustments for refunds, transfer price adjustments, non-deductible interest expenses, expenses not admitted, inventory adjustments, expenses without vouchers with tax value, deferred income tax, forecasts not admitted and non-sustained liability, among others. In the case of negative adjustments, the following can be mentionned: deficiency in depreciation, inventory adjustments and exchange difference. In addition to these adjustments, taxpayers have the formal duty to include in their income tax form any exemptions by law of incentives, dividends earned on investments in other companies, and proportion of tax losses of previous years that are compensated.
Profits earned by legal entities will be taxed using an accrued basis method, while individual taxpayers will be subject to income tax based on the taxable income perceived on the tax year, respectively.
There are no special incentives for investments in technology or special treatment of R&D expenses in the Dominican Republic. The tax legislation basically establishes that, subject to the consent of the DGII, taxpayers may treat expenses incurred or the payments made in R&D during the fiscal year as current expenses and not add them to the capital account. Such treatment must be consistently applied during the fiscal year and subsequent years, unless the DGII authorises a different method for all or a portion of said expenses, and this treatment shall not apply to land or depreciable assets, or to any expense incurred or paid for the purpose of determining the existence, location, extent or quality of any natural deposit.
In the Dominican Republic, there are special incentives aimed at the development of industries or relevant economic sectors by granting tax exemptions related to income tax and trade taxes, among others, to promote capital mobility. Some of the industries or relevant economic sectors are the border area of the country with Haiti; export free zones; tourism businesses development; special trusts under Dominican law; the film industry; non-renewable energy companies; manufacturing companies under special regimes; textile and footwear manufacturing companies; religious, sports and educational institutions; and books and libraries.
The tax system does not provide special incentives to financing transactions. However, national and international financing (nor their interests) granted to companies in the tourism sector that qualify under the special incentive regime will not be subject to income tax withholdings or tax payments. In addition, non-renewable energy companies will have a reduced tax rate of 5% (in comparison to the standard 10%) in the withholding tax for the payment of interest for external financing.
According to Dominican tax regulations, operational losses suffered by legal entities in their financial years will be deductible from profits obtained in the immediate years subsequent to the losses. This compensation cannot be extended beyond five years, and is subject to a limitation of 20% per tax year for the first three years. In the fourth year, that 20% will be deductible only up to a maximum of 80% of the taxable net income corresponding to that exercise, and in the fifth year, this maximum will be 70% of the net taxable income. The losses that are not deducted during corresponding timeframes cannot be carried forward.
Capital losses would not be subject to percentage or annual limitations; however, they can only be compensated against capital gains.
In addition to the basic rule, which establishes that any deductible expenses should be done to obtain, maintain and preserve taxable income and directly related to its activities and be supported by reliable proof, since the Tax Reform Law of 2012, some limitations have established the deduction of interest as expenses by local corporations. Those limitations apply to sub-capitalisation rules, interest payments to individuals and interest payments made to foreign legal entities.
These rules aim to control leverage compared to invested capital, as well as to discourage the granting of non-formal financing and financing structures in favour of creditors established abroad, basically, in low or zero-tax jurisdictions.
Permanent establishments (branches or subsidiaries) of incorporated businesses in the country must elaborate their accounting records separately from their parent companies, their subsidiaries and other branches abroad in order to determine the tax result of income from Dominican-source. Tax losses are not transferable between companies of the same group.
The DGII has the faculty to declare what constitutes an economic group for tax purposes. Taxpayers who make up the same economic group could request the DGII via a special process to be considered as such, and consequently could receive exceptional treatment for accounting records of operations that occur between the components of said group, and submit their joint or individual affidavits according to the guidelines established by the DGII for the taxes in question.
Capital gains subject to income tax shall be determined by deducting from the price or value of disposal of the good, the acquisition or production cost adjusted for inflation (cost basis). In the case of shares, the sum or subtraction of accumulated gains or losses of the issuing entity must be considered. There is no specific tax applicable to capital gains. Corporations established in the country must include capital gains in their gross income for the determination of their net taxable income subject to income tax.
The sale of shares of incorporated businesses would be subject to income tax, because of capital gains. Transactions that involve other assets could involve other taxes such as VAT, excise tax or transfer of real estate property tax, depending of the nature of the transaction.
In addition to income tax applicable over the net taxable income, businesses established and operating in the country will have to comply with other taxes related to (i) trade of goods and/or services such as VAT, (ii) tax over assets and (iii) excise tax related to the capital mobility of capital and services. Incorporated businesses in the Dominican Republic must comply with formal duties of reporting as a withholding agent, especially with regard to their participation as an employer in the country (including social security contributions on behalf of employees), and a provider of goods or a service provider.
Closely held local businesses could incorporate and execute their businesses from a corporate or non-corporate form. However, the structuring of businesses via corporate form offers the advantage for the shareholders to separate their personal assets from the commercial operation, as well as being able to define the corporate governance rules that will govern the administration of the business. In the Dominican Republic, most closely held businesses operate in a corporate form.
In the Dominican Republic, the corporate tax rate is higher than the individual tax rate. Additionally, both the method and the base of the determination of the net taxable income are different for each case. The Tax Administration has been making efforts for the implementation of special regimes focused on small and medium-sized businesses, as well as liberal professionals, with the main goal of simplifying their taxation procedures.
There are no rules that prevent closely held corporations from accumulating profits for investment purposes.
Dividends derived from Dominican sources are subject to a 10% rate of withholding tax, considered as a unique and definitive payment for income tax purposes.
Dividends derived from foreign sources will be taxable in the Dominican Republic. However, they must be included as part of the gross income for the determination of their net taxable income subject to income tax at the maximum rate of 25% for individuals, and 27% for corporations.
Capital gains received from the sale of shares will be subject to income tax and shall be included as part of the taxable income considered for the determination of the taxable net income that would be subject to income tax payment.
The tax treatment of dividends from Dominican sources or for taxable capital gains on the sale of shares will be the same in the case of closely held or publicly traded corporations.
Payment of interest from Dominican sources to individuals, legal entities or entities non-resident or domiciled in the country must withhold 10% of the amount paid as a unique and final payment for income tax purposes.
Interest paid to an individual resident or domiciled in the country is subject to a final withholding tax of 10% by financial entities. The law establishes the possibility that individuals can apply for a return of said withholding, considering certain conditions.
Dividends and/or any other way of profit distribution from Dominican sources to individuals, legal entities or resident or non-resident entities is subject to a final withholding tax of 10%. Dividends distributed by way of shares are exempted from the application of income tax.
Payments other than interest and dividends (such as royalties or services) made abroad from Dominican sources are subject to a 27% final withholding tax over the gross amount.
The Dominican Republic only has two double taxation treaties. One is with Canada (1977) and another with Spain (officially approved on 31 March 2014).
The DGII has the faculty to challenge the use of treaty country entities by non-treaty country residents with a special emphasis on ensuring the non-implementation of precedents of abusive tax practices.
One issue could be the need to comply with all the obligations and formal duties of reporting in accordance with the established scope, in addition to dealing with market terms and conditions in their commercial or financial operations carried out with other related parties, for tax purposes.
Local tax authorities may challenge the use of related-party limited risk distribution agreements for the sale of goods or provision of services locally if they do not establish reasonable market terms and conditions, and/or if they create economic circumstances in detriment of determining the effective taxable income or deductible expenses of the participants.
The current transfer pricing rules in the Dominican Republic are based on the OECD guidelines. Nevertheless, they have to be modified in order to fully comply with all OECD standards.
An annual information report must be submitted no later than 60 days after the income tax due date. Current methods established to assess arm’s-length standards are (i) comparable uncontrolled price (CUP), (ii) resale price (RPM), (iii) cost plus, (iv) transactional net margin (TNMM) and (v) profit split.
Compensatory adjustments will be allowed or made when a transfer pricing claim is settled. The Dominican Republic does not have rules with respect to PTC.
Local branches of non-local corporations will be taxed similarly to local subsidiaries of non-local corporations.
Capital gains obtained by non-residents or non-domiciled entities from the sale of stock in local corporations and the sale of shares of a non-local holding company that indirectly owns assets in the Dominican Republic will be taxable in the country. The DGII has the faculty to audit combined transactions in order to ensure compliance with local tax duties.
Double taxation treaties do not necessarily eliminate the obligation of taxation in the country, but try to govern with respect to contracting countries (Canada and Spain in the case of the Dominican Republic), in which country the income tax would be paid. Under the current treaties, investment transactions that directly or indirectly have a relevant local real estate patrimony would be taxed in the Dominican Republic. The DGII must validate every transaction in which the treaties are challenged.
Changes of control that result from/in changes, directly or indirectly, of the ownership structure of an asset held in the Dominican Republic could implicate tax duties in the country. The DGII has the faculty to review any combined transactions and determine if the situations and events occurred in accordance with the facts by applying the substances over form rule.
The withholding of taxes at the source of the payment, the obligation to claim expenses deductions, formal duties established on sales and expense reports matters, as well as transfer pricing rules, are some of the formulas used by the tax regulation to determine the income of foreign-owned local affiliates selling goods or providing services.
To allow the deduction for payments by local affiliates for management and administrative expenses incurred by a non-local affiliate, without prejudice to the basic rule related to expenses to be deducted, any payments abroad from Dominican sources other than interest and dividends (as services) will be subject to a 27% final withholding tax over the gross amount. Therefore, the services effectively provided must be billed by the non-local affiliate and said income tax withholding paid to claim the deductibility of the expense.
Since operations occurred between related parties, they must also comply with transfer pricing rules. A special administrative process established by this jurisdiction's tax regulation could be executed before the DGII with respect to the distribution of corporate expenses, subject to the authorisation of the Tax Administration.
There are no restrictions imposed on loans between related parties such as a local affiliate and a non-local affiliate. The Dominican tax system has sought to control the leverage of established local affiliates through the limitations imposed on the deduction of interest, given that interest paid from a Dominican source in favour of legal entities established in low or non-tax jurisdictions would not have the quality of being deductible for the local affiliate.
The Dominican tax system is essentially territorial given that all income from a Dominican source is taxed and, in addition, it establishes that income from foreign sources that exclusively derive from financial gains will be taxable in the country. This income must be included as part of the gross income for the determination of the net taxable income subject to income tax.
If expenses are incurred in order to obtain, maintain or keep taxed income, the deduction will be made in the respective proportion in which such expenses were incurred in the year. These deductible expenses must be effectively incurred and related to the activity or business. In general, expenses not considered deductible are personal expenses; withdrawals or salaries to shareholders and related parties (without an effective provision of services with an according amount); preventative losses from illicit operations; income tax and its accessories charges; taxes on inheritance and donations; taxes incurred to build, maintain and preserve capital goods (except when they are computed as part of the cost to be alienated from the good); expenses without feasible vouchers; remuneration of persons or organisations operating from abroad; and remuneration or salaries paid to board members, councils and other management or administrative bodies that operate abroad. Profits for the tax year that are used to increase capital or to reserves of companies are not expressly admitted as deductions.
Dividends derived from foreign sources will be taxable in the Dominican Republic. However, they must be included as part of the gross income for the determination of their net taxable income subject to income tax at the established rate of 27% for corporations.
Payments made abroad (individuals, legal entities or entities that are not resident or domiciled in the country) other than interest and dividends (such as royalties or services) from Dominican sources are subject to a 27% final withholding tax over the gross amount. The transaction will not be subject to VAT.
The Dominican Republic does not have controlled foreign corporation (CFC)-type rules regardless of the jurisdiction of the company. From a tax standpoint, non-local branches or subsidiaries established in the country, and local corporations, will have equal fiscal treatment in the country, except for (i) the capitalisation tax (1%) that applies to Dominican entities and (ii) real estate transfers tax (3%) that is applicable to the contribution in kind of real estate property if the recipient is a foreign entity established in the country (as local branch or subsidiary).
The DGII has the faculty to audit combined transactions in order to ensure compliance with tax duties in the country.
Gains derived from a local corporation that holds shares in a non-local affiliate entity are subject to taxation in the Dominican Republic as taxed income from foreign sources (those from investments and financial gains). Subsequently, capital gains obtained by non-residents or non-domiciled affiliates from the sale of stocks in a local corporation, and/or with respect to shares of a non-local holding company that indirectly owns assets in the country, will be taxable in the Dominican Republic.
The sub-capitalisation provision targets tax avoidance practices by limiting the deduction of interest to the amount that does not exceed the value obtained by multiplying the interest accrued during the period by three times the relation between the annual average balance of shareholders equity and average interest-bearing debts. Furthermore, the excess interest can be deducted in the following within a maximum period of three years since they accrued.
Interest paid abroad or under special tax regimes is subjected to a limited deduction in proportion to the income tax rate of the creditor.
A regular routine audit cycle is not established in the Dominican Tax Code; instead a non-periodic audit takes place after the reports of income tax, asset tax and VAT are filed and any inconsistency in a tax return might trigger the suspicion of tax evasion or avoidance. This non-periodic audit can be carried out in the premises where the taxpayer keeps proper books and records; this auditing can extend from three months to twelve months. Also, a non-periodic audit can consist of the verification of a determined fiscal year, and be carried out in the local Tax Administration of the taxpayer.
Thus far, the only measure implemented in the Dominican Republic in compliance with the recommendations of the BEPS Action Plans is Action 4, the limitation on interest deductions.
The government of the Dominican Republic is seeking to implement the BEPS actions that allow the reduction of erosion of the tax base. In March 2018, the Dominican Republic started a process to adhere to the BEPS inclusive framework and became a member as of October 2018. Action plans of minimum required standards are currently undergoing the peer review process.
The Ministry of Treasury and the DGII implemented the international tax strategic plan in 2013, and from that moment it has represented one of the pillars of the tax policy of the country. This plan is based on (i) adherence to the Global Forum for transparency and exchange of information; (ii) signing the Federal Account Tax Compliance Act (FATCA) – Model 1A IGA (reciprocal exchange of information); (iii) signing the Convention on Mutual Administrative Assistance in Tax Matters; and (iv) the implementation of BEPS Action Plans.
In consequence, BEPS is an element that will define international taxation policy in the Dominican Republic, and currently tax authorities are structuring an international taxation unit to specifically address and administer these matters.
The balance of the government's competitive tax policy objective against the pressures that BEPS will bring may be sought in the negotiation of double taxation conventions (DTCs) and the modification of the tax rates and the tax base applied to non-residents (ie, tax withholding to payments abroad). These matters are subject to discussion in the upcoming “fiscal pact”, established in Law No 01-12 of the 2030 National Development Strategy.
From an international taxation perspective, the key features that must be considered are (i) taxation of permanent establishments, (ii) taxation of intangibles, (iii) taxation from services rendered via the internet (ie, streaming), (iv) CFC rules and (v) adequacy of transfer pricing regulation.
The Dominican Republic has not implemented the hybrid instruments standards to date.
The Dominican Republic has a territorial tax regime and, as previously stated, interest deductibility provisions in effect, and this firm does not think these will affect people investing in and from this jurisdiction.
The Dominican Republic does not have CFC rules in place. Nonetheless, this firm does not agree with having a sweeper CFC rule put into effect; it agrees on implementing it when there is no substance located in an offshore subsidiary.
Since the Dominican Republic only has two DTCs in place, the proposed DTC limitation of benefit or anti-avoidance rules have not had any impact.
This firm does not consider the transfer pricing changes that have been proposed as a radical change in this jurisdiction, considering that the current rules contain most of the OECD guidelines, and just have to be modified/updated to recent standards. Regarding the taxation of profits from intellectual property in transfer pricing, a recurrent adjustment is made to the payment of royalties for the concept of intellectual property or industrial property.
This firm is currently in favour of the proposals for transparency and country-by-country reporting, which is a minimum standard of BEPS; however, law modifications are required in order to complete the process.
No implementations have been made in relation to the taxation of transactions effected or profits generated by digital economy businesses operating largely from outside this jurisdiction; discussions on this matter are on the agenda for the upcoming year.
Thus far, the country has not taken an official position in relation to the BEPS proposals for digital taxation.
No additional provisions have been introduced by the Dominican Republic with regard to dealing with taxation of offshore intellectual property that is deployed within the country. Article 305 of the Dominican Tax Code establishes the tax withholding for payments made abroad, which are taxed at the source of said income.
The Dominican Republic is undergoing a peer review process of the minimum standards. Additionally, the country is interested in the implementation of Action 1 on the digital economy, and Actions 2 and 3 on hybrid instruments and CFC rules respectively; however, law modifications are required in order to complete the process.