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DOING BUSINESS IN DOMINICAN REPUBLIC

BASIC INFORMATION Situation and area The Dominican Republic lies between Cuba and Puerto Rico, occupying the eastern two thirds of the island of Hispaniola. The western third of the island is occupied by Haiti. The Republic includes the small islands of Saona, Alto Velo, Beata and Catalina, situated off the south west coast. The island has an area of about 48,072 sq. km. Population The Dominican Republic has a population of approximately 8,950,034 (July 2005), a third of whom live in Santo Domingo. Political status and structure The Dominican Republic is an independent republic, with a democratically elected two-chamber Congress. Language The official language is Spanish. English is widely spoken. Climate The climate is sub-tropical, with the temperature ranging from 27°C during the dry season (November-April) to 37°C between June and October when the climate is at its most humid. Currency The Dominican Republic peso (DOP) is divided into 100 centavos. Public holidays New Year's Day (1 January) Epiphany (6 January) Our Lady of Altagracia (21 January) Duarte Day (26 January) Independence (27 February) Good Friday Pan-American Day (14 April) Labour Day (1 May) Foundation of Sociedad la Trinitaria (1 July) Restoration Day (16 August) Our Lady of Mercedes (24 September) Columbus Day (12 October) United Nations Day (24 October) All Saints' Day (1 November) Christmas Day Membership of international organizations The Dominican Republic is a member of the following organizations among others: Economic Commission for Latin America United Nations International Monetary Fund Organization of American States World Health Organization Inter-American Development Bank World Bank. The Republic is a beneficiary country under the US Caribbean Basin Initiative. Addresses Central bank (Banco Central de la Rep. Dominicana), Av. Dr. Pedro H. Ureña esq. Leopoldo Navarro, Santo Domingo. Ministry of Finance (Secretaría de Estado de Finanzas), P.O. Box 20216, Santo Domingo. Tax training institute (Instituto de Capacitación Tributaria de la Secretaría de Estado de Finanzas), P.O. Box 20216, Santo Domingo. General Directorate of Internal Revenue (Dirección General de Impuestos Internos), Av. México, Piso 48°, Santo Domingo. Directorate of Foreign Investment (Dirección de Inversiones Extranjeras), c/o Av. Dr. Pedro H. Ureña esq. Leopoldo Navarro, Santo Domingo. Association of Industry (Asociación de Industrias de la República Dominicana Inc.), P.O. Box 850, Santo Domingo. Government Centre for Export Promotion (Centro de Exportacion e Inversion de la Republica Dominicana), P.O. Box 199-2, Santo Domingo. Government Bureau for Promotion of Industrial Development (Corporación de Fomento Industrial), P.O. Box 1472, Santo Domingo. Economic Development Investment Fund (Fondo de Inversión para el Desarrollo Económico), c/o Central Bank. National Chamber of Commerce, Agriculture and Industry (Cámara Oficial de Comercio, Agricultura e Industria del Distrito Nacional), P.O. Box 815, Santo Domingo. Federation of Employers of the Dominican Republic (Confederación Patronal de la Rep. Dominicana), Cambrona/G. Washington, Edif. Mella, Santo Domingo. 1. GENERAL INFORMATION 1.1. Description, political status and law The Dominican Republic occupies the eastern two thirds of the island of Hispaniola, the western third of which is occupied by Haiti. It lies between Cuba and Puerto Rico in the Caribbean Sea. The Dominican Republic gained independence from Haiti in 1844. Under the 1994 Constitution, executive power is exercised by the president and a Cabinet of Secretaries whom he appoints. The president is elected by direct vote for a 4-year term but cannot be re-elected in the following election. Legislative power is vested in a bicameral Congress, made up of a 30-member Senate and a 149-member Chamber of Deputies. Members of both Chambers are elected by direct vote for a 4-year term. Judicial power is exercised by the Supreme Court of Justice and other tribunals. In 1994, the Dominican Constitution created the National Council of Magistracy which elects the judges for the Supreme Court. This court consists of at least 11 judges. The Supreme Court elects the judges of other courts, hears penal cases against high level government officials and also functions as the Court of Cassation, with the power to review judgements issued by inferior courts in order to preserve the correct application of the law. There are nine regional Courts of Appeal, a Court of First Instance in each judicial district, municipal Justices of the Peace and various special tribunals. 1.2. Natural resources; economy Natural resources The Dominican Republic has major deposits of ferronickel, gold and silver. Large tracts of arable land provide for a productive agricultural sector, the main products of which are sugar, tobacco, cocoa and fruit for export and local consumption. Cattle are also an important export category. The natural beauty of beaches and forests is a strong tourist attraction. Services in general have grown significantly and have become the strongest economic sector in the country. Gross domestic product The gross domestic product for 2003 decreased by 0.8% compared with the previous year. This decrease affected almost every sector, including commerce (- 15.4%), transportation (- 9.8%), agriculture (- 7.2%), manufacturing (- 4.0%), construction (- 3.7%) and the electricity and water sectors (- 3.3%). However, the economy expanded significantly in the sugar sector (3.2%), free-zone activities (5.8%), communications sector (15.4%), mining sector (20.0%) and above all tourism (33.6%). Resumption of a badly needed International Monetary Fund (IMF) loan, put on hold due to government repurchase of the country's electrical power plants, may contribute to the restoration of social and economic stability. The current administration has recently passed a tax reform and is working to meet preconditions for a DOP 600 IMF standby arrangement to ease the country's fiscal situation. Imports and exports; balance of payments In 2003, total proceeds from export of goods increased to USD 2,782.6 million (from USD 2,561.9 million in 2002), while imports increased to USD 3,934.7 million, resulting in a deficit in the commercial balance of USD 1,152.1 million. On the other hand, the balance of services continued to show a surplus, with a positive result of USD 1,246.6 million. Likewise, remittances from Dominicans abroad and tourism continued to be significant sources of foreign currency. Inflation In 2003 the inflation rate reached 33.14%, while for 2004 the inflation rate is estimated to increase to 55%. Employment The 2003 unemployment rate increased to 16.4%. For 2004, the estimated rate is 17%. For the entire public sector, the minimum wage is DOP 3,890. In the private sector most employees fall within the salary categories contained in Resolution 5-2002 of the Minimum Salary National Commission: Category of business Minimum wage per month (DOP) ______________________________________________________________ business with assets and inventory of at least DOP 500,000 3,890 business with assets and inventory of between DOP 200,000 and DOP 500,000 2,675 business with assets and inventory of less than DOP 200,000 2,365 The annual Christmas bonus equal to one twelfth of annual salary is mandatory. The Labour Code approved by Congress in 1992 provided significant improvements in the working conditions of Dominican workers. It has established a framework for the protection of women and employees in general. During the last year, the Secretariat of State for Labour was deeply involved in programmes to protect minors and increase their school attendance. 1.3. Government revenue and expenditure; economic policy In 2003, the total revenue of the central government was DOP 36,210.6 million, representing a 10.1% growth over 2002. Governmental support to those who lost their savings on the bankruptcy of one of the major Dominican banks, as well as spending in support of the power distribution sector, have created significant fiscal pressure. These economic circumstances led the government to negotiate with the International Monetary Fund as well as other financial institutions and, in this framework, the government has had to create new taxes, including an international travel tax and a currency exchange tax (see 11.2. and 11.3.). 1.4. Investment; investment incentives The focus of economic and investment policies of the current government is to oversee the transition of the Dominican economy from a commodity exporter to a processing and service economy. Competition has been encouraged by deregulation of the economy and the elimination of subsidies. A new Foreign Investment Law was promulgated in 1995, while a constitutional amendment, which addressed judicial and electoral issues, was approved in 1994. These steps strengthened the democratic process and helped increase foreign direct investment. Moreover, the Dominican Republic is a member of the World Trade Organization and a party to the ACP-EU Partnership Agreement. As beneficiary of the Caribbean Basin Initiative (CBI), it is allowed duty-free import into the United States for most manufactured goods and preferential access levels for assembled textile products. The Trade and Development Act of 2000 also allows for a zero tariff and the liberalization of quotas for textiles meeting requirements established in the Act. These benefits will be in force up to 30 September 2008 or until the signing of a Free Trade Agreement for the Americas. The Dominican Republic has also expanded its markets by negotiating Free Trade Agreements with Central American and CARICOM countries. Other factors which encourage investment in the Dominican Republic include political and macro-economic stability, a trained labour pool, low operating costs, an excellent telecommunications infrastructure, a developed banking and insurance system, a risk free industrial zones environment, attractive fiscal and financial incentives, training programmes to enhance labour skills and increase productivity and a strategic geographical location. Formalities Foreign investment in the Dominican Republic is regulated by Foreign Investment Law 16 of 8 November 1995, which replaced Foreign Investment Law 861 of 1 September 1978. The new law opens all areas of investment to foreign capital and in general liberalizes the regulations applicable to foreign investment in the Dominican Republic. This law gives foreign and national investors equal status, as well as allowing repatriation of capital and profits. The only prohibited investments are: (i) toxic, dangerous or radioactive refuse not produced in the country, (ii) activities affecting public health or the environment, as well as (iii) production of equipment and material directly related to national security or defence, except when express authorization is granted by the Executive Power. Law 16-95 provides that foreign investment may be through paid-in capital, contributions in kind and financial instruments. Moreover, investments may be in new or existing companies, in real estate or in the acquisition of financial assets. Bearer shares are not permitted. A foreign investment must be registered with the central bank of the Dominican Republic. The procedure for registration must be initiated by the foreign investor within 90 days following the making of the investment. In the case of free zone enterprises, the investor must obtain a licence from the National Council of Export Free Zones, which will inform the central bank of the investment made. After making an investment, the foreign investor may remit abroad, without prior authorization, the invested amount as well as the dividends from each fiscal year, including capital gains. When amounts are remitted abroad, the foreign investor must inform the central bank of the profits of that fiscal year and the percentage of those profits which have been remitted abroad. This information must be certified by an authorized public accountant and proof provided that tax has been paid. Incentives Foreign investment is specifically encouraged by various tax incentives for investment within particular sectors of the economy, specifically export-manufacturing and free zones. (See 6.2. and 6.3.) The Dominican Republic benefits from relief from customs duties on exports to the United States (its principal trading partner) under the US Generalized System of Preferences and the Caribbean Basin Initiative (CBI) (See General, 2.2.2.). On May 18, 2000, the United States enacted the Trade and Development Act of 2000. This measure included the U.S-Caribbean Basin Trade Partnership Act of 2000 (CBTPA). The passage of the CBTPA forms part of the comprehensive response from the United States to the enormous damage caused by hurricanes Mitch and Georges to Central America and the Caribbean, which dramatically increased unemployment and the requirements for foreign exchange in those areas. The Dominican Republic also enjoys preferential access to EU markets under the ACP-EU Partnership Agreement. Following the current trend away from non-reciprocal trade agreements towards reciprocal trade agreements, the Dominican Republic is preparing itself for the Free Zone of the Americas in the year 2005 and has already signed two free trade agreements with the Caribbean and Central America countries. 1.5. Exchange control; remittances Exchange control is exercised by the central bank of the Dominican Republic through the Monetary Board, which issues Resolutions containing exchange control regulations. The Dominican Republic has a two-tier exchange rate system with an official rate determined by the central bank and a floating private market rate. Usually, the private market rate is some points above the official rate. Dominican Law permits the remittance of profits without previous authorization. A remittance may not exceed the net profits from the period after payment of income tax. Remittance of capital invested is also allowed as well as capital gains registered in the enterprise's accounts, according to generally accepted accounting principles. The central bank provides foreign exchange at the official rate only for certain specified purposes which do not include the remittance of profits. Hence, foreign currency for the remittances permitted by law must be obtained on the private market. However, foreign exchange is available through commercial banks for the payment of principal and interest on approved foreign debts, as well as technical assistance, services or exploitation of industrial property rights registered with the central bank, imports, studies, health, travel and a number of other expenses. Notice of transfers of shares or other interests from one foreign investor to another must be given to the central bank. The transferee is then registered as the new owner of the direct foreign investment and is entitled to the same rights as the transferor. Export-manufacturing enterprises established in the free zones are exempt from exchange controls. (See 6.2.) 2. MAIN FORMS OF BUSINESS ORGANIZATION 2.1. Introduction The main forms of business organization in the Dominican Republic are the same as in most Latin American countries and include stock corporations, partnerships (general, limited, limited by shares), sole proprietorships and joint ventures. These entities and business activities in general are regulated by the Commercial Code of 1878 which is essentially a Spanish translation of the Napoleonic Code. By far the most common vehicle for the foreign investor is the stock corporation. Investors who wish to establish a Dominican branch of a foreign corporation must comply with the formalities discussed in 2.2. 2.1.1. Stock corporations The stock corporation (sociedad anónima) is a limited liability share company. No distinction is drawn between public and private stock corporations. 2.1.2. Formation Seven or more persons may establish a corporation; there are no residence or nationality requirements. Under Dominican commercial law the word "persons" includes other legal entities. The formation procedure begins with the preparation of articles of association by the corporation promoters. The articles or by-laws must state the names of the shareholders and directors, the activities to be carried on and the amount of the share capital. The company formation procedure is then followed by the receiving of contributions. Dominican law requires that at least 10% of the authorized shares be paid up and the incorporation fees be satisfied. The promoters of the company must prepare a declaration as to the subscription and payment for shares before a notary public. Thereafter, the articles or by-laws are presented to a meeting of founding shareholders for approval. Once the articles have been formally adopted in this forum, an application for registration is authorized by the shareholders along with the minutes of the meeting. Major changes were introduced by Law 3-02, promulgated on 18 January 2002, with regard to formalities for Dominican company formation. This Law regulates mercantile registry in the Dominican Republic, establishing a system for the registration, renewal and inscription of books, acts and documents of individuals or legal entities habitually carrying on business activities before the Chambers of Commerce and Production which are empowered to act as depositories and attestors. Under the new Law, the main purposes of the mercantile registry are to establish a complete system of business information in the Dominican Republic and to formalize the business activities of commercial companies. The procedure to incorporate commercial companies under Law 3-02 consists of payment of fees, subscription of documents, mercantile registration and the obtaining of a national taxpayer registration . The mercantile registration is filed with the Chambers of Commerce and Production and the national taxpayer registration is obtained from the General Directorate of Internal Taxes. 2.1.3. Capital, shares and shareholders There is no minimum capital requirement. However, at least 10% of the authorized capital must be fully subscribed and paid up on formation. Dominican law makes provision for more than one class of shares with equal or disparate rights attaching thereto. Shares must have a minimum value of DOP 5 each. They are normally in registered form but bearer shares are permitted. It should be noted that for the purposes of registering foreign investment with the central bank, shares held by foreign investors must normally be registered shares. (See 1.4.) Shareholders can be legal entities or individuals of any nationality. However, for foreign investors a taxpayer number must be obtained before forming a company. 2.1.4. Directors, supervisory boards The administration of a Dominican company can either be performed by a president or a Board of Directors. This Board can be formed by any number of persons, shareholders or not, Dominicans or foreigners, since the law does not contain any requirement regarding these matters. The Board or President is controlled by a supervising officer (Comisario de Cuentas). Above these corporate officials is the General Assembly of Shareholders which appoints and controls them. 2.1.5. Accounts, audit, supervision, returns The law requires an annual legal reserve to be maintained of at least 5% of net profits, before distribution of dividends. This reserve is not mandatory after it reaches 10% of authorized capital. Stock corporations whose paid-up capital exceeds DOP 50,000 must file a balance sheet and corporation accounts prepared by an auditor who must be a registered accountant (Law 4548 of 22 September 1956 as amended by Regulations No. 8895 of 25 November 1962). 2.1.6. Liquidation, dissolution A company may be dissolved and consequently go into liquidation. In that case, the legal procedure requires the obtaining of an authorization from the General Directorate of Internal Tax. Moreover, if the dissolution is part of a process of corporate reorganization (merger, transfer), the company must present a sworn declaration within 60 days of cessation of business. 2.1.7. Mergers, groups of companies There are no specific provisions in the 1878 Code regarding mergers, takeovers or groups of companies. However, there is a legal framework within which mergers, takeovers, etc. may be effected. 2.1.8. Fees Stock corporations are subject to incorporation fees payable on authorized capital in accordance with the following schedule: Amount (DOP) Rate (%) _______________________________________ on the first 10,000 1 on the next 15,000 0.75 on the next 25,000 0.5 on the next 50,000 0.25 on the next 400,000 0.125 on the next 500,000 0.0625 over 1,000,000 0.03125 Increases of authorized capital are subject to the same tax, payable on the increase at the rates indicated above, taking the original capital as the starting point. Fees payable on incorporation are subject to a 12% surcharge (Law 5113 of 24 April 1959). The stamp duty payable on incorporation is discussed at 10.2. 2.2. Branch of foreign company There are no taxes on the establishment of a branch in the Dominican Republic. In order to establish a branch of a foreign company in the Dominican Republic, the company is required to obtain a taxpayer number (RNC or Taxpayer National Register). The company must present a request before the General Directorate of Internal Taxes enclosing a set of certified copies of its formation documents, including by-laws, articles of incorporation and/or other documents required at its original jurisdiction for its legal formation. These documents must be authenticated by the Dominican consul in the country of incorporation. A branch of a foreign company may also petition the Secretary of State for the Interior and Police for authorized domicile status, in which case the duly certified formation documents must be filed with the request, along with stamps and receipts for DOP 1,500 - 3,000. The Secretary of State reviews the request and remits it to the Executive Power. After approval, a Presidential Decree is issued and sent to the Secretary of State for Interior and Police to be furnished to the foreign company. Obtaining authorized domicile status is a recommended rather than a compulsory course of action. Authorized domicile status confers the right to bring suit in civil, as opposed to commercial matter, without first issuing a litigation bond or submitting proof of ownership of immovable property in the Dominican Republic. All documents in a language other than Spanish must be accompanied by a translation prepared by an official Dominican translator. 2.3. Partnerships and joint ventures General partnership A general partnership is formed by two or more persons by a written contract. Each is jointly and severally liable for all partnership obligations. The partnership name may include the names of all or some of the partners but must include the words "and Company" (y compañía). Limited partnership A limited partnership is composed of two kinds of partners, active or general partners (comanditarios) and limited partners (socios en comandita). Active partners are jointly and severally liable for the debts of the partnership while limited partners are liable only to the extent of their investment in the limited partnership. A limited partner may not perform any management functions and if he does so, he will become an active partner. The name of a limited partnership may not include the name of a limited partner. Joint ventures Dominican law contains few provisions on joint ventures (sociedad en participación). Under the tax law, a joint venture is assessed to tax as if it were an entity separate from the parties involved in the venture. 3. INTRODUCTION TO THE TAX SYSTEM 3.1. Taxing powers Under the constitution of the Dominican Republic, Congress is the sole body empowered to impose taxes. It is also the sole body constitutionally permitted to utilize sums collected by way of taxes. The constitution prohibits laws having retroactive effect, including tax laws. 3.2. Territorial scope Tax laws extend to the entire territory of the Dominican Republic, which includes the islands of Saona, Alto Velo, Beata and Catalina. 3.3. Tax administration The Secretary of State for Finance administers tax through the General Director ate of Internal Taxes and the General Directorate of Customs. The latter is in charge of collecting and supervising the tariff and customs duties, while the General Directorate of Internal Taxes administers the remaining Dominican taxes. 4. THE INCOME TAX SYSTEM 4.1. Introduction The Dominican Tax Code (DTC) was passed into law in June 1992 as Law 11-92, repealing former Income Tax Law 5911. This Code contains the main provisions regulating the income tax system in the Dominican Republic. In December 2000, important amendments to the DTC were approved by the National Congress. Law 147-00 of 27 December 2000 was passed, followed by Law 12-01 of 17 January 2001, the law 228-04 July 2004 and 557-05 on December 2005. A number of Tax Regulations supplement the legal framework,. The law 227-06 from july 2006 establishes the independence of the Tax Department from the goberment creating an autonomy of the institution Companies Under the DTC companies are subject to tax whether or not they are domiciled in the Dominican Republic. If domiciled in the Dominican Republic, companies are taxable on their Dominican-source income and on certain investment and financial income (see 4.2.) derived from sources outside the Dominican Republic (Art. 269 DTC). Non-domiciled companies are taxable only on their Dominican-source income (Art. 270 DTC). For tax purposes, all of the following entities are considered to be companies: - stock corporations; - state-owned enterprises; - any organization which is usually tax exempt but which is engaged in activities other than those the income from which is tax exempt; - estates after the third fiscal year during which the estate remains undistributed; - unlimited liability companies; - joint ventures; - de facto corporations; and - any form of organization the main objective of which is to obtain profits. (Art. 297 DTC) The DTC requires taxpayers to maintain separate accounts for the branches and subsidiaries of foreign individuals or entities, i.e. separate from those of its foreign-based parent companies, branches or other subsidiaries in order to determine taxable Dominican-source income (Art. 279 DTC). Individuals Resident individuals are subject to tax on their Dominican-source income as well as on certain foreign-source investment and financial income as defined in 4.2. (Art. 269 DTC). Foreign individuals and nationals of the Dominican Republic who become resident are subject to tax on their income from financial investments and gains from sources outside of the Dominican Republic as of the third taxable year or period in which they become resident (Art. 271 DTC). Non-resident individuals are subject to tax on their Dominican-source income only (Art. 270 DTC). For income tax purposes, undivided estates, up to the third year from the taxpayer's death, are considered as individuals (Art. 297 DTC). Partnerships, joint ventures and estates As can be inferred from the definition of companies above, a partnership constitutes an entity separate from its members; the principle of fiscal transparency does not apply. Hence a partnership is charged to income tax on income separately from its members under the rules governing corporations. Individual members may also be taxed on their share of profits separately. On distribution of profits, the partnership is required to withhold tax at the corporate rate which tax may be credited against the tax liability of the individual partners. Likewise, a joint venture, which takes a corporate form, is taxed as an entity separate from the parties thereto. Any Dominican-source income accruing to an estate in the tax year is charged to tax. The legatees may, instead of filing a return in respect of the income accruing to the estate, opt to report their individual share therein together with their other income. Taxpayers choosing this course must notify the tax administration. The tax year coincides with the calendar year (1 January to 31 December) (Art. 300 DTC). Companies may elect to close their fiscal year on a date other than 31 December. Companies can elect to close their taxable year on any of the following dates: (i) 31 March; (ii) 30 June; or (iii) 30 September. Companies may not change the elected tax year without prior authorization of the tax administration. Newly-formed companies must indicate in their by-laws the tax year method to be applied in accordance with the rules set forth above. The first tax year for individuals starting trade or business operations must close on 31 December (Art. 300 DTC). 4.2. General definitions Company Under Dominican commercial law, the stock corporation is a limited liability share company known interchangeably as sociedad anónima, compañía por acciones or compañía anónima. The term "stock corporation" is often used in contradistinction to a "company of persons" which is a general term for various types of limited liability entities whose capital is not divided into shares. Even though for some provisions the law uses the concept of stock corporation, for the purpose of applying the corporate tax rate, the DTC treats any organization with a profit objective as a company. (See 4.1.) Dominican-source income Resident individuals and companies domiciled in the Dominican Republic are charged to tax on Dominican-source income as well as income and gains derived from financial investments located outside the Dominican Republic. Dominican-source income is widely defined under Art. 272 of the DTC to include the following: - income derived from industrial, commercial, agricultural or mining activities carried on in the Dominican Republic; - income from tangible property (or rights attached thereto) located or exploited in the Dominican Republic; - income resulting from rendering technical assistance services, whether provided from abroad or in the country; - income from the use of industrial property or know-how; - fees and salaries and other such payments for the provision of personal, professional or official services; - fees and other forms of remuneration paid by the state to officials or representatives abroad; - income from rentals and leases; - income from loans in general as well as from loans secured wholly or partially by mortgages of property located in the Dominican Republic; - interest on bonds where the borrower or issuer is domiciled in the Dominican Republic regardless of where the security is located; and - income derived from exporting goods produced (wholly or partially) in the Dominican Republic even if the transaction is effected by intermediaries who are resident abroad (Art. 273 DTC). Investment and financial income In addition to the concept of Dominican-source income, the DTC extends the scope of the income tax payable by resident individuals, companies domiciled in the Dominican Republic and undivided estates, to income derived from foreign-source financial investments and gains. Regulations 139-98 do not define them; however, these regulations list as financial investments and gains the following: dividends, interest on loans or bank savings, gains obtained in bank or financial operations, bonds, shares in capital companies, bills of exchange and other movable capital or securities on the capital markets. Domicile Under the DTC, a taxpayer's domicile is regarded as any of the following places: (i) the place of habitual residence; (ii) the place where the principal focus of his activities is located; (iii) the place where the principal place of business is located; or (iv) the place where the events generating his fiscal obligations are located (Art. 12 DTC). Residence An individual is considered to be resident for tax purposes if he remains in the Dominican Republic for a total of more than 180 days in a fiscal year, which period need not be continuous (Art. 12 DTC). Permanent establishment Regulations 139-98 define the term permanent establishment as a fixed place of management, office, branch, workshop, mine, oil or gas well, quarry or other place of extraction of natural resources, an assembly project and supervisory activities in connection therewith, construction or supervisory activities connected with the sale of machinery and equipment where their cost exceeds 10% of the sales price thereof, business consultancy services exceeding 6 months in a fiscal year and the activities of dependent agents and independent agents who carry out all or most of their transactions in the name of their principal. 4.3. Business income 4.3.1. Introduction A resident taxpayer's income from a business is his income from the business for the fiscal year; "income" includes ordinary trading profits as well as capital gains on the disposal of depreciable assets and exchange gains realized at close of the accounting period (DTC Arts. 289, 293). However, business income excludes dividends from which tax has been withheld by the distributing entity in accordance with the provisions described in 4.4.1. (DTC Art. 308). For resident taxpayers, business income will also include foreign-source financial and investment income. (See 4.2.) Since the Dominican Republic applies different tax treatment to different (conceptual) sources of income under separate chapters of the DTC, non-residents must distinguish between those types of Dominican-source income which are subject to a final withholding tax and those which are subject to tax by assessment. Dominican-source dividends, interest, royalties, technical assistance fees, rents, fees for personal, professional or official services are subject to a final withholding tax when paid or credited to non-residents (DTC Arts. 272, 305). However, when such income is derived by a non-resident through a permanent establishment situated in the Dominican Republic, it is subject to tax by assessment on the basis of separate accounts in respect of its Dominican activities. The rules for computing business income apply equally to business income earned by an individual, stock corporations, companies of persons and undivided estates after their third fiscal year. (See 4.1. Companies.) 4.3.2. Income included Under the DTC the concept of income is more comprehensive than under the former Law 5911 and is defined as all income constituting earnings or profits resulting from goods or activities and all benefits, earnings accrued or collected, and capital gains, whatever their nature, origin or description (DTC Art. 268). Corporations, associations of persons, partnerships and individuals engaged in commercial activities are required to report income for tax purposes on the accruals basis. Their annual sworn declaration must be accompanied by a general balance sheet endorsed by a certified public accountant. Individuals, undivided estates and entities without legal personality and whose annual income is below DOP 3 million are permitted to report income on the cash basis. Presumed income Under the DTC, the Dominican-source income of taxpayers engaged in certain types of activities is calculated on the basis of a presumed minimum, normally taken as a percentage of gross receipts. This presumptive basis is applied only as regards minimum taxable income. Taxpayers engaged in the following activities will be subject to this presumptive basis: Foreign insurance companies, with or without a permanent establishment in the Dominican Republic, are presumed to earn minimum net profit equal to 10% of gross premiums received for insuring or reinsuring risks of individuals and legal entities located in the Dominican Republic. This assumption is applied to Dominican insurance companies whenever their corporate income cannot be determined. Foreign transportation companies operating from the Republic to other countries are presumed to earn a minimum net profit equal to 10% of the gross receipts from passenger and cargo charges. Dominican transportation companies will be subject to this presumption whenever their corporate income cannot be determined. Foreign communication companies are presumed to have a minimum net Dominican-source income equal to 15% of gross income. Again, the assumption applies to Dominican companies whose income cannot be determined. Film distribution profits derived by producers, distributors or intermediaries of foreign cinematographic films in respect of films shown locally are presumed to be 15% of the gross sums paid to the former, regardless of the manner in which payment is made. When the net income of persons or companies dedicated to livestock and forestry activities cannot be determined, the tax administration will estimate it according to production, prices and other general indicators. If that information cannot be obtained, it will be assumed that net profits are equal to 10% of the value of the real property on which the activities are carried out. 4.3.3. Exemptions Under Art. 299 of the DTC, certain types of income which might otherwise constitute business income are exempt from income tax in the hands of individual and corporate taxpayers. These exemptions are as follows: - income from chambers of commerce; - income from religious institutions which is obtained directly from its religious activities; - income from civil entities of social assistance, charities, as well as political, literary, artistic, scientific centres and unions provided that the income is destined for their charitable activities; - income and sports associations provided that the association does not pursue any profit-making activities nor permits games of chance; - the annual net income of individuals residing in the country, up to DOP 257,280, annually adjustable for inflation; - interest received by individuals from financial institutions; - cash contributions to the capital of a company, not including contributions in kind which are taxable in the hands of the partner or contributor personally; - cash and stock dividends, from which tax has been withheld in accordance with the provisions described in 4.4.1.; - income from the salary or compensation of diplomats or consuls or foreign relations officers; - compensation for labour accidents; - proceeds obtained by beneficiaries of a life insurance policy; - capital contributions received by corporations; - income received from an inheritance or donations; - amounts granted by employers to their employees for business travelling expenses; - income derived from the disposal of a dwelling house, provided that the taxpayer (seller) owned and used the property for living purposes for 3 years prior to disposal. The exemption is limited to DOP 500,000; - gains from stock dividends paid to stockholders; - gains from dividends paid to stockholders, provided that the relevant taxes have been withheld; - indemnity payments under health insurance policies; and - alimony payments provided for by law or as ordered by the courts. Whereas income derived by the state and municipal governments is generally exempt, income derived from entrepreneurial activities undertaken by the same is subject to tax under the principles governing corporations. 4.3.4. Deductions As a general rule, any expenditure incurred in the Dominican Republic in order to obtain, maintain or preserve taxable income or the source of that income is deductible (Art. 287 DTC). Subject to this overriding principle, two further conditions must be met before a deduction is allowed: - the expense must have actually been incurred and must not exceed what is usual for such income; and - the claim for the deduction must be supported by written evidence, unless it is clear from the very nature of the expenditure that it was actually incurred (Arts. 285, 286 and 287 DTC). The onus is on the taxpayer to prove that the expenses were incurred to obtain, maintain or preserve the income or the source of income in the Dominican Republic. Expenses incurred to obtain exempt income are not deductible and where they are incurred for the dual purpose of obtaining taxable and non-taxable income, a deduction will be granted only for the pro rata portion of expenses related to taxable income (Art. 286 DTC). A claim for the deduction of expenses which are themselves subject to withholding tax may be rejected by the tax authorities if the tax has not actually been withheld. Moreover, a company which does not withhold the tax may be held jointly and severally liable therefor. Subject to the rules outlined above, Art. 287 of the DTC provides for the following specific deductions: - Bad debts or a provision (reserve) for the same to the extent that the amount is justifiable. - Contributions to qualifying pension and retirement plans created for employees up to a maximum of 5% of taxable income in the accounting year; interest on debts and expenses incurred on the renewal or cancellation of the same provided that such debts were directly linked to the business activity of the taxpayer; interest on financing for imports and foreign-source loans are deductible provided that the relevant taxes have been withheld. - Donations to charitable, educational or religious institutions up to a maximum of 5% of the net taxable income in any fiscal year after the deduction of losses from previous years (Art. 287 VIII(i) DTC). - Exchange losses on the book value of a taxpayer's foreign currency assets or debts incurred by reason of movements in the rate of exchange are deductible (Art. 293 DTC); - Insurance premiums covering risks on income producing property. - Life and health insurance premiums, paid by an entity in favour of all salaried staff (Art. 318 DTC). - Losses incurred on damage to profit-producing assets caused by acts of God, force majeure or acts of third parties, less any indemnity or insurance payments received. - Research and development expenses are deductible as current expenditure and need not be added to capital account provided that these are treated as such consistently; expenses incurred in exploration and prospecting for natural resources do not constitute research and development expenses (Art. 287(VIII) DTC). - Salaries paid to shareholders in respect of services rendered to the company to the extent that they do not exceed the remuneration which would have been paid to third parties for similar services. - Transaction taxes payable on the disposal of capital goods which are treated as part of the costs of disposal. - Taxes and duties on property producing taxable income, with the exception of the income tax, related charges, fines and interest, inheritance and gift taxes. - Provisions made by banking institutions to cover assets of high level risk required by the governmental authorities. - Interest payments on loans and expenses incurred in contracting, renewal or cancellation of a debt, provided that the debt is effectively connected with the business and that the funds were intended for the acquisition of goods to be used for productive purposes. However, interest paid abroad is only deductible if the corresponding withholding taxes were duly paid and collected. - Depreciation, amortization and depletion. (See 4.3.5.) - Net losses. (See 4.3.9.) Individuals - special provisions Individuals who carry out activities other than those relating to business and employment may deduct all expenses incurred which are necessary to obtain, maintain and preserve the taxable income or its source (Art. 287(m) DTC). Resident individuals, more than 80% of whose gross income is from entrepreneurial, professional or similar activities, and whose income does not exceed USD 100,000 per year, may opt for a flat-rate deduction of 30% of their gross income rather than deducting expenses for specific costs and purchases in order to determine their net taxable income (Art. 290 DTC). Non-allowable deductions The following are specifically deemed non-deductible expenses for the purpose of determining the net income of corporate taxpayers by Art. 288 of the DTC: - Personal expenses of the owner, partner or representative of a taxpayer. - Salaries paid to, or withdrawals made by the owner, partner or representative of a taxpayer entity, or by his/her spouse or relative, in the absence of proof that the recipient has actually provided services to the taxpayer entity. - Losses incurred in illicit activities. - Remuneration paid to persons or entities acting from abroad, in the absence of proof that the taxpayer has effectively earned income from Dominican sources through or by virtue of the foreign parties services or other activities. - Profits put in reserve or used to increase the capital of the entity. - Undocumented expenses. - The income tax and related fines, penalties and interest, inheritance and gift taxes and other taxes incurred to construct, preserve or maintain capital assets, with the exception of transfer taxes payable on the disposal of such assets. Neither are fines, penalties and interest paid in connection with other taxes deductible. Fringe benefits Fringe benefits are defined in Regulations 139-98 as compensation or benefits which can be individualized and that an employer gives his/her employees in addition to their salaries. The costs of providing fringe benefits to employees, by way of housing allowances, vehicles and other benefits in kind are subject to a tax at the corporate rate. This tax must be paid on a monthly basis by the employing entity or individual. Employers are required to keep a separate account for fringe benefits which are valued according to the principles laid down in Regulations 139-98. Expenses incurred by the employer in order to provide the fringe benefits are deductible from gross corporate income; however, the amount paid as fringe benefit tax cannot be deducted. 4.3.5. Depreciation (capital allowances) and amortization; depletion Art. 287 of the DTC permits taxpayers to amortize or depreciate capital assets used in the production of taxable income. Depreciable assets are those used in the production of taxable income which decline in value because of wear and tear, deterioration or obsolescence. The annual deduction for depreciation is based on the acquisition cost of assets plus insurance, freight and installation costs. The base cost of capital assets constructed by the taxpayer himself will include all relevant taxes and charges, customs duties and interest attributable to the assets before they have been put to use. The depreciation system groups depreciable assets into three categories each of which is depreciable at a specific rate. The categories and depreciation rates are as follows: - Category I Buildings and their structural components. - Category II Cars and light trucks; office equipment and furniture, computers, information systems and equipment for information processing. - Category III Any other property subject to depreciation. Category % ____________________ I 5 II 25 III 15 Special rates of depreciation apply to a taxpayer's depreciable assets consisting of leased property; for Category II leased property, the rate is 50% and for Category III property, the rate is 30%. Moreover, for assets under Categories II and III, the value added tax (ITBIS) paid in respect of their prices must be deducted before determining the initial price of the asset for purposes of depreciation. Taxpayers are required to keep separate accounts for Category I assets; assets in Categories II and III may be placed in a single account. Intangible property Intangible assets such as patents, copyrights, drawings, models, contracts and franchises which have a defined life span are depreciable (Art. 287(VIII)(g) DTC). The base cost of these is the same as for tangible assets. The amount deducted for depreciation should reflect the useful life of the assets on a straight-line basis. Depletion A depletion allowance is granted in respect of mineral deposits including gas or petroleum wells (Art. 287(VIII)(f) DTC). All costs related to the exploration and development of the mine or well must be added to the capital account. The deductible amount is determined by applying the unity of production method, i.e. dividing the machinery cost by the units of extracted material (the result of which is multiplied by units in fact produced) to the capital account of the mineral or oil deposit in question. 4.3.6. Investment allowances There are no provisions for investment allowances under the DTC. 4.3.7. Stock valuation There are two methods used for stock valuation: (a) production or acquisition cost; and (b) sales price less sales expenses. The tax authorities may accept other methods provided that they, inter alia, suit the special characteristics of a particular business. It should be noted that valuation methods must be used consistently from year to year and cannot be changed without specific authorization from the tax administration. All taxpayers who keep stocks of raw materials, inputs or finished products, must maintain inventories according to the last-in, first-out (LIFO) method. Under special circumstances, other methods may be authorized by the tax authorities (Art. 303 DTC). Any immovable property forming part of a taxpayer's stock is to be valued according to its acquisition cost or construction cost. 4.3.8. Reserves The DTC does not make any provision for the creation of non-taxable reserves. However, reserves created to compensate for bad debts are tax-deductible. (See 4.3.4.) 4.3.9. Business losses Deduction of net losses. Net losses incurred by companies may be deducted for purposes of determining income tax liability and may be carried forward for a 5-year period. No carry-back is allowed. Net losses resulting from corporate reorganizations or non-deductible expenses are not deductible. Companies may only deduct up to 20% (the authorized percentage loss deduction) of annual total net loss. However, as from 2009, the authorized percentage (20%) loss deduction will be limited to an amount equivalent to 80% of taxable income and as from 2010, this will be limited to 70% of taxable income. However, a company that incurs a net loss in the first year of operations (the start-up period) may deduct the full amount of the loss. Any excess may be carried forward subject to the limitations described above. The amount of losses which could have been set off in a year, but in fact were not, may not be carried forward. At the request of the taxpayer, the tax authority can authorize a higher deductible amount of losses if there are good reasons therefor. See 4.3.5. for deduction of extraordinary losses due to force majeure. 4.4. Specific types of income All references in this section to withholding tax at the corporate rate are references to the corporate rate of 30%. 4.4.1. Dividends For the purpose of income tax, Art. 291 of the DTC specifically states that a dividend includes any distribution made by an entity to its shareholders or partners in respect of his shareholding in the entity. Entities other than stock corporations with share capital are treated as if they are stock corporations so that partners or other participants in the entity who are entitled to profit shares are subject to the dividend withholding tax provisions described below. The question of whether a distribution has been made does not take account of whether the entity had actual or accrued profits in the year of distribution. Dividends do not include amounts (up to that of their initial contribution) distributed to shareholders when the corporation is liquidated (Art. 291 DTC). Art. 308 of the DTC establishes an imputation system for the treatment of dividends paid or credited to shareholders. When dividends earned from Dominican-source income are distributed to a resident or non-resident individual or entity, the distributing corporation is required to withhold tax at the corporate rate (see 4.6.1.) from the amount distributed as a dividend. The distributing corporation is then permitted to credit the amounts withheld against its tax liability in the year when the distribution is made. Should the amounts withheld from dividends exceed the tax liability of the distributing entity, the excess credit may be carried forward to be credited against liability in the following fiscal year. The net amount of dividends received is not included in the taxable income of individual shareholders. The tax withheld by the corporation meets their liability to tax in respect of the dividends received and they have no future fiscal obligation with regard to the dividends received. Similarly, in the case of corporate shareholders, the dividends from which tax has been withheld on distribution do not form part of their taxable income. Instead, the dividends must be noted in a separate dividend account and subsequent distributions by the recipient entity will be deemed to have been paid out of the dividend account up to the amount thereof and will not be subject to further withholding. For example, in a case where a corporation (A) was shareholder of another corporation (B), the dividends received by A from B will be placed in A's dividends account and not added to the gross income of A. As a consequence of this mechanism, when A distributes its profits from these dividends, they are not subject to withholding (Art. 308 DTC) Where a corporation which is exempt from tax distributes dividends and is therefore unable to credit the tax withheld from dividends against its tax liability, it may transfer the credit to the shareholder or another party with the prior written authorization of the tax administration (Art. 308(VI) DTC). 4.4.2. Interest Interest is not expressly defined in the Dominican Tax Code but is understood in the usual meaning of amounts paid for the use of money. The Code does state that interest on debts is deductible as long as those debts are directly related to the business. (See further 4.3.4.) Interest on bonds issued by Dominican-domiciled entities and all interest on loans secured wholly or partially on immovable property located in the Dominican Republic are considered to be Dominican-source interest (Art. 272(h) DTC). With the exception of interest received by individuals on accounts in banks and other recognized financial institutions, interest from all Dominican sources is included in the gross income of taxpayers and is taxable by assessment at the usual rates (Arts. 272, 283 and 299 DTC). (See 4.6.1. and 4.6.2.) Interest from foreign sources received by Dominican resident individuals or companies is taxable in the Dominican Republic to the extent that it constitutes financial and investment income, which is defined in 4.2. Interest from Dominican sources which is paid or credited to non-resident taxpayers other than financial institutions, is subject to a final withholding tax at the corporate rate set out in 4.6.2. (Art. 305 DTC). Interest payments to non-resident financial institutions are subject to a 5% final withholding tax (Art. 306 DTC). Interest on loans by the Dominican government or its institutions or companies from governments, foreign nations or international credit institutions are exempt from this tax as long as the exemption is laid down in the loan agreement or payments are the responsibility of the Dominican government or its institutions or companies and the agreement has been approved by the National Congress. 4.4.3. Royalties Amounts paid for the use of all types of industrial property, trade marks and patent rights and similar (situated in the Dominican Republic or elsewhere), and know-how is considered to be Dominican-source income and is included in the taxable income of residents, and subject to tax at the usual rates (Arts. 272 and 283 DTC). Royalties paid to non-resident individuals and companies are subject to withholding tax at the corporate rate (Art. 305 DTC). When royalties are paid by a permanent establishment to its head office abroad, they are considered to be payments to a separate entity and are therefore subject to withholding tax at the corporate rate (Arts. 279, 281, 298 and 305 DTC). 4.4.4. Technical assistance and other fees for services, know-how payments Fees paid to resident individuals and corporations in respect of technical assistance services rendered from abroad or from within the Dominican Republic are considered Dominican-source income and are subject to tax at the usual corporate and individual rates (Art. 272 DTC). Technical assistance or services rendered in the Dominican Republic by non-resident individuals are subject to withholding tax at the corporate rate (Art. 305 DTC). 4.4.5. Capital gains Under Art. 29 of the former Income Tax Law 5911, capital gains were in most circumstances exempt from the income tax in the Dominican Republic. However, the new DTC specifically includes capital gains in the concept of taxable income. Art. 283 of the DTC includes in gross income subject to tax at the rates for corporations or individuals, all gains derived from the disposal of assets whether or not such sale is of an occasional or habitual nature. Disposal includes all inter vivos transfers of an asset whether or not for a consideration (Art. 289 DTC). Art. 289 of the DTC contains rules for the determination of the taxable capital gain: from the amount received from the sale, alienation or other disposal of the asset, or its market value in the case of disposals at an undervalue, is deducted the purchase or production cost, as adjusted for inflation according to Art. 327. In the case of depreciable property the purchase or production cost is considered to be its residual value, after taking account of any reduction in book value for depreciation. Capital assets are defined as all assets owned by the taxpayer whether or not connected to his/her business but exclude commercial stocks forming part of inventory and trading stock. Where the alienation of capital assets produces a loss in excess of the total capital gains derived in the same fiscal year, the amount of the loss may be set off against capital gains derived in subsequent fiscal periods. This possibility does not apply to an individual taxpayer in the fiscal year of his death. Although the acquisition of assets by inheritance or gift is generally exempt, a capital gain is deemed to arise on assets transferred as a gift (Art. 299 DTC). The difference between the value of the asset at the time of transfer and the greater of production or acquisition cost is the deemed capital gain and is taxable in the hands of the donor; however, the exemption for acquisitions by inheritance is not subject to any exception. Exchange gains derived on the book value of a taxpayer's funds or on foreign currency assets derived by reason of movements in the rate of exchange, but which have not actually been realized at the close of the fiscal year, are taxable gains (Art. 293 DTC). 4.4.6. Rental and other leasing income Resident individuals are subject to tax on income derived from the rental of movable and immovable property which is situated in the Dominican Republic. Where rental income is paid by public entities, commercial companies and other entities with or without legal personality, professionals or agents to individuals or undivided estates acting in the course of commercial activities, the income is subject to withholding tax at 20% (Art. 309 DTC). The tax withheld may be final or on account of the recipient's ultimate tax liability, as the case may be. Rental income derived by resident individuals or corporations in respect of foreign property is not subject to tax to the extent that real property income is excluded from the definition of financial and investment income and list thereof provided by Regulations 139-98. Resident corporations are subject to tax on income derived from the rental of movable and immovable property situated in the Dominican Republic. The income is aggregated with income from other (conceptual) sources and is taxed at the usual rates. The withholding tax mechanism of Art. 309 which applies to rental payments to individuals and undivided estates does not apply to corporations. Rental payments to non-resident individuals and companies are subject to withholding tax at the corporate rate (DTC Art. 305). 4.4.7. Employment income Income derived by resident individuals from employment is subject to income tax. Income from employment is taxed by withholding at source. Employers are required to withhold and pay the administration the applicable tax on the monthly salary of employees, applying the progressive rates set out in 4.6.2. Income from employment includes cash remuneration only. Fringe benefits and other in-kind perquisites are not taxable in the hands of recipient employees but are taxable in the hands of the employer under the fringe benefits tax regime introduced by the DTC. The fringe benefits tax is payable by every public or private sector employer in respect of the provision to employees of any of the following benefits: housing allowances, vehicles, household servants, special discounts on purchases, educational support of the employee or his dependants, life or health insurance premiums not forming part of a collective policy for all employees, expense accounts and contributions to social security plans which exceed the legally fixed amounts. The fringe benefits tax is levied at the corporate rate and is payable by the employer on a monthly basis. Travelling allowances are specifically exempted from tax in the hands of individuals and are not subject to fringe benefits tax (DTC Art. 299). Amounts received as compensation for illness or injury under a policy of health or disability insurance are not exempt from income tax (DTC Art. 299(q)). Individuals whose only source of income is that from employment are not required to file an annual tax return, as the amounts withheld at source by employers are deemed to satisfy their tax liability. Non-resident individuals are subject to income tax on remuneration received for services provided in the Dominican Republic. The tax is withheld at source at the corporate rate (DTC Art. 305). 4.4.8. Directors' fees A managing director receiving a salary from the employer corporation is subject to tax on that income under the rules for employment income described at 4.4.7. Directors who are not employees, but rather independent professionals are subject to tax under the rules governing professional income which are described at 4.4.9. Fees earned by a non-resident director in respect of his office in a Dominican corporation are considered to be Dominican-source income and are subject to withholding tax at the corporate rate (DTC Arts. 272, 305). 4.4.9. Professional income Income received by a resident individual from the exercise of a profession within the Dominican Republic is subject to income tax by withholding at source by any payer which is a public entity, agency, commercial company, co-operative society, another professional or a fiduciary (DTC Art. 309). The withholding rate is 10% and may be final or on account of the recipient's ultimate liability. Fees received by non-resident individuals for the provision of professional services in the Dominican Republic are subject to withholding tax at the corporate rate (DTC Art. 305). 4.4.10. Redundancy payments Redundancy payments and state-provided unemployment benefits paid in conformity with the provisions of the Labour Code and other unemployment benefits are exempt from income tax (DTC Art. 299(k)). 4.4.11. Pensions, annuities and similar payments Under Art. 238(7) of the DTC pensions and annuities form part of the gross income of resident individuals (Art. 283(7) DTC). However, from the company's point of view, the expenses for pensions, annuities and retirement plans are deductible up to 5% of corporate taxable income. Dominican-source pensions should be aggregated with the taxpayer's income from other (conceptual) sources and taxed at the progressive rates set out in 4.6.2. Foreign-source pensions are not subject to tax. 4.4.12. Life insurance policy proceeds The amounts received by a beneficiary of a life insurance policy on the death of the policyholder are exempt from income tax (Art. 299(h) DTC). Amounts received as compensation for illness or injury under a policy of health or disability insurance are exempt from income tax (Art. 299(q) DTC). 4.4.13. Alimony, etc. There are no specific provisions for the taxation of sums received by way of alimony or similar payments (see 4.3.3.). 4.5. Computation of taxable income 4.5.1. Corporations The description below applies to all entities which are regarded as companies for the purposes of the DTC. (See also 4.1. Companies.) The taxable income of resident companies is the aggregate of all income from Dominican sources (i.e. trading income, taxable capital gains, royalties, interest, service fees) and financial and investment income (defined in 4.2.) derived from sources outside the Dominican Republic. Dividends received from another resident company are not included in taxable income provided that tax was withheld on distribution. From this sum, the following items may be deducted: certain expenses (broadly those incurred to preserve or maintain the income or its source), interest on debts, research expenses, insurance premiums, depreciation and depletion allowances, losses from previous fiscal years (see 4.3.9.) and any tax-exempt income. (See 4.3.3. for exemptions.) Inflation adjustment for each calendar year is allowed, based on the central bank's index of prices to consumers. Corporations may credit the following items against Dominican tax liability: foreign taxes paid on income which is also taxable in the Dominican Republic; tax withheld during the fiscal year from amounts paid out under the withholding tax provisions of Arts. 305 and 309, advance payments and dividend withholding tax withheld from distributions under Art. 308. Branch of a foreign company A branch of a foreign company is required to keep separate accounting records from the head office and income is computed on the basis of these accounts as if the branch were a separate entity from its head office (Art. 279 DTC). Fees and other remuneration paid by the branch to its head office for technical, financial or other assistance are not allowable deductions in computing branch profits unless the appropriate withholding tax has been paid (Art. 281 DTC). 4.5.2. Individuals Income tax is calculated on a resident individual's total income from (i) Dominican sources, i.e. employment and business, from the provision of professional services, taxable capital gains, amounts received in respect of a legacy, rentals, partnership profit shares, etc. received in an income year; and (ii) certain foreign-source investment and financial income as defined in 4.2. The first DOP 257,280 of Dominican-source income is not taxable and represents a standard deduction for all resident taxpayers. The DTC abolished all allowances for children, health costs, etc. which were granted under the previous law. 4.6. Rates of income taxes 4.6.1. Corporations Any form of profitable organization (corporations, companies of persons) (see 4.1. Companies) which is not expressly declared to be tax exempt and domiciled in the Dominican Republic or permanently established in the country, as well as undivided estates as of the third year following the death of the taxpayer, are subject to income tax at a flat rate of 30% (for 2006). However, the tax rate will be gradually reduced to 29% for 2007, 27% for 2008 and 25% for 2009. This rate also applies to fringe benefits tax (see 4.4.7.) and all withholding taxes levied at the general corporate rate (dividends, royalties, interest, etc.). 4.6.2. Individuals As from 2006, the following progressive table is applied to the net taxable income of individuals: Taxable income (DOP) Tax rate (%) _____________________________________ up to 257,280 0 257,280 - 385,920 15 385,920 - 536,000 20 536,000 - 900,000 25 over 900,000 30 The maximum tax rate will be gradually decreased to 29% for 2007, 27% for 2008 and 25% for 2009. 4.6.3. Withholding taxes Under the Tax Reform of 2006 (Law 557-05), which became effective 1 January 2006, in addition to other taxes previously levied, new withholding taxes were introduced on the following types of income: (i) Interest from Dominican sources paid or credited to international credit institutions will be subject to a 10% final withholding tax. (ii) Income from the rental of any kind of movable or immovable property is subject to a 10% withholding tax. (iii) Income from independent personal services paid by a legal entity is subject to a 10% withholding tax. (iv) Income from prizes or gains derived from lotteries, raffles, electronic games, bingo, horse races, casinos, betting shops or any kind of premium or prize obtained from sources of advertisement are subject to a 15% withholding tax. (v) Income derived from payments other than wages by the state, its entities, including state enterprises and decentralized and autonomous entities, is subject to a 5% withholding tax. (vi) Any other type of income is subject to a 10% withholding tax. The withholding taxes listed at (ii) to (vi) above may be credited against the taxpayer's liability to advance payments. Specific rules and obligations for withholding agents are also provided for in the law. Exemption from withholding taxes Dividends and interest are exempted from withholding obligations when paid to or received from regulated financial institutions, The National Bank for Promotion of Housing and Production (Banco Nacional de Fomento de la Vivienda y la Produccion), savings and loan associations, certain pension funds as defined in Law 87-01 of 9 May 2001, certain intermediary business entities engaged on the stock exchange, investment fund administrators and certain companies known as "titularizadoras". 4.7. Assessment and collection 4.7.1. Returns All taxpayers are required to submit a return of income received to the General Directorate of Internal Taxes every year. As a general rule the return should contain sufficient information for the administration to determine the taxpayer's liability. However, there are cases where the law provides for a presumed income basis of assessment. In such situations the administration takes into consideration the previous year's returns and statements and evaluates the economic situation of the area of business as well as the inflation rate of that calendar year, in order to determine a presumed taxable income with which it computes the taxes due from the taxpayer. Also, the administration may use a basis other than that used by the taxpayer depending on the nature of the taxpayer's activities. The term within which individual taxpayers and undivided estates are required to summit their income tax return is from 1 January to 31 March of each year. Companies must file their income tax return within the 120 days following the date of the end of their fiscal year. 4.7.2. Assessment Income tax is assessed on a current year basis, i.e. a taxpayer is assessed to tax in December 1999 in respect of income received in that fiscal period, i.e. January to December 1999. The assessment is made on the basis of the information provided in the return submitted by the taxpayer. Where a taxpayer fails to file a return, files a return which is incomplete or contains inaccurate entries or fails to submit supporting account books and vouchers, the tax authorities may make an assessment on the basis of an estimation of the taxpayer's net income. This estimated assessment is based on the invested capital, transactions of preceding periods, trading stock, the volume and nature of the business and other elements which the authorities deem relevant. The tax administration's right to raise objections to returns, and issue estimated assessments expires within 3 years of the final date established for filing returns. This 3-year period will lapse if, inter alia, the administration begins an investigation of the taxpayer's affairs or if an irregularity arises which was occasioned by the taxpayer's conduct. 4.7.3. Payment and collection The Dominican Republic operates a file and pay system, i.e. the filing of a return must be immediately followed by payment of the corresponding tax. The time limits for payment of the tax is the same as that for filing of the returns. Withholding agents (i.e. all parties responsible for withholding of tax) are required to inform the administration of amounts withheld and must pay them on account of the person who bears the tax according to the terms and requirements established by the tax administration. Withholding agents are also required to inform the tax administration of all the amounts paid, exchanged or accredited to taxpayers even if these amounts are not subject to withholding. Individuals or corporations that pay the tax due after the date established for these purposes are considered to be in default. The term "default" applies equally to cases of irregular payment and in cases in which the Administration has notified the taxpayer. Advance payments Pre-2006 system Law 147-00 of 27 December 2000 was promulgated. This law established a system of advance payments. It required a business to make a monthly payment of 1.5% of its gross income as advance tax. At the end of the fiscal year, this payment was considered to be the minimum income tax. For businesses whose income was a commission or regulated margin, the 1.5% rate was calculated in respect of the commission or margin rather than the total gross income. For individuals doing business and companies with an annual average income lower than DOP 2 million, advance payments were subject to regulations which provided for a 50%, 30% and 20% payment in the 6th, 9th and 12th month, respectively. Taxpayers whose total income was derived from income subject to withholding taxes (Art. 314 DTC) were exempt from advance payments. System after the 2006 tax reform The 2006 Tax Reform (Law 557-05) amended the system of advance payments. As from 1 January 2006, a business whose effective tax rate is equivalent to 1.5% is required to make a monthly payment of 1.5% of its gross income as advance tax. Businesses, the effective tax rate of which is higher than 1.5%, are required to pay monthly advances equivalent to one twelfth of the total tax liability of the previous year. At the end of the fiscal year, this payment will be considered to be the minimum income tax. Individuals and estates are also required to pay advances based on the total tax liability of the previous year. The advances are payable in three instalments, in June, September and December, at the rates of 50%, 30% and 20%, respectively. If there is any balance in favour of the taxpayer at the end of the tax year, the balance may be: (i) deducted for purposes of computing the net-worth tax liability or (ii) refunded to the taxpayer. For businesses whose income consists of a commission or regulated margin, the 1.5% rate is calculated in respect of the commission or margin rather than the total gross income. Individuals doing business and companies with an annual average income lower than DOP 5 million, are exempt from advance payments. Taxpayers whose total income is derived from income subject to withholding taxes remain exempt from advance payments. 4.7.4. Tax clearance A clearance certificate is not required on departure from the Dominican Republic. 4.7.5. Offences and penalties The DTC contains a chapter dedicated to tax offences which classifies infringements of its provisions as tax felonies and tax misdemeanours. Tax felonies are crimes as well as being tax offences and once the tax administration has evidence of a tax felony, it has the power to initiate ordinary criminal proceedings against the offender. Where companies, successions and incapacitated persons are concerned, it is the legal representative who is liable for penal sanctions which may include imprisonment. Felonies Taxpayers who fraudulently attempt in any manner to evade or frustrate the administration in the determination of his tax liability are charged with tax fraud. This felony is aggravated by the complicity of a public employee who has the power to intervene in the tax collecting process for the administration. The penalty provided for in the DTC for this offence ranges from a fine to imprisonment for a period of between 6 days and 2 years. Clandestine trading in taxable products is another felony and offenders may be penalized by confiscation of the merchandise and closure of the establishment as well as a fine of between DOP 5,000 and DOP 200,000, and/or imprisonment for periods of between 6 days and 2 years. The fabrication and forgery of fiscal documents for the purpose of tax evasion is subject to a fine of between DOP 10,000 and DOP 100,000. Any taxpayer who makes a false tax declaration under oath is guilty of perjury. Misdemeanours Taxpayers who make a false or inexact tax return and withholding agents who omit total or partial payment on account of taxpayers are charged with tax evasion, and are liable to a fine of between DOP 1,000 and DOP 10,000 and foreclosure of the establishment. Taxpayers or withholding agents who fail to make the payment of the tax due at the established time are charged interest on the unpaid tax at a rate of 25% for the 1st month and 5% for each additional month until the tax is paid. When the taxpayer does not comply with his tax liabilities on time, interest will be charged at the rate of 30% on the unpaid tax, in addition to any other charges or penalties as may be appropriate. When a taxpayer pays the tax due in accordance with the return filed but it is subsequently discovered that more tax was due, then he will be charged interest at a rate of 25% for each month or part thereof, commencing from the time the complete payment ought to have been made. 4.7.6. Error or mistake A taxpayer who pays assessed tax but later proves to the tax administration that the assessment was excessive by reason of an error in computation on the part of the taxpayer, may have the amount of tax reduced through subsequent returns. This right expires within 3 years from the final date provided for filing the return and paying the tax. 4.7.7. Objections and appeals The appeals procedure for taxpayers who dispute estimated or actual assessment of their income and/or tax liability, is in two stages: an administrative and a judicial one. The first stage of the appeals procedure is purely administrative: the taxpayer files with the General Directorate of Internal Taxes what is known as a "request for reconsideration". The request must be made within 20 days of notice of the disputed matter. The decision of the General Directorate may be appealed to the State Secretariat for Finance, to which the General Directorate is responsible. The appeal must be made within 15 days of notice of the decision of the General Directorate and the documents on which the appeal is based must be attached thereto. Once these administrative remedies have been exhausted without success, the taxpayer must pay the disputed tax before proceeding to the judicial stage. The first right of appeal in the judicial stage is to the administrative court: in this forum the taxpayer may allege that the administrative decisions against which he is appealing were taken in violation of the tax law or regulations thereto. The taxpayer may ask the administrative court to reconsider its own decision in certain circumstances. Otherwise, there is a further right of appeal to the Supreme Court of Justice, whose decision is final. 4.7.8. Powers of investigation The tax administration has extensive powers of investigation of taxpayer's affairs if returns prove inconsistent with evidence submitted by the taxpayer. It also has power to make enforced collection of tax in circumstances where payment is not made. 4.8. Anti-avoidance rules The DTC contains anti-avoidance provisions with respect to income taxes which are described below 7.4. 4.9. Other taxes on income This section will deal with additional taxes on income derived from special activities. 4.9.1. Surcharge on sugar production Under Law 361 of 29 September 1981, persons engaged in the production of sugar and molasses for export are subject to a surcharge equal to 40% of the income tax arising from sugar operations. Where the average production per plot of an enterprise exceeds 200,000 short tons per year the surcharge is 70%. Fifty per cent of the surcharge is withheld by the producer and is earmarked for investment in projects (particularly housing) which improve the standard of living of personnel in the industry and the productivity of the industry in general. 4.9.2. Mining and oil Law 146/71 provides for a 5% royalty tax based on the f.o.b. price of mineral exports. Minerals exported by metal refineries and smelters are exempt from the royalty tax. Royalties paid by a mining company may be deducted from the tax due from the mining company in the same fiscal year in which the royalties were paid. No refund of tax is available if royalties exceed income tax owed in a given year. 4.9.3. Withholding tax on lotteries, etc. Art. 309 of the DTC, as amended, provides for a 15% withholding tax on all income derived from lotteries, electronic games, horse betting, casino gambling and similar earnings. Please note that other withholding taxes as mentioned in 4.6.3. may also apply. 4.9.4. Withholding tax on government payments Art. 309 of the DTC, as amended, also imposes a 1.5% withholding tax on all amounts paid by the government, its agencies, decentralized or autonomous bodies to individuals or legal entities for the acquisition of goods and/or services offered outside of an employment relationship. 4.9.5. Contractors' levy The withholding agents provisions of Art. 309 impose the obligation on private companies to withhold tax from payments to contractors and subcontractors at a rate of 10% upon the paid amount. This provision does not apply to payments made to legal entities that are subject to an annual income tax return and payment. 4.9.6. Fringe benefits tax A fringe benefits tax is payable by employers in respect of certain benefits in kind and perquisites provided to employees as part of their remuneration from employment. (See 4.4.7.) 5. SPECIAL TYPES OF TAXPAYER 5.1. Partnerships The tax treatment of general and limited partnerships is identical. Under the DTC a partnership is subject to tax under the rules governing corporations and the partnership is treated as an entity separate from its members. The taxable income of a partnership includes its business income and any other taxable income (Art. 297 DTC). The dividend withholding tax provisions described in 4.4.1. apply to distributions of profit shares to partners and the partnership is required to withhold tax at the corporate rate (Art. 291). The profit share of the individual partners is not subject to further taxes. 5.2. Joint ventures The DTC contains no special provisions for the taxation of joint ventures. All organizations and entities with a profit making purpose are subject to the corporate tax provisions both as regards computation of taxable income and the rate of tax (Art. 297 DTC). If the joint venture takes a corporate form, the dividend withholding tax provisions described in 4.4.1. apply to individual shares of joint venture profits. 5.3. Trusts and estates Trusts There are no provisions governing the taxation of trusts and similar fiduciary arrangements in Dominican tax law. Estates Income accruing to undivided estates is taxable at the rates and under the rules governing individuals for the first 3 fiscal years after the death of the testator. Taxable income of an undivided estate includes all Dominican-source income as well as financial and investment income from foreign sources (see 4.2.). It should be observed that the DOP 257,280 taxable threshold for individuals (see 4.5.2.) does not apply to undivided estates which are taxable on the first peso of taxable income earned in a fiscal year. From the third year after the death of a testator, undivided estates are treated as corporate taxpayers both as regards tax rates and computational rules. 5.4. Exempt organizations Under the DTC the following organizations are exempt from income tax: - chambers of commerce; - religious organizations; - civil entities providing social assistance, charities, as well as political, literary, artistic and scientific centres, and trade unions; - sports associations; and - the state and municipal governments, except the income derived from entrepreneurial activities. The exemptions listed above are generally granted provided that the income obtained by the exempt institutions is used for the activities for which they were created. When the income obtained by such institutions is used for a different purpose, or when such income was derived from activities of a different nature from those for which the entities were created, then the income will be taxable (Art. 299 DTC). Note that under Regulation 1-02 of 26 February 2002, the General Directorate of Internal Taxes now requires exempt organizations to pay income tax as well as the advance monthly payment of 1.5% of gross income in respect of any activity of a commercial nature performed by said organizations. Likewise, the General Directorate obliges exempt organizations to pay value added tax on the supply of goods or provision of services which are not specifically exempted under the value added tax provisions contained in the DTC. 5.5. Exempt individuals The salaries and other payments earned by foreign diplomatic personnel and other employees of foreign governments in the performance of their job are exempt from income tax (Art. 299 DTC). Individuals who receive less than DOP 257,280 annually, as adjusted for inflation, are exempt from income tax (Art. 299(o) DTC). 5.6. Minors There are no special provisions regarding minors. 6. TAXATION OF AND INCENTIVES TO SPECIAL TYPES OF BUSINESS 6.1. Introduction One of the most controversial provisions of the new DTC was the virtual abolition of tax incentives for investment in priority sectors of the Dominican economy. The most notable of the tax incentives which have been totally abolished by Art. 401 of the DTC are those relating to investment in the industrial sector under Law 299 of 1968, to the tourism sector under Law 153 of 1971, to the agricultural and industrial sectors under Law 409 of 1982, and forestry under Law 290 of 1985. Art. 402 of the DTC contains a list of those laws which have only been partially repealed and these include the Export Free Zones Law 8-90 of 1990, the only repealed incentives of which were those relating to exemption of reinvestment and investment in construction stock, certificates and securities, and the Non-Traditional Exports Law 69 of 1979, previously partially repealed and now completely repealed and replaced by Law 84-99. 6.2. Free zone enterprises Incentives for free zone operations are currently available under the Free Trade Zone Law 8-90 of 15 January 1990. Law 8-90 was designed to promote the growth of already existing free zone enterprises and the creation of new free zone enterprises whose production is geared primarily to the export market. Free zones are managed by the government-created National Free Zone Council. Law 8-90 grants the following incentives to free zone enterprises under Arts. 24 to 30: - 100% exemption from incorporation fees of corporations and fees on increase of capital (see 2.1.8.); - 100% exemption from the corporate income tax; - 100% exemption from import duties including ITBIS (VAT) on raw materials, equipment, parts of buildings, etc. for use in construction, preparation or operations within the free zones; and - 100% exemption from consumption tax, stamp duties on loan contracts and on recording and transfer of real property from the date of formation of the free zone operator. Enterprises in the border area also enjoy the following special benefits: - 100% duty exemption on the importation of construction materials on equipment necessary for the construction of employees' housing; - subsidized rents for premises leased from the Industrial Development Corporation; - preferential export quotas for products subject to quotas; - possibility of obtaining the status of special free zone enterprise, even if they do not meet all the requirements for this category; - eligibility for preferential interest rates on loans granted by the central bank with FIDE funds; and - any other incentives which may be granted by the executive branch. These incentives exist for different periods of time, depending on the location of the free zones. The incentives last 20 years for free zones located in the border area and 15 years for the rest of the country. An extension of the incentives is possible with the authorization of the National Free Zone Council. Application procedure An enterprise which is interested in establishing in a free zone should submit an application form to the National Free Zone Council, containing: - name, address, and nationality of the person, enterprise and/or its shareholders; - authorized capital and paid-up capital; - composition and origin of the capital; - types of goods to be made or service to be provided; - numbers and types of jobs to be created for nationals and foreigners; - local value added of finished product; - description of raw materials, semi-finished products, packaging materials, machinery, labels, and equipment to be imported, as well as the estimated value thereof; and - any other information which the National Free Zone Council may request for its evaluation, in view of the type of project involved. The National Free Zone Council studies the file and presents it to its board of directors. If the request is in accordance with the law, the National Free Zone Council issues a provisional approval and publishes it in a national newspaper, thereby granting third parties the right to oppose the prospective project. If no objections are raised and the original documents required are deposited, the Council issues the final authorization or licence to establish a free zone enterprise. Some of the criteria for granting approval are the effect of the project on the country's balance of payments; the extent to which local goods and services will be utilized; the value added to the product; the economic feasibility of the investment for the industry involved; the training and technical skills for Dominican workers; the ratio of national/foreign technicians; and above all, the number of local jobs created or the support the new company will offer labour-intensive companies in the free zone. Law 8-90 provides a term of 30 days for the National Free Zone Council to review the petition. A free zone enterprise may sell up to 20% of its goods on the domestic market if the following two conditions are met: (i) the products must be manufactured in the country and the import of the inputs must be permitted by the Law; and (ii) a 100% of relevant import taxes (including ITBIS) must be paid. By contrast there is no limit on the percentage of production which may be sold on the domestic market if the product is not manufactured in the Dominican Republic or if at least 25% of its total value comprises local components or raw materials. All goods which may be exported from the free zones into Dominican territory under special customs regulations are considered imports and are subject to the provisions of Law 251 of 11 March 1964, as amended, on International Transfer of Goods. Exchange control Dominican law provides that enterprises will not be subject to exchange control provisions which require conversion of payments received in foreign currency through the central bank of the Dominican Republic. As a result, free zone enterprises have no obligation to repatriate the resulting profits through, or to account for such profits to, the central bank. However, free zone enterprises are required to convert dollars into pesos to pay for all local expenses, such as installation costs; rent or purchases of land or buildings; payroll; insurance; local transportation or communications; raw materials, packaging materials, labels and intermediate products acquired in Dominican territory; income tax withholdings on salaries of all employees, and on dividends paid to shareholders; and other local costs or expenses. To monitor this obligation, the law requires that their local expenses as well as their dollar conversions be reported on a monthly basis. 6.3. Export promotion The Non-Traditional Exports Law 69 of 1969 has been repealed and replaced by Law 84-99 which was promulgated on 6 August 1999. Law 84-99 encourages the export of products manufactured in areas outside the free zones by granting exporters incentives under three different schemes: (i) reimbursement of import duties; (ii) simplified compensation system of import duties; and (iii) temporary admission regime for processing. 6.3.(i) Reimbursement of import duties Under this scheme, exporters receive reimbursement of the duties paid by them or by third parties, on imported raw materials, labels, packaging materials and spare parts when they have been incorporated in goods being exported. The benefits of this scheme can also be claimed when products are re-exported in the same condition as they entered the Dominican duty area. In no case may the amount of the reimbursement exceed the sum of the import duty paid. Goods temporarily exported for alteration, improvement or similar purposes, will not benefit from this reimbursement scheme. Moreover, if any of the exported goods have been subject to any penalty for the violation of the import law, they will not enjoy the benefits of reimbursement. Reimbursement is by means of a cheque in the name of the exporter and/or a tax set-off voucher. These bonuses are issued in national currency by the Secretariat of State for Finance and can be used during a 6-month term from the date of issue. The law does not consider them as income for purposes of income tax. The quantities of items which may benefit from this incentive are determined by the Dominican Promotion Export Centre. 6.3.(ii) Simplified compensation system of import duties Under this system an individual or legal entity, Dominican or foreign, owning a company exporting goods, will be entitled to reimbursement of the import duty paid but this may not exceed 3% of the f.o.b. value of the goods exported. Cheques and/or tax set-off vouchers are issued to the exporter in question. The percentage applicable is determined by Presidential Decree and reviewed every 12 months. The procedure is administered by the Dominican Export Promotion Centre. 6.3.(iii) Temporary admission regime for processing For the purposes of Law 84-99, goods will be admitted temporarily to the Dominican custom area, without payment of import duties as long as the goods are re-exported within 18 months. Under this incentive system, exporters can import raw materials, inputs, labels, packaging materials and spare parts and items to be used in the production of export goods. Any exporter interested in the benefits described above must file a request with the Dominican Export Promotion Centre which will make a decision thereon within 3 working days from the date of filing. Once authorized, the exporters may import the merchandise and at the same time post with the Directorate General of Customs, a bank or insurance company a bond for the amount of duties should the processed goods not be re-exported. 7. INTERNATIONAL ASPECTS 7.1. Unilateral relief The DTC permits taxpayers resident or domiciled in the Dominican Republic to credit any foreign tax paid abroad on income which is also subject to Dominican income against Dominican tax liability. The credit of foreign tax is limited to the amount of Dominican tax to which the foreign-source income would be subject were it subject to tax in the Dominican Republic (Art. 316 DTC). 7.2. Double taxation agreements Double taxation treaties To date, the Dominican Republic has only one comprehensive double taxation treaty, with Canada. The Convention was signed on 6 August 1976, approved by Congress on 12 October 1976 and entered into effect on 1 January 1977. Withholding tax rates for dividends, interest and royalties are reduced to 18% under Arts. 10, 11 and 12 of the treaty, respectively. Art. 23 of the treaty provides a form of tax sparing to Canadian investors in the Dominican Republic who benefit from tax incentive legislation listed in the treaty. Canadian resident companies are given a deduction for Dominican income tax spared (exempted) under tax incentive legislation, including both taxes on business profits and dividends. The deduction in respect of dividends is limited to 15% of the gross amount thereof by paragraph 2 of the Protocol to the treaty. Tax Information Exchange Agreement The Dominican Republic signed an Agreement for the Exchange of Information with Respect to Taxes with the United States of America in August 1989. The Agreement was approved by Congress Resolution 64-89, dated 26 September 1989 and entered into force on 13 October 1989. It provides for the exchange of information necessary for the enforcement of income and other tax laws of the Contracting States. The Agreement also grants investors access to Section 936 funds for projects in the Dominican Republic. Other agreements The Dominican Republic signed a Transport Tax Treaty with the Netherlands on 15 December 1998, which is not yet into force. The treaty includes comprehensive provisions (Art. 10) for relief of double taxation on income and profits from the operation of aircraft in international air transport. The Dominican Republic, along with Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Portugal, Spain, Uruguay, Venezuela) signed the Ibero-American treaty on social security matters dated 26 January 1978 and effective as from 5 January 1985. The purpose is to assist in providing health and other social security benefits to citizens of the member countries. 7.3. Multilateral measures The Dominican Republic is not a party to any multilateral agreement dealing exclusively with mutual assistance in tax matters. However, the country has been a party to some important multilateral agreements with tax implications. World Trade Organization As a signatory to the General Agreement on Tariffs and Trade (GATT) and a member of the World Trade Organization (WTO) which succeeds it, the Dominican Republic has undertaken a process of economic liberalization involving major legal and economic reforms, as well as participated in the development of regional free trade agreements. The American Free Trade Area (AFTA) The Dominican Republic has actively participated in meetings held to discuss trade and the formation of the American Free Trade Area (AFTA), including the American Summit in Miami, Florida (1994); Denver, Colorado (1995); Cartagena, Colombia (1996); Belo Horizonte, Brazil (1997); San José, Costa Rica (1998); and the American Summit in Santiago, Chile (1998). In preparation for this free trade area, the Dominican government has signed subregional agreements as a first step towards the formation of the AFTA. Free Trade Agreement with Central America In November, 1997 the Presidents of Central America and the Dominican Republic decided to start discussions for a free trade agreement, during the Extraordinary Summit of Heads of State and Government held in Santo Domingo. The negotiations ended with the signature of the Free Trade Agreement with Central America in April, 1998. This treaty provides for the free movement of goods and services, and the equal treatment of investments. The Central America-Dominican Republic-United States Free Trade Agreement The Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR) is currently not in effect. The CAFTA-DR includes seven signatories: the United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. The US Congress approved the CAFTA-DR in July 2005 and the President signed it into law on August 2, 2005. The CAFTA-DR has been approved by the legislatures in the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua. Approval is pending in Costa Rica. The agreement will enter into force on a date to be agreed upon among the parties. The export zone created will be the US' second largest free trade zone in Latin America after Mexico. Free Trade Agreement with CARICOM After negotiations in 1997 and 1998, the Caribbean Community (CARICOM) and the Dominican Republic signed a free trade agreement during the Special Meeting of Heads of State and Government of CARIFORUM held in Santo Domingo in August 1998. The agreement provides for the progressive liberalization of goods and services, the promotion of commercial relations and joint ventures between the signatories. CARICOM is represented by the governments of Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname and Trinidad and Tobago. Free Trade Agreement with Costa Rica The Dominican Republic has also signed a free trade agreement with Costa Rica that entered into force on 2 October 2001. The agreement aims to eliminate barriers to trade and facilitate cross-border movement of a number of goods between the territories. In the last 3 years, Costa Rican exports to the Dominican Republic have increased by approximately 30%. 7.4. Anti-avoidance rules and transfer pricing 7.4.1. International anti-avoidance provisions Art. 279 of the DTC requires that local subsidiaries of non-resident companies, permanent establishments of foreign entities or individuals keep separate accounts from those of their head office, parent company or other foreign affiliates in order for the determination of taxable Dominican-source income. Where the account of the Dominican entity does not accurately reflect net Dominican-source income, the tax administration may deem the Dominican entity and its foreign affiliates to be a single economic unit and determine net income on this basis (Art. 280 DTC). In principle, the legal transactions effected between a domestic foreign-capital entity (A) and a foreign individual or entity (B) which indirectly or directly controls A, are considered to be effected between independent parties when its terms conform to the norms of the market place governing arm's length transactions (Art. 281 DTC). Nevertheless, where a person, enterprise or group of persons (X) whether domiciled within or outside the Dominican Republic carry on activities through other companies or enterprises (Y) whose activities are connected with, controlled or financed by X, the tax administration may deem that the parties constitute an economic unit and attribute or allocate gross income, deductions or credits between the entities if it deems such attribution or allocation to be necessary to prevent tax avoidance or to clearly reflect the net income of one or more of the aforementioned enterprises (Art. 292 DTC). The tax administration may demand certified statements as to the relationship between the parent and subsidiary, reciprocal purchase and sales values, the value of fixed assets and any other data which will assist it in determining the subsidiary's actual income. 7.4.2. Transfer pricing Under Art. 273 of the DTC, the arm's length principle governs certain export and import transactions which give rise to Dominican-source income. Import and exports Income derived from exporting locally produced goods is Dominican-source income even if the export transaction is effected by means of intermediaries resident abroad. The income is normally determined by deducting from the wholesale price at the place of destination, the cost of the goods including insurance, and freight. However, where no price is fixed or the declared price is lower than the wholesale price at the place of destination, the parties to the transaction are deemed to be economically connected, in the absence of proof to the contrary. The wholesale price at the place of destination will be taken as the basis for determining the real value of the goods exported. Income derived by foreign exporters on the mere introduction of goods into the Republic is deemed to be foreign-source income. In cases where it is appropriate to apply the price of goods at the place of origin and that price is unknown or doubtful, Dominican-source income will be determined on the basis of margins obtained by independent entities engaged in similar activities. 7.4.3. Thin capitalization The DTC does not contain any specific provisions regarding thin capitalization. 8. CAPITAL AND PROPERTY TAXES 8.1. Net worth tax General: The 2006 Tax Reform (Law 557-05) introduced a new net worth tax (impuesto al activo) payable by companies and individuals carrying on a trade or business. The tax is levied at a rate of 1% on the taxpayer's average total net worth, wherever located, including the net value of real estate without taking into account adjustments for inflation. However, stock held in other companies, real estate located in rural areas and amounts paid as tax advance payments are exempt. The net worth tax is reported and filed in the same period that is applicable for income tax purposes. Therefore, if the taxpayer is granted an extension to the deadline for the filing of the income tax return, such extension will automatically be valid for the net worth return as well. The tax is payable in two instalments in June and December. Exempt persons The following are exempt from the tax: (i) persons not subject to income tax; (ii) taxpayers who hold investments considered by the tax authorities to be capital intensive. Further, a temporary exemption is available for investments with a start-up period longer than 1 year. In this case, the taxpayer must demonstrate to the tax authorities that the investment can be regarded as capital intensive or that it involves the use of new assets; and (iii) taxpayers who report losses on the income tax return can request a temporary exemption from the net worth tax. Amounts of tax actually paid may be credited against the income tax liability for the same period. If the amount of income tax liability is equivalent or higher than the total amount of net worth tax liability, the latter can be considered as satisfied. 8.2. Real property taxes 8.2.1. Tax on houses and undeveloped land Law 18-88 of 5 February 1988, as amended, imposes an annual tax on (i) dwelling houses and commercial property owned by individuals of a value exceeding DOP 5 million, including the value of the urban lots on which they are built and (ii) urban lots without built structures. The applicable tax rate is 1% on the value exceeding DOP 5 million. Owners of a villa, house or urban plot with no structures must file an annual sworn declaration with the Office of the Director of the Income Tax at the Secretariat of State for Finance during the first 60 days of the year. Within that term the owner must pay half of the annual tax amount and the remainder will be due 6 months from the date of the first instalment. Exemptions Real property owned by the Dominican state, charitable organizations, religious entities and diplomatic missions is exempt from this tax. Also exempt is real property considered to have acquired commercial goodwill by the Office of the Secretary of Industry and Commerce and villas bearing a mortgage of which 50% or less has been redeemed. The exemption is also applicable to real property owned by companies or individuals subject to net worth tax (see 8.1.). 8.2.2. Real property transfer taxes In the Dominican Republic, all transfers of real property are subject to payment of the following taxes: - a transfer tax levied at 2% of the price of the real property declared in the sales agreement (Law 2660 of 1951, Law 3341 of 1952 and Law 32 of 1974); - a 12% surcharge calculated on the 2% transfer tax mentioned above; and - stamp duties. (See 10.2.) In addition, certain duties must be paid for the filing, cancellation and registration of deeds with the Registrar of Deeds and the Land Court. These duties range from DOP 1 to DOP 5 (Law 1542 of 1947, as amended by Law 5147 of 1959). See 4.4.5. for the taxation of capital gains realized on the disposal of real estate. 8.3. Inheritance and gift taxes 8.3.1. Taxable property Law 2569 of 4 December 1950, as amended by Law 288-04 published in Official Gazette of 28 September 2004, imposes a tax on inheritances and gifts in the Dominican Republic. This tax is levied on personal and real property which forms part of the gross estate of a deceased person; a gift of property located in the Dominican Republic; and foreign-situs personal property of a deceased person who had Dominican nationality or had his/her last domicile in the Dominican Republic. 8.3.2. Tax rate The tax is applicable at a flat rate of 3% on the amount of the inherited estate. Gifts are subject to a flat rate of 25%. 8.3.3. Exemptions Law 2569 provides for the following exemptions to the inheritance and gift taxes: - transfers of property of a value of not more than DOP 1,000 in favour of direct descendants or ancestors; - transfers of property of a value of not more than DOP 500 to any non-relative; - transfer of the taxpayer's dwelling house; - the receipt by a beneficiary of life insurance proceeds; and - bequests or gifts to public or charitable institutions. 9. IMPORT, EXPORT AND EXCISE DUTIES AND OTHER TAXES ON GOODS AND SERVICES 9.1. Import (customs) duties In September 1990, Presidential Decrees 339-90 and 340-90 comprehensively reformed the Dominican tariff system. The reform aimed to harmonize customs duties by reducing the number and disparity in rates and application of import taxes. The most notable innovation was the adoption of the worldwide recognized Harmonized System of Codification and Designation of Goods by Decree 339-90. A year later, in September of 1991, a third Presidential Decree (No. 366-91) reduced even further the ad valorem duties on some food products, medicine and raw materials. The new tariff system of Decree 399-90 was approved by Congress and was passed into Law 14 of 26 August 1993. Under the current tariff system, as amended by Law 146-00, a basic import tax of 0%, 3%, 8%, 14% or 20% is levied on the ad valorem price of imports, equal to the c.i.f. value of the import multiplied by the official rate of exchange. Exceptions to these rates include: - goods listed in the Technical Rectification presented by the Dominican Republic before the WTO are subject to a higher import tax; - legislators' vehicles (Law 50-66); free zone imports (Law 8-90); educational materials (Law 66-97); insulin imports (Law 486-98); pork and bovine meat (Law 72-00); equipment for handicapped persons (Law 42-00), and equipment and machinery under the provisional import scheme (Presidential Decree 367-97); Dominican government imports, diplomatic and foreign governments' imports; the movement of household items; and trade show merchandise, are subject to lower or no tariffs (Art. 13 DTC). In addition to the tariff reform, on 1 July 2001 the Dominican General Customs Directorate started to apply the WTO valuation system. This procedure has been difficult to implement since for decades the Customs Directorate has been determining by itself the value of imported items. However, significant progress has already been achieved. 9.2. Consumption tax The DTC introduced a selective consumption tax on the transfer of certain goods produced locally, at manufacturer level, as well as on their importation. Alcohol by-products, tobacco by-products and automobiles are taxable. Also taxable are items listed in the law including some food items, tapestries, jewels, perfumes, guns and household appliances. The consumption tax is levied either at percentage rates or at fixed amounts depending on the specific item to be taxed. The taxable base of the consumption tax is as follows: - for goods transferred by the manufacturer (with the exception of alcohol and tobacco products, whose taxable base is defined below) the net price of the transfer stated on the invoice or equivalent document which includes related services provided by the vendor, such as packaging, freight, financing once the bonus, discounts and/or value added tax (ITBIS) are reduced; - for alcohol and tobacco products transferred at the manufacturer's level, the retail sales price before taxes (this price is determined by surveys conducted by the Central Bank of the Dominican Republic in the local market. If the product is not manufactured in the Dominican Republic, the price of the closest substitute product will be used); - for imports, the retail sales price including the c.i.f. value and all taxes on imports, with the exception of value added tax (ITBIS). If similar products are manufactured locally, the taxable base used for the imported item will be the same as the one for the domestic product; - for services, the value stated in the invoice or equivalent document. The following is a selection of fixed-amount rates of the tax: Taxable item Fixed amount (DOP) (for 2006) __________________________________________________________________ beer 335.94 wines 270.68 other fermented drinks 335.94 gin, cognac, brandy and grappa 249.50, 369.28 liquors, rum and other sugar cane derived drinks 222.23 cigars 130 cigarettes 130 perfumes 39 jacuzzi whirlpool 52 carpets 39 jewellery 39 appliances 32.5, 39 stoves 32.5 As from April 2005, the tax rates applicable to cigarettes have been subject to quarterly inflationary adjustment. Services subject to consumption tax Telecommunication services are subject to a flat rate of 10%. These services include the transmission of voice, image, written material, symbols or telephone sound, telegraph, cable, radio, wireless transmissions, satellite transmissions, submarine wire, and any type of communication other than land or air transportation. Banking services consisting of payment of cheques and wire transfers are subject to a tax rate of 0.0015%, to be gradually reduced to 0.0010%, 0.0005% and 0%, in taxable years 2007, 2008 and 2009, respectively. However, the services of automatic teller machines and credit cards are exempt. Transactions carried out by the state and pension plans are considered exempt. Exempted goods Goods for personal use are exempt, as are some goods imported by certain public, international, charitable or educational institutions (Art. 366 DTC). The import of samples and postal parcels exempt from import duties, import of goods under the temporary import system (see 6.3.) and the exports of taxable goods are also exempt from the payment of the consumption tax. Special obligations The DTC (Art. 370) requires persons subject to consumption tax to register in the National Taxpayers Registry. Moreover, persons manufacturing alcohol or tobacco products in the Dominican Republic must register with the tax administration and post a bond to cover any future liability for consumption tax. Fuel oil and gasoline consumption tax Law 112-00 of 16 November 2000 introduced a tax on the consumption of fuel oil, gasoline and natural gas, provided that the product is purchased from the Refineria Dominicana de Petroleo, S.A. (REFIDOMSA) or private companies. The tax is also payable where the oil product is imported into the Dominican Republic by private companies or individuals for purposes of resale or personal consumption. The tax is in the range of DOP 0.00 to 18.00 per gallon. The tax rates depend on the kind of fuel (e.g., premium gasoline, regular gasoline, diesel oil, etc.). Furthermore, under the 2006 Tax Reform (Law 557-05), an additional tax, assessed at a flat rate of 13%, is applicable to the consumption of fuel oil and gasoline. This additional tax is to be withheld by individuals or companies that process, refine, supply or distribute the fuel products. 10. TRANSACTION TAXES; STAMP DUTIES 10.1. Value added tax (Impuesto sobre la transferencia de bienes industrializados y servicios, ITBIS) Section III of the DTC governs the Tax on the Transfer of Industrialized Goods and Services which is often referred to by its Spanish language acronym ITBIS. The ITBIS is a multistage value added tax. The DTC repealed the former ITBIS Law 74 of 1983. ITBIS is charged at a rate of 16% on most supplies (whether or not for a consideration) of manufactured goods and services as well as on imports (Arts. 336 and 342 DTC). The term "manufactured goods" refers to goods which have been processed. The following supplies are specifically identified as taxable by Art. 335 of the DTC: - the supply of manufactured goods; - the importation of manufactured goods; and - the supply of services. The supply of manufactured goods includes supplies of used as well as new goods. A supply means any contract, agreement or similar act which has the effect of transferring title to the goods irrespective of the form or place where the contract, agreement or other act is concluded. Imports refer to the introduction of goods for final use or consumption within the customs territory of the Dominican Republic. Taxable persons Under Art. 337 of the DTC individuals and companies and other enterprises, both domestic and foreign, that carry out taxable activities listed under Art. 335 are liable to pay ITBIS. Taxable base In the case of supplies of goods, the taxable base for the purposes of ITBIS is the total value of the supply including any additional costs incurred by the vendor such as transportation, packaging, interest on financing, whether or not billed separately, less bonuses and discounts given. The taxable base of ITBIS for imported goods is the amount that results from adding to the customs value all import taxes or those resulting from it (Art. 339 DTC). The taxable base for supplies of services is the total cost of services stated in the invoice, though in the case of restaurants, hotels, nightclubs, etc. any obligatory service charges are deducted from the taxable base. Exemptions Arts. 343 and 344 of the DTC respectively provide a list of goods, locally produced and imported, which are exempt from ITBIS. Traditionally, the goods listed have included live animals, game and fish for consumption, milk and milk derivatives, eggs, honey, plants for cultivation, vegetables and fruit for consumption, coffee, cereals, flour, seeds for cultivation, vegetable and animal oil, sugar, cocoa, chocolate, infant food, water, some condiments, raw materials of animal origin, gas, medicine, raw materials for pharmaceutical products, raw materials and capital goods for agribusiness, books, magazines, educational materials, raw materials for the graphic industry, computers, and items exempt from import taxes under the Tariff Code. However, the 2006 Tax Reform removed approximately 200 goods from the exemption list. Consequently, these goods are now subject to ITBIS at the 16% rate, including certain raw materials and basic consumer goods (e.g., soap and detergents, pastas, toothpaste, baby food, salt, vinegar, sea foods, including cod and herring). With regard to services, the exemption list includes education, culture, health, financial services (except insurance), pension, ground transportation, electricity, water, garbage, house rental and personal care services. Exportation of goods is subject to a 0% tax rate. Under the 2006 Tax Reform (Law 557-05), taxpayers have the right to credit the input ITBIS charged to the taxpayers when acquiring goods and services that are connected with the exportation activity. If input ITBIS in a year exceeds output ITBIS, the taxpayer may apply for a tax refund of the full balance. The 2006 Tax Reform expressly regulates the case where the taxpayer's total production is not entirely exported. In such a case, the taxpayer must first identify the ITBIS directly relating to the purchase and services used for the exportation activity. If the taxpayer cannot identify or separate the expenses, the tax credit will be made on the ratio that the export activities bear to total business in the same tax year. Refund of ITBIS Under the DTC the taxpayer has the right to set off or deduct from the gross tax imposed on his sales (input ITBIS) the total amount of taxes paid in advance to customs or local suppliers (output ITBIS). Where total output ITBIS exceeds input ITBIS, the taxpayer has the right to transfer the resulting difference (balance in favour) to the following monthly periods for further set-off. Exporters and producers of tax-exempt products whose prices reflect credits for ITBIS paid on their purchased goods are entitled to apply for refund or set-off of the balance within a 6-month period (Arts. 342 and 350 DTC). The tax administration must decide on the taxpayer's request within a 2-month period; otherwise, the request will be presumed approved by the tax administration. The deduction of ITBIS credits from net taxable income for income tax purposes is permitted. 10.2. Stamp duties Stamp duties are levied on most written contracts, on the registration and renewal of trademarks, on documents evidencing loans, debts, shares, guarantees and all documents prepared or registered by notaries and registrars. Selected schedule of stamp duty rates: (i) Mortgage. Stamp duty rates for the registration of mortgages (Law 210-1984, as amended) are DOP 1,000 on the first DOP 20,000 and DOP 6 for each additional DOP 1,000. (ii) Leases. Notarized leases are subject to a DOP 114 duty, adjustable for inflation. (iii) Share transfers. Like all notarized documents, share transfer agreements are subject to a DOP 114 duty, adjustable for inflation. (iv) Notarized documents. Where a notary public legalizes a signature, an annual receipt (adjustable for inflation) of DOP 114 must be purchased from the General Directorate of Internal Taxes. A fee of DOP 15 will also be payable for registration of a notarized document. If the document contains a debt obligation, government fees will apply as follows: DOP 7 for each DOP 1,000, plus 12% of the amount so calculated; plus DOP 1,000 on the first DOP 20,000 and DOP 6 for each DOP 1000 over the first DOP 20,000. Stamps amounting to 50% of the amount so obtained must also be purchased. (v) Registration of trademarks. The registration of trademarks, logos, slogans, trade names or other industrial property is subject to DOP 1,220 government fees plus a receipt stamp of DOP 125 adjustable for inflation. (vi) Bills of exchange. For promissory notes the taxes and fees applicable to notarized documents apply. (vii) Insurance policies. No stamp duty is payable except for notarization. 11. FEES AND OTHER MISCELLANEOUS CHARGES 11.1. Business licence fees Business licence fees, which used to be payable in the Dominican Republic under Law 213 of 11 May 1984, were abolished by Law 96-97 promulgated on 30 May 1997. Business licence fees payable by financial institutions were also regarded as having been abolished by that law. 11.2. Foreign exchange duty Importers and all foreign exchange buyers are required to pay the central bank 4.75% of the equivalent in Dominican pesos on amounts exchanged in a foreign exchange transaction (Resolution 17 of 1 January 1991 of the Central Bank Monetary Board, amended by Resolution 3 of October 2001). 11.3. Miscellaneous charges When a traveller, Dominican or foreign, leaves the country, a USD 10 tax must be paid. Travel agencies must also charge the traveller the ITBIS applicable to services. Other taxes levied include a tax on public entertainment, tobacco products, the sale of gasoline and diesel fuel and alcoholic beverages. 12. SOCIAL SECURITY 12.1. Social security After some years of public discussion, a new Social Security Law 87-01 was approved by Congress on 10 May 2001. The law introduced a major reform into the Dominican social security system since it established a system based on individual capitalization. Under Art. 4 of the law, Dominicans and foreigners residing in the Dominican territory are required to be affiliated to the Dominican social security system. Affiliated persons have the right to choose their pension fund provider as well as their health care services provider. To make such mandatory affiliation possible, the system consists of: - a contributory scheme that includes public and private employees as well as employers, and the government; - a subsidized scheme, financed by the Dominican government, which protects the handicapped, unemployed, homeless and the self-employed whose earnings are less than the minimum salary; - a subsidized contributory scheme that protects independent professionals and technicians, as well as employees, with average income equal to or exceeding the minimum salary. The National Social Security Council, created by Law 57-01, will be in charge of defining and identifying the population to be protected under the second and third schemes. The law includes measures designed to ensure the transition from a governmental, service-limited monopoly system to one formed by private, public and mixed competitive service providers. The fundamental goal of the reform is to provide a modern and effective social security for all Dominicans and foreigners domiciled in the Dominican Republic. The implementation started November 2002. 12.2. Employee training tax Employers are legally required to pay a monthly tax at a rate of 1% of the regular payroll. This tax is paid to the Instituto de Formación Técnico-Profesional in order to finance a special fund for technical and professional training of workers. Employees also contribute by paying an annual 0.5% of income derived from profit sharing and bonuses. 12.3. Profit sharing Under the Labour Code, employers are required to share profits with their employees. Agricultural, industrial, commercial and mining businesses are required to share up to 10% of their annual profits with all permanent employees. The share of each employee may not exceed 45 days of salary for those employed for 3 years or less and 60 days of salary for those employed for 3 or more continuous years. The profit sharing of employees who have not worked with the employer for the entire year is determined pro rata. The following employers are exempt from profit sharing: - enterprises located in the agricultural, agribusiness, industrial, forestry and mining sectors during the first 3 years of operations; - enterprises in the agricultural sector whose authorized capital is DOP 1 million or less; and - enterprises operating in the free zones.

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