Legislation, Administration And Collection

Author:Guzman Ariza Attorneys At Law
Profession:Guzman Ariza Attorneys At Law
 
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Taxation in the Dominican Republic is governed by Law 11-92, commonly known as the Tax Code, and its regulations. Taxes are administered and collected by the Dominican Internal Revenue Agency, known by its Spanish acronym of DGII.

Custom duties, established under a separate statute, are administered and collected by the Customs Agency.

Territoriality

Dominican tax law is primarily territorial. In principle, the Dominican Republic only collects taxes on income from Dominican sources. Thus, on the one hand, all income derived from work or business activities in the Dominican Republic is taxable, no matter if the person is Dominican, a resident or nonresident foreigner, a Dominican business entity or a foreign company with or without a branch office in the country. On the other hand, income derived from work done outside of the Dominican Republic is not taxable, even if received by Dominican nationals or companies, foreign individuals residing in the Dominican Republic or foreign companies with branches in the country.

The only exception to this principle concerns income received by Dominicans or residents in the Dominican Republic from financial sources abroad, which is subject to local taxation. The most common foreign financial sources are stocks and bonds, mutual funds, certificates of deposits, and the like. For Dominicans living abroad who return home and foreigners who become Dominican residents, the obligation to pay taxes on foreign-sourced financial income only starts three  years after the date of return or of obtaining residency.  Pensions and social security benefits are expressly exempted, as well as income received by investors who became residents under the special provisions of Law 171-07.

For tax purposes, any person residing in the Dominican Republic for more than 182 days in a continuous 12-month period is considered a resident.

It is mandatory for all taxpayers to register with the Internal Revenue Agency and obtain a tax number.

Main Taxes

The main taxes affecting businesses in the Dominican Republic are:

Income tax Capital gains tax Goods and services tax Excise tax Real estate tax Tax on company assets Income Tax

Both companies and individuals must pay taxes on their net taxable income.

Corporate Tax Rate

The rate for all business entities is a flat 27%. Unlike in the United States and other countries, in the Dominican Republic the tax treatment for corporations, LLC's and partnerships is exactly the same.

Determination of Corporate Net Taxable Income

Net taxable income is determined after deducting from gross income the deductions admitted by law, which include, among others, expenses related to the business, interest payments on debts, depreciation, amortization expense of intangible assets,  charity donations (up to 5% of the period's net taxable income), and research and development expenses not related to mineral extraction.

Only those expenses and losses incurred to obtain local taxable income can be deducted.

Net operating losses of any given fiscal year may be carried forward up to five years, but not carried back.

Corporate Income Tax Returns

All companies, including those with no income or business  activity, must file income tax returns with the DGII every year.

For companies operating on a calendar year, returns must be filed on or before April 30.  For companies operating on a non calendar fiscal year, returns must be filed within 120 days from the fiscal year-end date.  Returns must be  accompanied by financial statements audited by a certified public accountant.

Payment in Advance of Corporate Income Tax

Corporate income tax is paid monthly in advanced installments of 1/12th of the total amount paid for the previous fiscal year. These advance payments are later compensated against the taxes due for the current fiscal year.

Income Tax Rates for Individuals

Natural persons who receive income from a Dominican source or from financial investments will pay taxes as follows:

Taxable Income (in DOP)        Tax (in DOP) 0 to 416,220.00                                       0 416,220.01 to 624,329.00    15% of taxable income over 416,220.01 624,329.01 to 867,123.00    31,216.00 plus 20% of taxable income over 624,329.01. More than 867,123.01    79,776.00 plus 25% of taxable income over 867,123.01.

Taxable income brackets are adjusted annually for inflation.

Only educational expenses can be deducted for income tax purposes.  No deductions are allowed for dependents, mortgage interest or medical expenses, as in the United States. Married couples must file separate returns.

Individuals who receive an annual income of more than 409,281.01 DOP from non wage sources must file a tax declaration every year, on or before March 31.

Capital Gains Tax

The Dominican Tax Code defines capital gain as the  difference between the  sale price of a capital asset and its acquisition price or production cost adjusted for inflation. In the case of assets subject to depreciation, the rate of inflation is applied to the residual value adjusted for inflation. This adjustment avoids the unfairness of having to pay taxes on the price increase due to inflation, as is the norm in the United States and other countries.

Tax rates for capital gains are exactly the same as for regular income: 27% for companies and zero to 25% for natural persons.

Capital gains are calculated only in Dominican pesos.

Goods and Services Tax

The Goods and Services Tax (GST), known locally as ITBIS, its Spanish acronym, is a value-added tax of 18% applicable to the sale and importation of most goods and services. For imports, the GST is calculated on the CIF (cost, insurance and freight) value of the goods plus applicable duty. A reduced rate of 16% applies to certain food products.

The 18% GST tax must be added to every invoice issued for goods and services. The individual or business entity receiving the GST must pay out the tax to the DGII in the first 20 days of the following month. Non compliance is subject to a 10% surcharge for the first month and 4% for each month thereafter, in addition to 1.1% penalty for each month or fraction of a month.

Taxpayers can deduct from the total GST received any GST paid by them to suppliers, vendors, customs, etc.

Some goods and services are exempted from the GST tax, such as basic foodstuffs, medicines, fuels, fertilizers, books, magazines, educational materials, financial services, transportation, home rentals, utilities, educational and cultural services, and exports of goods.

Excise Tax

Excise taxes are paid when purchases or importations are made on specific goods and services, such as motor  vehicles,  guns,  tobacco products,  alcohol  products,  jewelry,  electronic products, telecommunication services, insurance, and payments by check. Excise tax rates vary according to the good or service taxed; for example, the rate for telecommunication services is 10%; for insurance, 16%; for payments by check,  0.15%.

Real Estate Tax

A 1% annual tax is assessed on real estate properties owned by individuals, based on the cumulative value  of all the properties as appraised by government authorities. Properties are valued without taking into consideration any furniture or equipment to be found in them.

For built lots, the 1% is calculated only for values exceeding 6,858,885.00 DOP (about $150,000). For unbuilt lots, the 1% tax is calculated on the actual appraised value without the exemption.

The real estate tax is payable every year on or before March 11, or in two equal instalments: 50% on or before March 11, and the remaining 50%, on or before September 11.

The amount of the exemption is adjusted annually for inflation.

The following properties are exempt from paying real estate tax: (a) farm properties; (b) homes whose owner is 65 years old or older, and has no other property in his or her name; and (c) properties owned by companies, which pay a separate tax on their company assets..

Tax on Corporate Assets

Companies pay an annual 1% tax on company assets. However, the amount of tax on assets paid by a company can be applied as a credit toward its income tax obligations.

Tax Incentives

Tax incentives exist in certain industries and situations, as described in this website in the article "Investing in the Dominican Republic" under the section "International Trade and Investment".

Withholdings at the Source

The following payments by companies are subject to withholdings:

Payment to employees. Companies must retain and pay to the DGII, in the first ten days of every month, any income tax due on the salaries paid to their employees the previous month. Payments  abroad. Payments abroad to persons or entities not domiciled or residing in the  Dominican Republic are subject to a 27% withholding on the  amount paid. This withholding is  considered as  final  and definitive payment of the  taxes owed for the operation. No deductions are allowed. There are two exceptions to this rule: interest payments to financial institutions and payments by a branch office domiciled in the Dominican Republic to its headquarters abroad are subject to a 10% withholding. Dividends. Companies must retain 10% of dividends paid to shareholders. Rentals. Payments to individuals (not to companies) are subject to a 10% withholding. Fees  for  services  and commissions.  Payments to individuals  (not to companies) for any service or for commissions are subject to a 10% withholding. Anti Avoidance Rule

Based on the substance over form doctrine, the Dominican Tax Code has a general anti avoidance provision through which the DGII may ignore the existence of legal entities or certain transactions if used to secure an unwarranted tax advantage.

Transfer Pricing Rules

The Dominican Republic has established transfer pricing rules modeled on guidelines issued by the Organization of Economic Cooperation and Development (OECD). These rules will apply when a resident company or individual enters into a commercial or financial operation with (a) a related company, or (b) companies or individuals that are domiciled in States or Territories with preferential tax systems (low or zero taxation) or blacklisted jurisdictions, regardless of whether they are related or not.

Companies must file with the DGII an annual information return on transactions subject to transfer pricing

Double Taxation Treaties

The Dominican Republic has signed and ratified two double taxation treaties: with Canada, in 1977, and with Spain, in March 2014. The treaty with Canada only covers income taxes. The new treaty with Spain deals with income and capital gains taxes only.

Foreign Accounts Tax Compliance Act (FATCA)

The Internal Revenue Service (IRS) of the United States and Dominican Republic's DGII have begun a process to exchange bilateral financial and tax information as part  of the Foreign Accounts Tax Compliance Act (FATCA) of 2010. FATCA requires that financial institutions in other countries make available information about the accounts of US citizens, residents, companies, estates and trusts, to tax authorities in the United States to verify their tax compliance.

The Dominican Republic and the United States have reached an intergovernmental agreement (IGA) in substance by which Dominican financial institutions will report all FATCA-related information to DGII, which will then report it to the IRS. The IGA adopted is reciprocal, meaning that the United States will provide information about Dominican residents to the DGII in exchange for the information received.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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