Doing Business In: Dominican Republic
Headrick Rizik Alvarez & FernándezView firm profile
The Dominican Republic has been the fastest-growing economy in the region since 2014. With a population of 10.8 million inhabitants and a GDP of $85.5 billion USD, it is the tenth largest economy in Latin America and the largest in the Caribbean region.
The Dominican economy, formerly dependent on the export of agricultural commodities, mainly sugar, cocoa and coffee, has transitioned successfully in the last decades to a well-diversified mix mainly comprised of services, manufacturing, agriculture, mining, real estate and trade. The service sector accounts for almost 60% of GDP and includes the tourism, telecommunications and finance industries. This year, the country experienced continued dynamic growth within key economic sectors, including construction, agriculture, financial services, healthcare, hospitality, transportation and local manufacturing, with inflation holding relatively steady from previous years.
International trade has also been growing increasingly each year between the country and its most important trading partners: The United States, China, Haiti, Mexico, Colombia, Spain, Brazil, Netherlands, Belgium, United Kingdom, Jamaica and Cuba.
According to the International Monetary Fund, growth in the Dominican Republic in 2019 is projected to close at 5.0%, increasing to 5.2% in 2020.
A COUNTRY IN CONSTANT TRANSFORMATION
The country has taken important steps to ensure that education, business, and the legal environment continue to improve and rise up to meet global standards.
- The recently amended securities market law and its regulations, approved by the National Stock Market Council this year, will have a great impact in the strengthening of corporate governance and operational transparency.
- One of the most important laws recently enacted was the anti-illegal trade, smuggling and counterfeiting of regulated products law. This law reinforces the system and strengthens the mechanisms that prevent the smuggling of merchandise through customs and the consequent tax evasion that this generates. Its scope includes counterfeiting and smuggling of regulated products such as medicines, hydrocarbons, alcohol, tobacco and its derivatives.
- Important bills currently under review by the National Congress include the Public-Private Partnerships law, which will serve as an important framework to boost relations between investors and the different government Ministries involved in infrastructure and utilities; also, a customs law; the law of reciprocal guarantees, and guarantees on moveable assets.
- The government has established an advanced legal framework for disaster risk management and put in place an epidemiologic surveillance system and rapid response mechanism to speed up the detection and management of sanitary risks.
- The Criminal Justice system leaders have set a key goal to accelerate judicial processes through the “100 Days Challenge,” making it possible for thousands of cases to get solved within the first 100 days.
- The DR has passed an insolvency law to speed up and reduce the cost of commercial restructuring and has simplified its online business registration. The country, as well, is one of the world’s top 50 economies where trading across borders is easiest.
- The Dominican Republic made enforcing contracts easier by establishing specialized commercial court divisions and by adopting a framework for mediation and conciliation, including in commercial cases. Starting a business was also made easier by reducing the minimum capital requirement.
- The government has doubled education spending as a percentage of GDP since 2013 and implemented a series of reforms to improve learning outcomes. The Government has also joined the World Bank Group’s Human Capital Project, which provides a platform for countries to share experiences on improving human capital outcomes.
- In 2019, The Travel and Tourism Competitiveness Report, an insight report from the World Economic Forum, ranked the Dominican Republic as the most improved country in the North and Central America’s subregion, thanks to above-average regional and global improvement on 11 pillars, including Environmental Sustainability and Cultural Resources and Business Travel.
FOREIGN INVESTMENT IN THE DOMINICAN REPUBLIC
During the last two decades, the Dominican Republic has sought to foster a highly receptive environment for international investors, adopting policies that minimize regulatory obstacles and provide incentives to foreign companies and individuals to bring in capital. As a result, the Dominican Republic has become the primary destination in the Caribbean for foreign investors.
The Dominican Constitution gives equal treatment under the law to foreign and local investors: foreign investors are bound by the same rules and regulations applicable to local investors and can freely hold equity in local businesses and joint ventures, and own real estate.
The Foreign Investment Law eliminated all barriers formerly imposed on international investments in the Dominican Republic. Investors contributing capital to companies operating in the country are granted unlimited access to all sectors of the economy, except to those related to national security and certain sensitive industries. The government offers assistance to foreign investors through the Center for Exports
and Investment of the Dominican Republic (CEI-RD), and protection by vouching for loans provided by international agencies for significant infrastructure projects in the country.
In the past, the economic areas most benefited by foreign direct investment were free zones, tourism, mining, telecommunications, financial services, agriculture and livestock. At the present time, the country promotes FDI through important incentives in the tourism, renewable energy and the film industry; general incentives for industrial innovation and competitiveness; incentives to investors in free zones, as well as special incentives for border region free zones, international financial free zones, and special incentives for logistic operators.
There are no major restrictions on foreign investment and investors can repatriate their profits and capital.
The Dominican Republic is a member of the World Trade Organization and has received preferred treatment. The country has access to the United States through the Caribbean Basin Trade Partnership Act (CBTPA), which was an extension of the Caribbean Basin Initiative (CBI) and the Preferred Generalized System GSP. Along with the trade agreements the country has signed, it offers international investors and local producers unprecedented free-trade access to the two largest markets in the world: The European Union and the United States. Few other countries benefit from such a privileged situation.
- The Cotonou Agreement with the European Community allows preferential access to Dominican goods without quantitative restrictions.
- Dominican Republic and Central American Free Trade Agreement (DR-CAFTA) was implemented by the Dominican Republic on March 1, 2007.
- Economic Partnership Agreement (EPA) is a free trade treaty with financing and investment aspects between the European Union (EU) and CARIFORUM, an organization of Caribbean nations. The Dominican Republic entered the EPA on October 15, 2008.
- Free Trade Agreement with CARICOM, signed in 1998 and ratified by the Dominican Republic in February 2001, this agreement involves the Dominican Republic and 20 Caribbean nations (CARICOM), and establishes free trade zones in the region along WTO guidelines. The free trade agreement between the Dominican Republic and CARICOM coexists with free trade agreement between the Caribbean nations and the European Union (EPA).
- Free Trade Agreement with Central America came into effect in 2001. This agreement coexists with DR-CAFTA, which incorporates several of the provisions of the former. Although a regional treaty, it is in fact, a bilateral agreement between each Central American country and the Dominican Republic. The agreement provides for free trade in all products originating in the region, except those registered in a “negative list.”
- A Partial Free Trade Agreement with Panama was implemented in 2003.
Foreign companies may conduct business in the Dominican Republic by setting up a branch office, incorporating a local subsidiary or acquiring the shares of an existing Dominican company.
Shareholders, partners, members, officers and directors of a Dominican company do not need to be Dominican citizens or residents, except in very special circumstances.
Business Entities in the Dominican Republic
Corporations are best suited for large businesses with many shareholders where protecting minority interests is important. They are the only entities that can raise capital through public stock offerings.
Simplified Corporations are best for medium to large-sized businesses that require special shareholder provisions for corporate governance purposes. Simple Corporations cannot raise capital through public stock offerings, but are able to issue debt instruments to the public.
Limited Liability Companies are ideal for small to medium-sized businesses, and are the most commonly-used legal entity in the Dominican Republic. LLC’s cannot raise capital through public offerings.
Common vs. Preferred Shares
All companies can issue common shares and preferred shares. Preferred shares may grant the shareholder the right to a fixed dividend or a fixed percentage of profits, or both at the same time, as well as priority rights over the company capital in case of liquidation.
Shares in Foreign Currency
The value of company shares as well as its capital can be stated in foreign currency.
Regardless of the type of business entity, the company formation process involves five basic steps: registration of the company name; preparation and signature of company documents, such as the company bylaws or articles of incorporation; payment of the incorporation tax; registration of the company documents at the business registry and company registration at the internal revenue agency.
All Dominican companies as well as foreign ones registered to do business in the country must hold an annual shareholders’ meeting to review the company’s operation during the previous year. Minutes of this meeting must be recorded at the Business Registry.
Mergers and Acquisitions
Dominican company law contemplates different business combinations allowing companies to gain control over one another. Mergers and acquisitions are freely negotiated and carried out by the companies involved, except in case of public corporations or companies in certain regulated industries, such as electricity, telecommunications, banking, and insurance, in which it is mandatory to have the merger or acquisition approved by the pertinent regulatory agency.
Joint ventures in the Dominican Republic generally consist of a contractual arrangement between two or more existing business entities for the purpose of carrying out a particular project or task. The joint venture itself is not a legal person nor enjoys limited liability unless a new business entity is formed according to Dominican company law.
The main taxes affecting businesses in the Dominican Republic are income tax; capital gains tax; goods and services tax; excise tax; real estate tax and tax on company assets.
Withholdings at the source
The following disbursements made by companies are subject to withholdings: payment to employees; payments abroad; dividends; rentals; fees for services and commissions.
Based on the substance over form doctrine, the Dominican Tax Code has a general anti avoidance provision through which the Dominican Internal Revenue Service (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 related company, or 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
Foreign Accounts Tax Compliance Act (FATCA)
The Internal Revenue Service (IRS) of the United States and Dominican Republic’s DGII have an agreement to exchange bilateral financial and tax information as part of the Foreign Accounts Tax Compliance Act (FATCA) of 2010. The Dominican Republic and the United States have reached a reciprocal intergovernmental agreement (IGA) by which Dominican financial institutions report all FATCA-related information to DGII, which then report it to the IRS and vice versa.
Double Taxation Treaties
The Dominican Republic has signed and ratified two double taxation treaties: with Canada and Spain. The treaty with Canada only covers income taxes. The treaty with Spain deals with income and capital gains taxes only.
LABOR AND EMPLOYMENT
Labor relationships in the Dominican Republic are governed by the Dominican Labor Code (Law 16-92), which is characterized by its strong protection of the rights of employees.
Dominican labor laws are territorial in nature. Any work carried out on Dominican soil is subject to the provisions of the Dominican Labor Code irrespective of the nationality or residence of the parties involved.
Dominican labor laws are mandatory to the parties in an employment contract and employees cannot waive any rights that would lessen their benefits under the Labor Code. Any such waiver is automatically considered null and void.
At least 80% of a company’s work force must be Dominican. Likewise, no less than 80% of the payroll, with the exception of salaries for technical or executive positions, must correspond to wages earned by Dominicans. These rules do not apply to employees carrying out executive or managerial duties, or occupying technical positions for which there is no available Dominican substitute.
Wages are freely negotiated between the employer and the employee but cannot be less than the minimum salary established by the National Salary Committee, a dependency of the Ministry of Labor, and vary according to business size or industry type. Gratuities or tips are not considered part of the salary.
In addition to a regular salary, every employee in the Dominican Republic receives, on or before December 20, a “Christmas salary,” equal to one-twelfth (1/12) of the total regular salary earned during the year excluding tips, overtime and benefits received from profit sharing. The Christmas salary is exempt from income tax.
Employers must share 10% of their annual pretax profits, if any, with their employees. If the company is profitable, payment to the employees must be made within a 90 to 120-day period after the end of the company’s fiscal year. Businesses in free trade zones, and agricultural, industrial, forestry and mining companies during the first three years of operation, do not have to share profits with their employees.
Termination implies a permanent break in the employment contract. Several types of termination are contemplated under the Dominican Labor Code. The most common being at will termination (desahucio); for cause termination by the employer (despido); for cause termination by the employee (dimisión); and termination due to incapacity or death of the employee.
The Labor Code provides special protection for employees who are pregnant or have recently given birth. At will termination by the employer is strictly forbidden during the pregnancy of the employee and up to three months after the birth of her child. For-cause termination during a pregnancy nor within the six months following childbirth is allowed without the prior authorization of the labor authorities. Noncompliance is penalized with the equivalent of five months’ salary, in addition to the standard severance payment.
Withholdings by the Employer
Employers must deduct Income tax and Social Security from the wages of their employees and disburse them to the government within the first three days of the month following that in which wages were paid. The Dominican Social Security system contemplates three types of assistance: health insurance, occupational risk insurance and incapacity or retirement fund. The system is funded by a percentage of employees’ salaries made by both employee and employer contributions in established proportions.
Relocation of Foreign Workers
Depending on the time period an employee will be working in the Dominican Republic, companies wishing to relocate them to the country are required to obtain a temporary residency for work purposes which is renewable and issued for a one-year period, or a short-stay permit, granted for periods ranging from two to eleven months.
- A Legal Guide to Invest in the Dominican Republic by Fabio J. Guzmán Ariza