Broad Range Of Incentives For Businesses Are Available In The Dominican Republic

Monday, August 19, 2013 - 09:50

U.S. companies and investors seeking opportunities abroad often read articles about a specific law or regulation in a particular country that explain how that law or regulation can protect a corporation’s property or workers. That kind of information certainly can be crucial for a business executive to receive while he or she is in the process of evaluating a destination where it might be advantageous to move some or all of a company’s operations, or in which it might expand.

Indeed, many times over the years in articles in this very publication, my firm has highlighted a particular statute or legal development and explained its significance to U.S. corporations and their senior business people.

For instance, among other things, our recent articles here have discussed a new regulation that simplified the Dominican stock market and securitization processes in the country, that explored the Dominican Republic’s recent adoption of a law to promote and encourage the film industry, and that reviewed new rules expanding the Dominican Republic’s transfer pricing program so that it now applies to a much larger group of foreign companies doing business in the Dominican Republic than it did previously.

All of these articles were intended to, and, we believe, actually did, provide valuable information to readers. In this article, however, we are going to do something a little different. This article will explore a variety of Dominican laws and regulations, some that have been around for a while and some that are relatively new, that all help to demonstrate one fact: that the Dominican Republic, its government, and its people all welcome U.S. businesses and investors and offer a broad range of incentives and a business environment that is intended to encourage American companies to begin doing business in the Dominican Republic or to expand their existing operations in the country.

Tourism

Consider, for example, the Dominican law on tourism development, which formally is known as Law No. 158-01. This law establishes a foundation for the development and construction of projects ranging from hotels and resorts to amusement parks and harbors. It creates incentives for utility companies to develop in specific areas in the Dominican considered to be favorable for the development of tourist facilities.

The law provides a number of tax incentives. For instance, qualifying developers are completely exempt from paying the following taxes:

  • Income Tax;
  • National and municipal taxes levied on the use and issuance of construction permits, including land purchase documents; and
  • Import duties and other taxes, such as tariffs, fees, late charges, and the Tax on Transfer of Industrial Goods and Services (“ITBIS”), that are applicable to equipment, materials, and furnishings needed for initially equipping and putting a tourist resort into operation.

In addition, financings provided to entities qualifying for these incentives are exempt from all taxes and withholding, and individuals and businesses involved in tourist projects may deduct up to 20 percent of their annual profits when calculating their taxable income.

The law also provides a tax exemption in connection with machinery and equipment needed for products including kilns, incubators, production control treatment plants, and laboratories used when a tourism project is established.

Free Trade Zones

For quite some time, the Dominican Republic has actively supported the creation and expansion of free trade zones. Law No. 8-90, on the Promotion of Free Trade Zones, aims to foster the establishment of new free trade zones as well as the development of pre-existing zones – and it has been quite successful. Consider the scope of incentives set forth by this law:

  • A special customs regime, and,
  • Up to a 100 percent exemption from, among other things:
    • Payment of construction taxes and taxes on loan contracts and on the registration and transfer of real property, from the moment of the creation of the free zone operator.
    • Payment of taxes on the formation of business companies or on the increase of a company’s capital.
    • Payment of municipal taxes likely to affect such activities.
    • All import taxes, tariffs, customs fees, and other related duties affecting raw materials, equipment, construction materials, parts of buildings, and office equipment intended to build, furnish, or operate in a free zone.
    • All existing export or re-export taxes, with limited exceptions.
    • Taxes on patents, assets, or net worth, as well as ITBIS.
    • Consular fees regarding all imports intended for free zone operators or companies.
    • Payment of import taxes regarding equipment and tools necessary for installing and operating budget diners, health services, medical care, child care, entertainment, or amenities, and any other equipment for the well-being of workers.
    • Payment of import taxes on transportation equipment other than cargo vehicles, waste collection vehicles, microbuses, and minibuses for transporting employees and workers to and from work, upon approval, in each case, of the National Council on Export Free Zones.
Developing The Frontier

Yet another law, Law 28-01, creates a Special Zone of Frontier Development for the Dominican provinces of Pedernales, Independencia, Elias Piña, Dajabón, Montecristi, Santiago Rodriguez, and Bahoruco. The governing regulatory body for purposes of this law is the Council of Coordination of Border Development Special Zone.

The incentives under this law are varied and have been very well received. Entities that install and conduct their operations in these provinces enjoy a 100 percent exemption from income tax and ITBIS, import duties and taxes, and other tariffs on raw materials, equipment, machinery, and fuels (subject to the requirement that there be a substantial transformation in the Dominican Republic so that the aggregate final product resulting from the transformation corresponds to a different customs heading than that of the imported raw material). They also are entitled to an exemption of 50 percent of transportation costs and the costs of using the country’s ports and airports (for a term of 20 years).

Similarly, they are entitled to a reduction of 50 percent of any other tax, fee, or contribution in effect at the time or enacted in the future, for a period of 20 years.

The Law On Competition

Finally, it is important to highlight Law No. 42-08, on the Defense of Competition. The primary objective of this law is to promote and defend the competitiveness of all industries to increase the economic efficiency of all markets for goods and services in the Dominican – something of crucial importance to all businesses in the Dominican Republic, domestic and foreign.

This law recognizes, as a constitutional right, the right of free enterprise, compatible with economic efficiency and commercial good faith. Thus, the law prohibits all actions, agreements, and arrangements among competitors, express or implied, verbal or written, that have the object or effect of imposing unjustified barriers in the market. In particular, it prohibits, among other things, agreements to do the following:

  • Impose prices, discounts, extraordinary charges, or other selling conditions as well as to exchange information that would produce the same object or have the same effect;
  • Coordinate or agree on offers or on the withdrawal of bids;
  • Distribute or assign parts of a market;
  • Limit the production, distribution, or commercialization of goods or the rendering or frequency of services; or
  • Eliminate competitors from the market or limit their access.

In addition, the law prohibits activities that constitute an abuse of a dominant economic position in a relevant market that may create unjustified barriers against third parties. The following activities are among those considered to be an abuse of a dominant position prohibited by the law:

  • To subordinate the decision to make a sale to a requirement that the purchaser abstain from buying or distributing products or services to other competing entities;
  • The imposition by a provider of price or other sale conditions on its resale agents, without a justified commercial reason; and
  • The sale or any other transaction subject to the condition of not contracting services or acquiring, selling, or providing goods produced, distributed, or commercialized by a third party.

The law also bans unfair competition, including specified deceptive and confusing practices. It is enforced by the National Commission on the Defense of Competition. Businesses – domestic and foreign – that believe that they have been harmed by any prohibited practice may go to court, seeking an order requiring that the prohibited conduct be stopped and rectifying false or deceitful information. They also may seek damages. In addition, the law provides for the imposition by the Commission of civil and criminal penalties.

The message of this law is clear: The Dominican government is intent on ensuring fair competition by all.

Conclusion

The Dominican Republic has put up a “Welcome” sign for American companies and businesses from other countries and, as explained here, that sign is more than just a word. The Dominican Republic, through a host of acts, clearly welcomes foreign businesses to its shores. The country’s leaders recognize the benefit of foreign investment to Dominicans, as well as the benefits that foreign businesses obtain from operating in the Dominican Republic.  It is a win-win for everyone.

Ricardo A. Pellerano, the Managing Partner of the Dominican Republic law firm of Pellerano & Herrera (www.phlaw.com), is Head of the firm’s Financial Services Department resident in the firm’s office in Santo Domingo. 

Please email the author at r.pellerano@phlaw.com with questions about this article.