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Tax resident business
A business entity is considered tax resident, in relation to Dominican-source income, when it qualifies as a permanent establishment. According to the tax laws, a "permanent establishment" is a fixed place of business in which a foreign undertaking, person or entity carries out all or a portion of its activities. This includes management seats, offices, branches and enterprise consulting services, if and when they are present in the Dominican Republic for more than six months within a 12-month period.
It also includes construction or supervision services when these are derived from the sale of machinery and equipment, provided these services’ cost exceeds 10% of the value of the machinery; and representatives and dependent and independent agents when they are conducting all, or almost all, of their activities in the name of the company.
Non-tax resident business
Non-tax resident companies must pay tax on their Dominican-source gross income at 27%. In most cases, this tax is payable through withholding at the time of payment.
Companies incorporated, or considered tax resident, in the Dominican Republic must pay:
- Income tax, payable at a rate of 27% on all income after subtracting costs, expenses and any tax deductions allowed.
- Assets Tax, currently at a rate of 1% of the value of the assets owned by the relevant entity. However, this tax is only payable if the company does not have any operations, or if the amount payable as income tax is less than 1% of the value of the assets of the entity.
- Tax on Fringe Benefits for employees:,payable at a rate of 27%.
- Tax on Transfers of Industrialised Goods and Services (Impuesto de Transferencia a los Bienes Industrializados y Servicios) (ITBIS), a local VAT tax . The general rate of the ITBIS is currently 18% of the cost of the goods or services, although some products may be subject to payment at a different rate.
- Excise Tax on the import and transfer of luxury items at variable rates depending on the item. Luxury items include alcohol, tobacco, jewellery, watches and rugs (section 375, Tax Code).
- Capitalisation Tax, applicable to locally incorporated entities in the event of an increase in their social capital, at a rate of 1% of the increased amount.
Dividends, interest and IP royalties
How are the following taxed:
- Dividends paid to foreign corporate shareholders?
- Dividends received from foreign companies?
- Interest paid to foreign corporate shareholders?
- Intellectual property (IP) royalties paid to foreign corporate shareholders?
Dividends paid to foreign or local corporate shareholders (residents and non-residents) are subject to withholding tax at the rate of 10%.
Taxes applicable to income received from dividends are usually withheld by the local entity making the payment. Further distribution of dividends is not subject to additional taxes.
All payments of interest made or credited on account to non-residents (regardless of the type of entity receiving this interest) will be subject to 10% withholding tax. Additionally, the Dominican Republic has thin capitalisation rules which should be observed.
IP royalties paid
IP royalties paid to foreign corporate shareholders are treated as coming from a Dominican Republic source and are subject to tax at 27%.
Payments of royalties in other contexts, such as the granting of concessions, are also subject to tax at 27% by withholding at time of payment. Any other payments made abroad by Dominican entities, and/or with Dominican source income, are subject to the same withholding tax of 27%.
Groups, affiliates and related parties
Are there any thin capitalisation rules (restrictions on loans from foreign affiliates)?
There are two rules. The one applied is that which is most favourable to the tax authorities:
- The deduction of interest paid to non-resident recipients (or non-resident individuals) is limited to the amount that results from applying the interest withholding rate (currently 10%) and the corporate income tax rate (currently 27%).
The payer cannot deduct interest which is equal to or higher than 27%.
- Thin capitalisation, whereby interest deduction cannot exceed the value obtained by multiplying the interest expense for the period by three times the average annual balance of the shareholders' equity divided by the average annual balance of all interest-bearing debt. The average annual balance is obtained by adding the beginning balance to the end balance of the period and dividing the resulting figure by two. The shareholders' equity is the share capital, legal reserves and retained profits, according to financial statements (excluding profit for the relevant period). All interest-bearing debt excludes debt owed to individuals or entities resident or domiciled in the DR.
These rules do not apply to:
- Debts that taxpayers have entered into with persons or entities resident or domiciled who include the interest in their taxable income at the 27% rate.
- Entities in the financial system regulated by the Monetary Board of the Dominican Republic and the Superintendence of Banks.
Interest not deducted in a fiscal year may be carried forward in subsequent periods, for a maximum of three years.
Must the profits of a foreign subsidiary be imputed to a parent company that is tax resident in your jurisdiction (controlled foreign company rules)?
Profits from a foreign subsidiary cannot be imputed to a parent company that is tax resident in the Dominican Republic.
Are there any transfer pricing rules?
The following transfer pricing rules apply:
- The taxpayers will have sufficient information or analysis to assess transactions between related parties at the time of filing the Informative Return of Operations between related parties (DIOR Form). This form must be filed within 180 days of year-end and disclose the operations conducted between related entities. Values should be at arm’s length and be supported by the corresponding TP study.
- The Dominican Republic applies the Organisation for Economic Co-operation and Development (OECD) model.
- Taxpayers may subscribe to advanced pricing agreements (APA) to establish in advance the values of the transactions carried out between related parties for a specific period of time. The time period in question is three years, which is in line with the statute of limitations on tax matters.
How are imports and exports taxed?
Imports of goods are subject to the following taxes:
- Customs duty, which is taxed at variable rates (0 to 40%).
- Excise tax, which is taxed at variable rates .
- ITBIS or VAT, which is taxed at 18%
Exports of goods are not taxed.
Double tax treaties
Is there a wide network of double tax treaties?
The Dominican Republic has signed double tax treaties with Canada and Spain.