Corporate tax in Dominican Republic

Summary

Corporate Income Tax Rate (%) 27
Capital Gains Tax Rate (%) 27
Branch Tax Rate (%) 27 (a)
Withholding Tax (%)
Dividends
10 (b)
Interest 10 (c)
Royalties 27 (d)
Branch Remittance Tax 10
Net Operating Losses (Years)  
Carryback 0
Carryforward 5
    a) The Dominican Tax Regulations do not contemplate an exclusive or addi­tional income tax for branches. Therefore, the standard corporate income tax rate applies to branches.
    b) This is a final withholding tax applicable to payments to both residents and nonresidents.
    c) This is a final withholding tax applicable to payments to resident individu­als and to nonresident individuals, companies and unincorporated business entities.
    d) This withholding tax applies to royalty payments made abroad to nonresident individuals or legal entities.

Taxes on corporate income and gains

Corporate income tax. Resident corporations are subject to tax on their Dominican-source income and on their foreign-source in­come derived from investments and financial gains, such as divi­dends and interest from bonds acquired abroad.

A company is resident in the Dominican Republic if it is incor­porated in the Dominican Republic.

A foreign company is considered domiciled in the Dominican Republic if it has its principal business or its effective manage­ment located in the Dominican Republic. Permanent establish­ments are considered fiscal entities separate from their overseas parent companies and are subject to income tax as companies incorporated in the Dominican Republic even though they are not considered by the Dominican law to be residents.

Corporate income tax rates. For the 2016 fiscal year, the corpo­rate income tax rate is 27%.

Full exemptions or certain income tax credits usually apply to companies established in designated Free-Trade Zones (FTZs) or benefiting from other special incentive laws, such as the Frontier Development Law (Law 28-01), the Tourism Development Law (Law 158-01, as amended by Law 195-13), the Renewable Ener­gies Law (Law 57-07) or the Film Law (Law 108-10).

Asset tax. The annual asset tax is assessed at a rate of 1% on the assets registered in the taxpayer’s accounting books.

The tax base is the net carrying value of the taxpayer’s assets at the end of the fiscal year. Investments in shares of another com­pany and real estate used for agricultural exploitation are exclud­ed from the tax base. Corporate income tax is creditable against the asset tax. The asset tax is calculated in the annual income tax return.

For financial institutions, electricity companies, stockbrokers, pension fund administrators, investment fund administrators and securitization companies, the tax base for the asset tax is the total value of fixed assets (net of depreciation) according to the balance sheet at the end of the tax period.

Entities that benefit from corporate income tax exemptions based on special laws or public contracts approved by Congress are exempt from the asset tax.

Capital gains. Gains derived from direct and indirect transfers of assets or rights located or economically exploited in the Dominican Republic are taxable and subject to the capital gains tax rate of 27%. Under the Dominican Republic Tax Code, capital gains may arise from the transfer of shares, land or other capital assets pos­sessed by taxpayers, regardless of whether the gains are connected to the taxpayers’ businesses. The following assets are not consid­ered capital assets:

  • Commercial inventories or assets possessed principally for sale to clients in the ordinary course of business
  • Depreciable assets
  • Accounts or promissory notes acquired in the ordinary course of business for services rendered or derived from the sale of inven­tory assets or assets sold in the ordinary course of business

The capital gain equals the difference between the transfer price of the assets and the cost of acquisition or production (adjusted for inflation).

Administration. In general, the tax year is the calendar year. How­ever, companies may adopt a fiscal year ending on 31 March, 30 June or 30 September. The income tax return must be filed within 120 days after the end of the fiscal year.

All companies must make monthly income tax prepayments. For taxpayers that had an effective tax rate (ETR) in the preceding tax year that was lower or equal to 1.5%, each prepayment equals the amount resulting from applying the 1.5% rate to the gross income reported in the preceding fiscal year. Taxpayers with an ETR higher than 1.5% must make monthly prepayments corresponding to 1/12 of the income tax paid in the preceding fiscal year. The ETR is determined by dividing the income tax paid in the preced­ing fiscal year by the gross income of the same period.

Taxpayers can request a two-month income tax return filing extension.

Indemnity interest at a rate of 1.10% (1.73% until 30 April 2015) is charged on outstanding balances of taxes due. In addition, a penalty of a 10% surcharge applies for the first month, and a 4% surcharge applies for each month or fraction of a month thereafter.

Non-compliance by the taxpayer with tax obligations may be subject to a penalty of 5 to 30 minimum wages (DOP43,225 to DOP154,740 [approximately USD956 to USD3,424]). In addi­tion, a penalty equal to 0.25% of the income declared in the preceding fiscal year may be applied.

Dividends. Dividends (and all other types of distributions of earn­ings) are subject to a final withholding tax of 10%. Under the Dominican Tax Code and its regulations, a dividend is defined as any distributions of profits or reserves made by any type of cor­poration or entity to a shareholder, partner or participant. The following are included in the concept of profit distributions:

  • Accounts receivable or similar arrangements that a corporation or entity has with its shareholders, members or participants, if they were not generated by a commercial transaction and if no principal or interest payments have been made in a period of more than 90 calendar days
  • Share capital reductions, if capitalized reserves and/or retained earnings exist, until these reserves and earnings accounts are exhausted

Foreign tax relief. Foreign income tax paid on income derived from investments and financial gains abroad may be claimed as a credit against the income tax payable in the Dominican Republic. However, such credit is limited to the portion of Dominican Republic tax allocable to the foreign-source income subject to tax abroad (that is, limited to a 27% rate).

Determination of trading income

General. Tax is imposed on taxable profits, which correspond to the accounting profits adjusted in accordance with the income tax law.

Expenses incurred to generate taxable income and preserve the source of such income are deductible on an accrual basis if prop­erly documented. However, certain expenses are not deductible, including the following:

  • Expenses not properly documented
  • Unauthorized bad debt provisions
  • Prior-period tax adjustments

In addition, the Dominican Tax Code contains interest deduction rules, which are described below.

Under the first limitation rule, the proportion of interest deduct­ible by a domiciled or resident debtor for loans granted by resi­dent individuals or foreign individuals, companies or entities is calculated by dividing the withholding rate applicable to interest payments to such lenders (10%) by the corporate income tax rate (27%). Nevertheless, if the interest paid by a resident or domiciled Dominican debtor constitutes taxable income for a nonresident or non-domiciled lender in its jurisdiction of domicile or residency and if the foreign lender’s tax rate for such income is equal or greater than the 27% corporate income tax rate applicable in the Dominican Republic, the local resident or domiciled debtor may claim a deduction for 100% of the interest expense. Conversely, if the foreign lender’s income tax rate for the interest income is lower than 27%, the local domiciled or resident debtor can only deduct a proportion of the interest equal to the foreign lender’s income tax rate divided by local corporate income tax rate.

In addition, thin-capitalization rules are also applied. Under these rules, interest on loans granted by resident individuals or nonresi­dent or non-domiciled individuals, corporations or entities are not deductible if the local debtor’s debt-to-equity ratio exceeds 3:1. Interest not deductible in one fiscal year may be deducted in the following two fiscal years.

Special industries. Rules applicable to special industries are out­lined below.

Nonresident insurance companies. Nonresident insurance com­panies are taxed on a deemed income equal to 10% of their gross income (premiums) derived from insurance services rendered to resident or domiciled companies or individuals.

Transportation. Income derived from transportation services ren­dered from the Dominican Republic to other countries is deemed to equal 10% of the gross income derived from such services.

Others. Film distribution companies are taxed in the Dominican Republic based on a deemed income equal to 15% of their gross income derived from the distribution of foreign films. In addi­tion, foreign communications companies are taxed on a deemed income equal to 15% of their gross income.

Inventories. In general, last-in, first-out (LIFO) is the approved method for valuing inventory. However, taxpayers may use other methods if previously approved by the tax authorities.

Provisions. In general, provisions are not deductible for income tax purposes. However, the Tax Code and Income Tax Regulations provide for limited exceptions to this rule, including a provision for uncollectable accounts receivable. This provision is allow­able as a de ductible expense if it is calculated based on 4% of the accounts receivable balance at the close of the fiscal year and if the amount is authorized by the Tax Administration.

Provisions for gratifications, bonuses and other similar compen­sation items are deductible for income tax purposes if the amounts in the provisions are paid by the filing date of the income tax return.

Tax depreciation and amortization allowances. Depreciation is cal­culated using a variation of the declining-balance method. In tan-gibles, such as patents, models, drawings and copyrights, may be amortized using the straight-line method if they have a definite useful life.

Salvage value is not taken into account in calculating deprecia­tion. The following are the generally applicable depreciation rates provided by law.

 

Asset Rate (%)
Buildings 5
Light vehicles and office equipment, including computers 25
Other assets 15

Relief for losses. Losses generated by companies in the ordinary course of a trade or business may be carried forward for a five-year period. In each fiscal year, 20% of the total loss can be used to offset taxable income. However, in the fourth and fifth years, only 80% and 70%, respectively, of the total taxable income may be offset by the 20% loss carry forward. Losses derived from reorganizations are not deductible for income tax purposes. Net operating losses may not be carried back.

Other significant taxes

The following table summarizes other significant taxes.

 

Nature of tax Rate (%)
Value-added tax; standard rate 18
Social security contributions
Health contributions; imposed on salary
up to a maximum amount of 10 legal
minimum wages (DOP86,450 or
approximately USD1,913; the legal minimum
wage for social security contributions is
DOP8,654 or approximately USD191)
Employer 7.09
Employee 3.04
Pension contributions; imposed on salary
up to a maximum amount of 20 legal
minimum wages (DOP172,900 or
Approximately USD3,826)
Employer 7.1
Employee 2.87
Labor risk contributions; payable by
employer on salary up to a maximum
amount of 4 legal minimum wages
(DOP34,580 or approximately USD765);
rate varies according to the risk level of
The company’s activity
1 to 1.3
Worker’s compensation insurance Various
Telecom Tax; imposed on the consumption
of telecom services by legal entities and
individuals in the Dominican Republic;
Tax rate applied to gross payment
10
Tax on financial transactions; imposed on the
value of checks and wire transfer transactions
and on payments made to third parties (the tax
applies even if the wire transfer is made to an
Account in the same bank)
0.0015

Foreign-exchange controls

The Central Bank of the Dominican Republic (Banco Central de la República Dominicana) has liberalized foreign-exchange con­trols. Only individuals and companies generating foreign cur­rency from exports, services rendered and other specified activities are required to exchange foreign currency with the Central Bank through commercial banks. The Central Bank is not required to furnish foreign currency to satisfy demands for foreign payments. Individuals and companies may buy foreign currency from, or sell it to, commercial banks.

The exchange rate is USD1 = DOP45.1931.

Treaty withholding tax rates

The following are the maximum withholding tax rates under the Dominican Republic’s double tax treaties.

  Dividends

%

Interest

%

Royalties

%

Canada 18* 18 18
Spain 10 10 10
Non-treaty countries 10 10 27

* Under the tax treaty with Canada, if the Dominican Republic enters into a treaty with another country in which the applicable income tax withholding rate for dividends is lower than the rate provided in the treaty with Canada (for example, maximum tax rate of 10% under the tax treaty with Spain), that same tax treat­ment automatically applies to the treaty with Canada.