Thinking beyond borders
An expatriate’s liability for purposes of the Dominican Republican income tax is generally determined by the territoriality principle. Income tax is levied at progressive rates on an individual’s taxable income for the year, which is calculated by subtracting allowable deductions from the total assessable income.
Extended business travelers are presumed to have triggered a permanent establishment or domicile in the Dominican Republic if they spend the equivalent of 6 or more months within a 12-month period working in the country. If a permanent establishment or domicile is established, income earned is presumed to be of Dominican source and should be declared and taxed in the Dominican Republic.
The Dominican Republic tax system is based on the territoriality principle, whereby all income derived from Dominican sources is subject to income tax.
A tax resident of the Dominican Republic generally refers to an individual who remains in the country for more than 182 days in a fiscal year (continuously or not). Foreigners become subject to taxation in the Dominican Republic on financial and investment from foreign income after the third taxable year in which they are deemed to be legal residents.
Employment income is generally treated as Dominican Republic–sourced compensation without considering the origin of the source funding a wage. The same applies to the rendering of services to Dominican enterprises and individuals.
For extended business travelers, the type of income that are generally taxed are employment income and Dominican Republic–sourced income that arises from capital, goods, or rights located, placed, or economically used in the Dominican Republic, as provided in the Dominican Tax Code (DTC) article 272.
For 2017, the net taxable income is taxed at progressive rates ranging from 0 to 25 percent. The maximum tax rate is currently 25 percent on income earned over 867,123.01 Dominican pesos (DOP) (USD 18,556) for both, residents and nonresidents.
The Dominican Republic has a comprehensive social security scheme to which both, individuals and employers shall contribute. Employee and employer contribution rates depend upon the benefit covered and are often capped at a maximum rate of 20 times the minimum wage.
Individuals are taxed on a calendar year basis. Income Tax returns (IR-1) are due by March 31 following the tax year-end, which is December 31st.
The Dominican social security system provides, as an obligation to employers, the contribution of about 70 percent of the cost of the contributory plan to fund old age, disability, survival insurance and family health insurance, while employees contribute the remaining 30 percent.
The cost of labor risks insurance (workers’ compensation) shall be covered 100 percent by employers. The contributory plan contains the following:
a) Old age, disability, and survival insurance
Contributions are based on 9.97 percent of the taxable salary as follows:
b) Family health insurance
The contributions regarding the family health insurance are based on 10.13 percent of the taxable salary as follows:
c) Labor risks insurance
The contributions to the labor risks insurance will vary depending upon the category of the risk. The existing categories are:
|Category||Percentage of the contributable salary|
It is important to note that, according to article 307, those employees who have a sole source of income derived from employment are not required to complete an income tax return. However, if an income tax form is filed for the first time in a given year, then the taxpayer is required to file a tax form every year.
Prior to arrival, a Dominican visa must be in possession of any foreign citizen wishing to work in the Dominican Republic. The type of visa required will depend on the purpose of an individual’s stay in the Dominican Republic.
United States citizens need a valid passport and a tourist card (valid for a maximum stay of 30 days) in order to enter to the Dominican Republic territory, and in this case, no visa is required.
In addition to the Dominican Republic’s domestic arrangements that provide relief from international double taxation, the Dominican Republic has entered into a double taxation treaty with Canada and Spain as to prevent double taxation and allow cooperation between these countries and the Dominican Republic.
A potential risk of a permanent establishment being triggered may result of extended business travel, but this would depend on the type of services performed and the level of authority the employee has.
The standard value-added tax (VAT) rate is 18 percent, such is applied to the supply of goods and services within the Dominican Republic and upon the import of goods. Monthly filings are required. Registration is required and is performed simultaneously with the registration for all other taxes. A selective consumption tax (based on value) is applicable to alcoholic beverages, beer, and tobacco products. Percentages may vary. In addition, custom duties apply to certain imported goods and luxury items not covered by DR-CAFTA (Dominican Republic – Central America Free Trade Agreement with the United States).
The enactment of Law No.253-13, which established the Fiscal Reform Law, introduced significant changes regarding the valuation of intercompany transactions. In accordance with the referred law, all entities operating in the Dominican Republic shall be subject to the dispositions of Section 281 of the Dominican Tax Code (DTC) when carrying out commercial and financial transactions with:
Consequently, commercial and financial transactions performed with the previously mentioned entities shall comply with the transfer pricing regulations.
Additionally, the Dominican Tax Law may consider the existence of Related parties when:
On December 13th, 2013, the Dominican government published Law 172-13, on Data Privacy Protection. Such law institutes the legal framework applicable to the comprehensive protection of personal data based on archives, public records, data banks and/or any other technical means of data processing for reporting, whether public or private. In view of that, the purpose of this law is to ensure the privacy and rights of the owners, while promoting the truthfulness, accuracy, effective updating, confidentiality and appropriate use of such information.
Law 172-13 has a nature “of public order” and its application shall be governed throughout all the national territory.
The Dominican Republic does not restrict the flow of Dominican Republican or foreign currency into or out of the country.
Nondeductible costs for assignees include contributions by an employer to non-Dominican Republican pension funds.
Dominican Law defines an employment contract as any relationship in which one person obliges him or herself to provide any form of service to another, in exchange for wage and under the direction and/or supervision of the latter, hence subject to the provisions of the Labor Code. An employment contract is presumed by law to exist in every such case, unless proven otherwise by the employer. Given this presumption, it is quite possible for a person considered a private contractor in other jurisdictions to qualify as an employee in the Dominican Republic. Dominican labor law characterizes by its strong protection favoring the rights of employees.
At least 80% of an entity’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. Minimum wages are established by the National Wage Committee, a dependency of the Ministry of Labor, and vary according to the different type of business and their installations and/or holdings.
Income earned from offshore work, either by Dominicans or foreign residents, is not taxable in the Dominican Republic. An exception to the Dominican principle of territoriality is constituted by income from financial sources abroad. A Dominican or a foreign resident receiving income from financial investments (stocks, bonds, notes, certificates of deposits, etc.) must pay taxes in the Dominican Republic on their income from those investments. For tax purposes, in addition, any individual is to be considered as resident when present in the Dominican Territory for at least 182 days at the same fiscal year. Pensions and Social Security benefits are exempt. As a general rule the stipulated wage cannot be offset and the mi¬nimum wages are set by the National Wage Committee.
Fringe benefits are defined by tax law as any sort of in-kind benefits which may be granted to an employee by his employer; i.e. usage of a company vehicle, housing, annual paid vacations, sibling scholarships, stocks or any other sort or benefits received by the employee in exchange for its la¬bor, whether or not included on his employment contract. If any employer pays cash to a third party with the purpose of the latter providing a benefit to the employee, the benefit resulting from such action is deemed also a fringe benefit. Tax law provides a rate on fringe benefits of 28% and shall be paid on a monthly basis.
In addition to his regular wage, every employee in the Dominican Republic receives, on or before December 20, a so-called “Christmas Bonus” equal to one-twelfth (1/12) of the total regular wage earned during the year. To calculate the Christmas wage, only the regular wage received is taken into account, excluding tips, overtime, fringe benefits or profit sharing. The Christmas Wage is exempt of income tax.
Employees as a group are entitled to a share equal to 10% of the pre-tax profits, if any, of the emplo¬yer. Assuming a sufficiently high profit, the amount each employee receives depends on his seniori¬ty. Those who have been employed for less than 3 years get 45 days of ordinary wages; those who have been employed for more than 3 years get 60 days of ordinary wages. These amounts are payable the following year, after the employer has filed his income tax return and as referred, are considered ordinary income for tax purposes. Workers in the Free Zones are not entitled to a share in profits.
When termination or breach of an employment contract occurs, usually, the employee has the right to receive severance from the employer. Severance, according to tax law provisions is exempted. When applicable, any amounts owed by the employer to its former employee must be paid within 10 days of the termination. Noncompliance entails a penalty of one day of wage for every day of delay.
The Dominican Jurisdiction provides equality for both foreign and national investments. Inequality between foreign and national investors occurs only when national security matters are implicated.
In addition, the Dominican Republic promotes foreign investors, and has created the Center of Export and Investment (CEI-RD) in the country to enhance investments from all over the world. Its mission is to promote exports and to attract foreign and national capital by improving the general export and investment industry.
In the same matter, foreign investors can repatriate under the same conditions the technical service contract obligations in which fees are established based on the transfer of technology and/or local manufacture of foreign brands contracts in which clauses include royalty payments. This is attainable if and only such payments and procedures have been approved by the Dominican Central Bank. Foreign investors are entitled to remit abroad, without prior authorization, the total amount of capital invested and dividends declared during each fiscal year, until the total amount of net benefits of the period, and prior to the payment of income tax, including Capital Gain.