Saturday, October 31, 2015

Dominican Republic's free zone: Do you know what that is?

Background on Dominican Republic's free zone industry

With the purpose of attracting foreign investment in order to increase levels of employment and foreign currency in the country, in 1970 the Dominican Republic established a legal regimen of extra-territoriality by means of which companies that are set up in a specific geographic territory declared as an "industrial free zone" and surrounded by insurmountable walls, are exempt from the payment of taxes on the profits they generate.

They also benefit from a series of  additional fiscal and labor incentives specifically established in the free zone law, such as exemption from the payment of the tax on the transfer of goods and services (value added tax), exemption from the payment of import and export rates and tariffs, exemption from the obligation to distribute profits among the employees, among others.

Certain tax exemptions to operations of free zone companies were not expressly included in the law, such as the tax situation of shareholders with regards to the dividends that could be generated by their companies in the Dominican Republic or the earnings on capital from the sale of their investments in our country, both of which are applied without restriction within the fiscal territory of the Dominican Republic, that is, to companies operating out of free zone. But for many years free zone companies were exempt from many tax concepts not specifically established in law 8-90 on Free Zones.

The unanimous criteria that prevailed for more than thirty-five years is that said obligations do not apply to free zone companies because their applicability is not consistent with the spirit and the objectives of free zone legislation. Of what interest would it be to an investor for the company to be free from taxes if their operational profits or the sale of their assets were to be?

Along with this line of thinking, during the aforementioned period, the Dominican fiscal authorities never showed the slightest interest in collecting any type of tax information directly or indirectly from free zone companies or their shareholders. It was not until the year 2005 when this was required for purely informational purposes, that is, the companies filed tax declaration forms, which includes the identification of their shareholders and the company's financial statements.

As a result of the changes that occurred in the Dominican economy as a consequence of the agreements with the World Trade Organization, around the end of last decade when the dismantling of the import tariff system of customs began and the State’s revenue decreased, the criteria arose among certain government officials that the free zone law, because it was a special law, should be interpreted restrictively and therefore only the obligations specifically mentioned in the law should be exempt from payment.

Then in the Tax Reform that took place in 2012, the Dominican Republic established that Free Zones Companies must pay tax when their investors proceed to take their profits out of the country. It is, however, a lower rate than normal companies's investors pay.

It is also important topoint out that there are Special Free Zone Companies, which are companies under the free zone regime although they are not operating inside of a Free Zone Park because due to the nature of its operations the company requires to be in a specific location where there are no parks. For example, a company that grows tobacco for exportation requires to be next to where the tobacco leaves are grown and processed, therefore the company itself become a park and, at the same time, it is just one company.

If you wish to know more about the provisions of Law 8-90 on Free Zones in the Dominican Republic, drop me a line in the comments.

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