Dominican Law No. 253-12, enacted at the end of 2012, (hereinafter called “the Tax Reform”) modified the Dominican Republic’s Tax Code as well as other laws of a fiscal nature.
The only significant change to the tax situation of free zone companies with regard to withholdings on dividend distribution is the amendment of Article 308 of the Tax Code by establishing a tax rate of 10% to be withheld and paid to the Tax Administration by all entities paying dividends on profits of Dominican origin.
All businesses operating under the free zone system of our country would be required to make this 10% withholding on dividends when they repatriate profits to their shareholders or parent companies, which will be considered as a final and definitive payment.
These provisions were to be effective to free zone entities only in the event any of the other countries which are members of the Dominican Republic – Central America Free Trade Agreement (DR-CAFTA) would approve a tax of the same nature to corporations that benefit from similar tax regimes.
Although by 2013 it had been confirmed that Honduras and El Salvador, both members of the DR-CAFTA, had enacted taxes of this same nature to corporations that benefit from similar tax regimes within such territories, the enforcement of such tax withholding had been placed on hold by the authorities.
On February 2014, the National Council of Free Zones requested the Tax Agency to confirm the status of the matter of the dividends distribution via a written consultation; therefore the Tax Agency issued a certification indicating that the Public Administration had not officially confirmed that any of the other members of the DR-CAFTA had approved taxes of the same nature as the herein discussed; therefore article 308 of the Tax Code, which establishes the tax rate of 10% on dividends distribution to be withheld to free zone companies, was not being applied by the Tax Agency throughout year 2014.
Again, in 2015, the National Council of Free Zones again requested the Tax Agency to issue a written consultation on this matter; therefore the Tax Agency stated in another certification that the Public Administration had not yet completed the internal regulation needed to set out the procedure on how to enforce article 308 of the Tax Code, therefore the tax rate of 10% on dividends distribution to be withheld to free zone companies was not yet being applied by the Tax Agency throughout year 2015.
The Tax Agency announced that the tax of 10% on earnings or dividends distribution shall be applied to free zone companies effective as from October 5th 2016; to such end, free zone companies shall complete and file Form IR-17 no later than on the 10th day of the month prior to the date in which the distribution is to be credited or paid.
It is important to point out that on February 13th, 2013 Decree 50-13 was enacted, which establishes that the concept of distribution of earnings includes: accounts receivable or similar formulas held by the legal person with shareholders, partners or members, which did not arise from a commercial operation (as therein defined), and capital reductions, when intended to return contributions.
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