THE DOMINICAN REPUBLIC: An introduction
The Dominican Republic was again one of the top investment destinations in the Latin American – Caribbean region this year. Political stability, a strong economy and a pro-investment legal climate were the key. The country has been spared the political and economic whirlwinds affecting many of our neighbours.
The Dominican Republic is a country with a long-standing tradition of democracy and free enterprise. It has had regular elections and peaceful transfers of power since 1966. Its institutions are quite solid, and the economy is extraordinarily robust, averaging close to 7% growth during the last four years, with low inflation and a stable currency. The country’s fiscal deficit, however, continues to be a point of concern.
Overall, the Dominican Republic's legal system is quite sophisticated, and it favours foreign trade and direct investment (FDI). Listed below are some of the salient characteristics of its legal system, both the ‘pros’ and the challenges:
•The Foreign Investment Law of 1965 grants foreign investors the same rights as domestic investors, guaranteeing full convertibility and repatriation of an investor’s dividends and capital.
•Other investment guarantees. Political risks, inconvertibility and expropriation insurance can be obtained through the United States’ OPIC or the World Bank’s MIGA.
•Trade. The Dominican Republic benefits from preferential trade access to the United States and to Central American countries through the Dominican Republic – Central American Free Trade Agreement (DR-CAFTA), as well as to the European Union through the Cotonou Convention. Other countries and regional blocs are currently negotiating free trade agreements with the Dominican Republic.
•The Dominican Corporations Law is very flexible. Limited liability corporations can be formed with a minimum of two shareholders. There are no nationality or residence requirements and foreign branches enjoy the same rights as domestic corporations. There is a strong movement to reduce red tape for business entities through a simplified registration system in the Mercantile Registry and the Tax Administration.
•Free Zones. The Dominican Republic continues to have a world-class system of free zones (maquilas), which are manufacturing operations primarily for the export market and located in special geographical areas that benefit from a 100% exemption on import duties, corporate tax, VAT, and other levies and taxes.
•Tourism. The Promotion of Tourism Development Law No. 158-01 granted certain hotels and tourism facilities in specific regions substantial tax exemptions for a period of ten years.
•Land ownership by foreigners. Whereas in the past foreigners needed presidential authorisation to own land in the country, such requirement has been eliminated.
•Taxation. The Dominican Republic has a tax system that is primarily territorial, with individuals and legal entities only being subject to tax on their Dominican source income. The Dominican Republic has a flat tax concept, and the current corporate and personal income tax rate, as well as the capital gains rate, is 27%. The VAT (sales) tax is 18% on most products.
•Intellectual Property. The Industrial Property Law of 2000 guarantees strong protection of intellectual property rights and complies with the 1995 Marrakech TRIPS Agreement.
•Film industry. The film industry in the Dominican Republic has had explosive growth in the last few years on the back of Law No. 108-10, which grants very generous tax exemptions to investors in cinematographic projects.
•Trusts. Although trusts are primarily a common law concept, foreign to the Dominican Republic's civil law tradition, in 2011 the Law No. 189-11 for the Development of the Mortgage Market and Trusts was enacted. Trusts have proved very popular in the construction industry.
•Independent judiciary. While in the past Supreme Court justices were named by the Senate, currently they are named by the independent (and somewhat less political) National Council of Magistrates. The Supreme Court, in turn, names the lower court judges from the ranks of the National School of Magistrates. The Judiciary controls its own budget.
•Distributor Protection Law. The Dominican Republic has a stringent agent and distributor protection statute, Law No. 173 of 1966, that protects duly registered local agents and distributors from the termination (or failure to renew) of their distribution contracts without “just cause”. Failure to prove just cause can result in the imposition of substantial indemnities.
•Labour law. Although wage scales in the Dominican Republic are quite competitive, and employers are free to terminate employees without Labour Department authorisation, severance benefits are quite high, roughly amounting to six weeks' salary per year of employment. Dominican labour law is quite protective of employee rights and labour courts tend to favour workers.
•Energy sector. A chronic problem of the Dominican economy over the last decades has been the energy sector. A reliable system of energy production and distribution is still a challenge and periodic blackouts continue to afflict the country. Most companies have adapted to this reality over the years and standby generators are the norm.
•Capital markets. Notwithstanding the enactment of the Securities Law No. 19-00 of the year 2000, the securities market is still small in the Dominican Republic, with most activity limited to trading in short-term commercial paper.
•Litigation. Although the courts are independent, litigation can be slow, expensive, and quite procedure-focused. The enforcement of judgments can also be a challenge.
•Institutional challenges. While there has been much institutional progress over the years, the consolidation of a true system of rule of law continues to be a challenge, as well as the effective fight against administrative corruption.
The fast-growing Dominican economy continues to outperform regional competitors, while enjoying an enviable political stability. M&A activity is vigorous, including public-private partnerships. New infrastructure projects are being developed, improving the local highway system, sea ports and electrical generating capacity.
So, it’s not only beautiful beaches, a warm and inviting population and a wonderful geographical location that the Dominican Republic has to offer. It is also a great place to do business.