DOMINICAN REPUBLIC: Inclusion

THE DOMINICAN REPUBLIC: An introduction 

Contributed by Georges Santoni-Recio, Managing Partner of Russin, Vecchi & Heredia Bonetti

The Dominican Republic, the second largest island in the Caribbean, and one of the larger economies in Latin America, had another stellar economic performance in 2018 with a 7% GDP growth rate and is on its way to a 5.7% GDP rate in 2019, easily outperforming its regional competitors. Inflation continues to be in the low single digits.

There has been no variation in the country’s economic policies, which are quite market friendly and favourable to foreign trade and direct investment. The local currency is stable and freely convertible against the U.S. dollar, the euro and other hard currencies. One point of concern on the economic front is the growing fiscal deficit, currently at 50% of GDP.

Political stability remains strong. The Dominican Republic has had an uninterrupted democratic tradition since 1966, with regular elections and peaceful transfers of power. Similar to other countries in the region, however, its political institutions and rule of law are being put to the test with the handling of several high-profile political corruption cases.

Worth noting is the increase in “quality” public investments in recent years, primarily in education (currently 4% of GDP for pre-university levels), infrastructure projects (namely roads, bridges, seaports and power generation plants) and the administration of justice.

Listed below are some of the salient characteristics of the Dominican legal system, both the ‘pros’, as well as the challenges:

Pros:

•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 DR benefits from preferential trade access to the United States and to other Central American countries through the Dominican Republic – Central American Free Trade Agreement (DR-CAFTA), as well as to the European Union (EPA) and other bilateral and multi-lateral trade agreements.

•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 has been a substantial reduction in red tape for business entities through a simplified registration system in the Mercantile Registry and the Tax Administration.

•The new Bankruptcy Law, formally known as “the Restructuring and Liquidation of Companies Law”, provides for a more orderly bankruptcy process and protections for the survivability of companies with liquidity issues.

•Renewable energy. Over the past years, renewable energy projects have been on the rise, and growth of this sector is expected to continue. Significant tax breaks have been granted to renewable energy projects.

•Free Zones. The DR continues to have a world-class system of free zones (maquilas), which are manufacturing operations primarily for the export market 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 and its modifications grants 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 a presidential authorisation to own land in the country, such requirement has been eliminated.

•Taxation. The DR has a taxation system that is primarily territorial, with individuals and legal entities only subject to tax on their Dominican source income. The DR has a flat tax concept, and the current corporate and tax rate, as well as the capital gains rate, is 27%. The VAT (sales) tax is 18% on most products. Dividends and interest payments are subject to a 10% withholding.

•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 DR 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 DR’s civil law tradition, in 2011 the DR enacted Law No. 189-11 for the Development of the Mortgage Market and Trusts. 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 branch controls its own budget.

Some challenges:

•Distributor Protection Law. The DR 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. Nonetheless, there are exceptions to the application of Law No. 173, such as for US companies under DR-CAFTA, as well as mitigation strategies.

•Labour law. Although wage scales in the DR 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. DR labour law is quite protective of employee rights.

•Traditional Energy sector. A reliable system of energy production and distribution is still a challenge.

•Capital markets. Notwithstanding the enactment of the new Securities Law No. 249-17 in the year 2017, and recent growth of this sector, the securities market is still small in the DR, with most trading activity limited to debt instruments.

•Litigation. Although the courts are independent, litigation can be slow, expensive and quite proceduralistic. The enforcement of judgments can be a challenge. Alternative Dispute Resolution (ADR) mechanisms have been strengthened and are growing.

•Institutional challenges. As indicated previously, 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.

In conclusion… 

The fast-growing Dominican economy continues to outperform regional competitors, while enjoying an enviable political stability.

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.