A Lawyer's Guide to the Dominican Republic
InterAm Database
National Law Center for Inter-American Free Trade
LEX MUNDI
A LAWYER'S GUIDE TO
THE DOMINICAN REPUBLIC
Prepared by:
PELLERANO & HERRERA
Santo Domingo, Dominican Republic
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The information contained in this publication is given by way of general reference only and is not to be relied upon. No responsibility will be accepted by the authors or publishers for any inaccuracy or omission or statement which might prove to be misleading. You are advised to seek your own professional advice before proceeding to invest or do business in the Dominican Republic.
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TABLE OF CONTENTS
I. THE COUNTRY AT A GLANCE
II. INVESTMENT PRINCIPLES AND GENERAL CONSIDERATIONS
A. Political System
B. Legal System
C. Economic System
D. Financial System
E. Court System
F. Culture
III. INVESTMENT FRAMEWORK
IV. SENSITIVE AREAS
V. DIRECT SALES
VI. EXPORTS FROM THE DOMINICAN REPUBLIC
VII. REPRESENTATIVES, DISTRIBUTORS, FRANCHISERS
VIII. INTELLECTUAL PROPERTY - LICENSING
IX. DIRECT INVESTMENT
A. Purchase of Stock or Assets of an Existing Company
B. Branch
C. Subsidiary
D. Types of Companies Recognized by Dominican Law
X. PURCHASE BY FOREIGN CORPORATION OF BUSINESS IN
THE DOMINICAN REPUBLIC
XI. BRANCHES
XII. INCORPORATION
XIII. EXCHANGE CONTROLS
TABLE OF CONTENTS (continued)
XIV. TAX
A. Income Tax
B. Import Taxes and Duties
C. Value Added Taxes
D. Business Tax
E. Other Taxes
XV. LABOR
XVI. DISSOLUTION
A. Causes for a Company's Dissolution
B. Procedure
XVII. INTERNATIONAL RELATIONSHIPS
A. Existing Relationships with Nations
B. Memberships in International Organizations
C. International Agreements
D. International Disputes
XVIII. DISPUTE RESOLUTION
A. Common Law Abritration
B. Commercial Law Arbitration
APPENDIX - Government Offices & Financial/Commercial Institutions
I. THE COUNTRY AT A GLANCE
The Dominican Republic, with an area of 18,712 square miles, is the second largest country in the Caribbean, after Cuba. The country occupies the eastern two-thirds of the island Hispaniola, named after its discoverer Christopher Columbus in 1492. The western third of the island belongs to Haiti. The topography of the island varies between rain forests and grass lands along the northeastern coast to desert regions along the southwestern border. The Dominican Republic is surrounded on the north by the Atlantic Ocean, on the south by the Caribbean Sea, and on the east by the Mona Passage, which separates it from the neighboring island of Puerto Rico. The country has three major mountain chains and boasts the highest mountain peak in the Caribbean with a height greater than 10,000 feet. The mountain chains carry many rivers. The longest river, Yaque del Norte, measures 183 miles.
The population of the Dominican Republic is over seven million. The capital, Santo Domingo, founded in 1494 as the first city in the New World, is the most populated with two million residents. Santiago, about 90 miles northwest of Santo Domingo, is the second largest city in the island with a population of 350,000. The official language is Spanish, but due to its close proximity with the U.S.A. and the increasing economic ties between the two countries, the use of the English language is becoming more prevalent.
The Dominican Republic is on Eastern time. The country does not change its time during daylight savings and thus, during the winter months, the time is one hour ahead of those parts of the U.S.A. on the same time zone.
II. INVESTMENT PRINCIPLES AND GENERAL CONSIDERATIONS
A. Political System
Under the amended Constitution of 1966, the Dominican Republic has a representative democracy with national powers divided between independent executive, legislative, and judicial branches. The executive branch is headed by a President. He is elected every four years on a single ballot with the Vice President, congressmen and city Mayors. The President appoints the cabinet, is Chief of Public Administration and Commander of the Armed Forces. The legislative power is vested in a bicameral Congress similar in form to the U.S. Congress. The members of the Supreme Court of Justice are elected every four years by the Senate. The nine member court has sole jurisdiction over actions against the President and members of Congress.
The country is divided into 26 provincial jurisdictions each headed by a Governor. The Governors are appointed by the President. They oversee matters of their respective provinces but have little discretionary power for the utilization of income generated from the provinces due to the highly centralized system of government in the Dominican Republic. City Councils and Mayors of municipalities experience the same lack of decision making.
B. Legal System
The law of the Dominican Republic is based on the Napoleonic Code, first introduced to the island during French rule and later again under Haitian rule. The code was formally adopted in 1844 after the Dominican Republic gained its independence from colonial domination. The code, written after the French Revolution under the supervision of Napoleon, reflects many of the philosophies of the French Revolutionists: equality to all freedom of commerce, and a strict penal system. Although, since the adoption of the Napoleonic Code, the government has revised the laws, many critics argue the laws do not always keep up with the changing social environment and should be revised on a more periodic basis.
C. Economic System
As of the last several years, the Dominican economy has undergone numerous and substantial changes. From a predominantly agricultural economy, based on traditional plantation crops such as sugar cane and coffee, the economy has diversified to include a successful tourist industry and industrial and export processing zones. The tourism sector has experienced a growth of 445% income increase from 1979 to 1989. The services sector, made up principally of tourism and commerce, has expanded from 42.9% of GDP in 1970 to 45% in 1989. Manufacturing in the free zones is contributing an increasingly greater share of national output, exports, and employment. Agribusiness does remain a significant source of Dominican production and employment at 8.72% of overall domestic output in 1989.
D. Financial System
The financial system consists of many specialized banks catering to agricultural, industrial, and commercial banking needs. Unfortunately, this system of specialization coupled by the multiplicity of financing laws does not facilitate banking and financing to all sectors. Proposals by the World Bank to unify the specialized banks into multibanks should alleviate the disjointed system. Additionally, financial laws and the structure of regulating agencies should be reviewed. Inconsistency between laws as well as weak supervision of their inforcement has meant a financial system incapable of keeping up with the needs of the rapidly changing economic system. This is evident in the numerous exchange rates. The official exchange rate for June 1990 was DR $7.30. The black market rate was DR $11. By the end of July 1990, Banco de Reservas, both a commercial bank with private-sector clients and the official bank of the government, began changing dollars at DR $8.50 creating another exchange rate. On August 6, 1990, the peso was further officially devalued to DR $10.50 to the dollar.
E. Court System
The court system of the Dominican Republic divests great authoritative power in its judges. It is through the Judge that a lawyer can question a witness. There is no jury in Dominican courts. It is the judge who gives the final decision. All decisions of the lower courts, Juzgado de Primera Instancia, may be appealed to the next highest level court, Court de Appellation. Normally, the appellate court must hear all cases brought before them. The appellate court reviews the whole case, hearing facts and interrogating witnesses to redecide the case. At the Supreme Court level, "Supreme Court de la Justicia", the laws of a case rather than its facts are reviewed. This higher process of review is similar to that used in the appellate and supreme courts of the U.S. There are Peace Courts handling very specialized cases, 30 Juzgados de Primera Instancia, 9 Courts de Appellation, and one "Supreme Courte de La Justicia." To present a case before a judge, one must not only be a lawyer but be a member of the Dominican Republic Bar of Lawyers Association.
F. Culture
Dominican society is a hybrid of many different cultures and races. The major influences and peoples come from Spanish, French, British, African, Haltian, and North American cultures. Although the island was populated by native Indians at the time of Christopher Columbus' discovery, the Indians soon became extinct, dying off from white mans diseases or committing suicide to escape the imposition of foreign rule. Spanish rule has left many traces on the customs of Dominican society, including the Spanish language, the greeting kiss, and siesta time. Siesta time is partaken of less and less but is still seen as a way of coping with the hot climate of the Dominican Republic.
As of the late 1970s and early 1980s, the Dominican society has adopted many cultural norms of the United States. The increasing development of economic ties with the U.S., the close proximity to the U.S., a two-hour flight distance from Miami, and cable television stations coming from the U.S. have prompted the expansion of the American culture into the Dominican way of life. Further, many Dominicans are going to the United States to work and live and an increasing number are going to North America to educate themselves before returning back to their country. This American influence can be heard in the music, the Spanish language (a sort of Spanglais is spoken), tasted in the food, and celebrated in the holidays including the newly adopted Thanksgiving Dinner.
III. INVESTMENT FRAMEWORK
Over the past decade, free zones have enjoyed the greatest foreign investment. In the past two years alone, the number of firms operating in the free zones has increased from 160 to 267. Employment in the free zones has similarly experienced a great increase, from about 43,000 workers employed two years ago to now about 105,000. To further encourage this area of growth, the Government passed in January 1990, law 8-90, Encouraging the Establishment of New Free Zones and the Growth or Existing Ones. This law bestows a multitude of incentives to encourage investment and facilitate the setting up of enterprises in free zones. Many of these incentives cover the areas of exchange controls, customs procedures, and grant exemptions from taxes and duties.
Outside the free zone area, law 69, Export Promotion Law, provides incentives to investors of nontraditional goods. This law grants the suspension of import duties and taxes on imported goods that will be re-exported within a period of not more than twelve months, after having been transformed or repaired (Article 2). The law also allows for tax certificates (CATS) to help pay any debt or obligation for up to 25% of the price of the product exported (Article 3).
Other areas the Government grants incentives to are both the tourism and agribusiness sectors. Law 153, Tourism Incentives Law, and Law 409, Agribusiness Promotion Law, grants exemption of numerous taxes and duties on activities or products applicable under the respective laws. The Agribusiness Promotion Law also encourages public expenditure of infrastructure works in rural zones with a present or potential capacity of agriculture development (Chapter III, Article 7).
While the numerous incentives create an attractive environment for the investor, the government declared restrictions restraining foreign investment from certain areas. As pronounced by Law 861, Foreign Investment Law, foreign investments cannot be registered in pubic services such as water, sewage, electricity, mail, telecommunications, and telephones (Article 23). Investors cannot invest in projects involved in the exploitation of radioactive materials, mineral, and hydrocarbons (Article 23). Direct foreign investment cannot be used to acquire shares or property rights of national investors except under certain circumstances including the avoidance of imminent bankruptcy. Foreign persons or corporations interested in investing in real estate property of over 2,000 square meters must obtain, in most cases, special permission from the Presidency.
Investment in the areas of publicity, radio, broadcasting, television, newspapers, magazines, publishing and mass communications must be at least 70% nationally owned Article 23). Forest exploitation and the production of materials and equipment directly linked to national defense and security must also be at least 70% Dominican owned according to Article 23 of Law 861. Foreign firms and individuals must enter into a joint venture with a Dominican partner to participate in public works projects, such as roads and government construction projects. Foreign participation is limited to 50% unless there is insufficient local capital available. Both insurance companies and financial institutions doing business in the Dominican Republic must be at least 50% Dominican owned. Exceptions to Law 861 are covered under the grandfather clause having existed prior to the passage of the law. Further, net profits for each fiscal year, originating from registered foreign investment, may not remit greater than 25% of the value of the registered foreign investment.
Under Article 8, Number 12 of the Dominican Constitution, monopolies are specifically forbidden unless they are of state or state related institutions. At this time, there are no laws establishing state monopolies over a certain sector. Therefore, this is a dormant state power.
IV. SENSITIVE AREAS
Besides the government enforced restrictions discouraging foreign investment in the Dominican Republic, several other factors complicate investing. A major problem of concern is the increasing electrical power outages. Due to unplanned physical development, the generation of electricity has not kept up with new energy needs. As a consequence, the use of generators is a must for any business, whether in the free zones or in the major cities. To not invest in a generator would cause unwarranted delays and leave a factory full of workers unable to perform their work.
Another concern to investors is the peso exchange rate against the dollar. In 1988, the Central Bank set the exchange rate at DR $6.35 pesos per dollar and demanded all money exchange to be done by the Central Bank through commercial banks. Since then, the Central Bank has had to devalue the peso further to DR S7.30. The demand for hard currency has created a parallel market with a dollar to peso rate of 11 as of July 31, 1990. The government's policy toward this black market has not always been consistent. Recently, the Central Bank decided a settlement with hotels and exporters to enforce them to exchange half their currency at the official rate and the other half they could continue changing on the black market. This action unofficially devalued the peso to DR $9.15, a composite average of the black market and official rate. In August, the peso is expected to be officially devalued to DR $10.50. The exchange rate situation causes difficulties in accessing foreign exchange for corporate remittances from the Dominican Republic and in recording these transactions.
V. DIRECT SALES
As a member of GATT, the Dominican Republic follows trade practices that promote the free flow of goods and services to and from the country. However, within the rules of GATT, the Dominican Republic, being a less developed country with balance of payment and external debt problems, has had to develop more protectionist-oriented trade policies. The include a preferential international system and a quota and tariff system protectionist system for national production.
Besides its membership with GATT, the Dominican Republic has bilateral treaties with many Caribbean and Latin American coutries. The Dominican Republic receives imports from all over the world, but 43% of all its imports come from the U.S. The most common imports include gas, petroleum, wheat, soybean, sheep or goat fat. Further, many raw materials are imported to be later assembled and re-exported. Some of these products include woven and textile fabrics, footwear uppers, medical equipment and supplies, and small appliances.
Restrictions have been placed on the importation of luxury items as well as conusmer goods including some food products, electrical appliances, apparel, and footwear. Quotas exist on the importation of automobiles. Although many of these restrictions were to be invalidated May 1990, the laws are still in effect. Import restrictions in the free zones include firearms and ammunition, counterfeit money, contaminated waste, and foods to be consumed by persons working in the free zones.
An additional point of importance is the requirement of importers to obtain all dollars through the Central Bank. The authorization to do so must be presented to customs officials when the goods arrive. Otherwise, the imported merchandise cannot leave customs.
The tariff schedule is very complicated with import taxes levied on the value of goods ranging from 50% to more than 100%. It is very difficult to predetermine precise costs of imports due to the many different formulas and the independent decision making given to the customs officers. On the other hand, the tariff system for free zone goods is clearly set forth in law 8-90. The free zones are under the supervision of a separate customs department, a subdivision of the main Customs Department.
Law 8-90 entitles free zone operators and enterprises 100% exemptions from the payment of most import duties and related taxes including those of raw materials, equipment, construction materials, parts of buildings, office equipment, etc. destined for construction, preparation or operation within the free zones (Article 24).
Customs procedures require shippers to the Dominican Republic to supply the importer with an original commercial invoice, an original bill of lading, plus a consular invoice in Spanish. This must be legalized by the nearest Dominican Consul either at the place of shipment or the port of export. It is advisable to ensure the importer receives all required documents prior to delivery of the shipment to avoid costly delays.
The Dominican Republic has not encountered many trade disputes with other countries. Trademark disputes prevent the most frequently occurring controversy. The most notable of these disputes centers around the unauthorized use of the AT&T logo by a local Dominican firm. Dumping disputes, common among other countries, is not considered a problem but is rather accepted within the practice of subsidizing.
VI. EXPORTS FROM THE DOMINICAN REPUBLIC
There is no strict policy on exportation but several laws influence this sector. The manufacturing of most exports takes place in the free zones. Law 8-90 addresses exporters in the free zones. This law provides numerous incentives including exemption from export taxes, import duties of raw materials, construction materials, etc. and payment of corporate income taxes. This law should further encourage domestic and foreign investment in an already highly active and dynamic sector.
Outside the free zones, Law 69 Export Incentives Law, provides incentives to exporters of nontraditional goods. Under the law, exporters are allowed to import raw materials and other imports duty-free and they are given tax certificates, CATs, that can be used to pay any debt or obligation for up to 25% of the price of the products exported. However, in the last several years, the Dominican Republic has issued only one CAT, and exporters are being held to pay import taxes the law exonerates them from. These circumstances are encouraging many exporters who could be benefiting from the law to push for reforms.
The Dominican Republic exports a variety of finished goods and semi-finished products. Exports from free zones include clothing, shoes, electronic components, medicines, and foods. Traditional goods consist of sugar, coffee, cocoa, and tobacco. The export of sugar to the U.S. is limited by U.S. sugar quotas. Even so, sugar quotas imposed on the Dominican Republic are the least constrictive of all those imposed on sugar exporters to the U.S. Minerals for export include ferronic, gold, tin, silver, and copper.
Dominican exporters enjoy a preferential status for many of their goods under: Generalized System of Preference (GSP), Caribbean Basin Initiative (CBI), Section 936 of the U.S. Internal Revenue Code, Items 806.30.001 and 807.00.001 of the Tariff Schedule of the U.S., and Lome IV.
The GSP gives the Dominican Republic duty-free access to U.S. markets for manufactured and semi-manufactured products. There are about 3,000 goods which can be exported from the D.R. to the U.S. under this program, as long as these goods have increased in value by 35% due to processing in the D.R. and are imported directly into the U.S.
The GSP has been substituted in practice by CBI which applies similar criteria but allows a greater variety of goods to enter the American market free of U.S. taxes and duties. The list of non-eligible products includes: textiles and apparel, canned tuna, certain watches and watch parts, petroleum or petroleum by-products as well as some leather items such as luggage, handbags, footwear and work gloves.
Jointly with CBI, Section 936 of the U.S. Internal Revenue Code provides special credit for certain American corporations operating in Puerto Rico plus tax exemptions of up to 90%, according to the Puerto Rican Tax Incentives Act; said incentives can be maintained when companies operating in Puerto Rico set up twin or complementary plants in the D.R. It also provides special funds, called 936 funds, made up of profits from U.S. corporations' subsidiaries that are deposited in Puerto Rican banks, which can be lent at reduced interest rates to projects in CBI countries if the Exchange Tax Information Agreement has been signed. There are over 30 twin plants installed in the D.R. even though there are not that many projects which have benefited from 936 Funds.
Another preferential program is U.S. Tariff Schedule: Items 806.30.001 and 807.00.001. These provisions grant reduced-duty entry for products made in the U.S. and sent overseas for further processing and later imported back into the U.S. paying import duties only on the amount of value added in the process outside the U.S., the D.R. in this case. Tariff Item 806. 30. 001 applies to metal manufacturers. Operations qualifying under 807.00.001 include the assembly of electrical components and of cut parts of apparel. Despite the quantitative restrictions to textile established in the Multifiber Agreement, the D.R. is now the leading exporter of textile to the U.S. from the Western Hemisphere, with Item 807.00.001 accounting for 40% of all Dominican made garments exported to the U.S.
The last preferential mechanism is Lome IV which allows (i) a variety of Dominican exports to enter European Economic Community (EEC) Countries free of import taxes and duties in most cases and paying small tariff in others, and (ii) Dominican projects access to funds for financing and donations.
For the future, there is hope that Lome will have a positive impact in the Dominican economy and that the D.R. will enter the Caribbean Common Market as well as the Hemispheric Common Market for America, proposed by U.S. President George Bush.
VII. REPRESENTATIVES, DISTRIBUTORS, FRANCHISERS
The use of agents in interactions with the Dominican Republic is very clearly stated in Law 173, Concerning the protection to Agents, Importers of Merchandise and/or Products. This law requires foreign firms wishing to sell in the Dominican market to appoint a local agent and/or distributor. It specifically prohibits all non-Dominicans, except those who have resided in the country for at least four years, from carrying outr promoting, or developing the importation, sale or lease of any foreign product.
Law 173 comes into effect as long as an agent and/or distributor has registered with the Foreign Exchange Department of the Central Bank, the foreign firms or enterprises on behalf of which they are acting. Once under this law, agents and/or distributors are protected from both indiscriminate or discriminate contract cancellations. No licenser nor someone acting on his behalf can denounce or disolve commercial relations or refuse to renew the contract unless there is just cause (Article 2,6). The provisions of Law 173 cannot be abolished or modified by private agreement (Article 10).
VIII. INTELLECTUAL PROPERTY - LICENSING
Intellectual property until 1986 was regulated by Law 1381 of 1947. Now this matter is regulated by Law of Author Rights No. 32-86.
To protect their rights, authors can register their work at the Intellectual Property Department of the Secretariat of State for Education as well as to register the name of the program at the Trademark Department of the Secretariat of State for Industry and Commerce.
The Law of Author Rights protects all scientific, artistic or literary production created, published, edited or represented in the Dominican territory or by a Dominican author in another country.
Likewise, this law provides that copyright comprehend all production reproduced or published using any procedure known or to be invented. Moreover, it states that this right includes the publication, editing and public representation of the work, it does not matter in which way they are accomplished.
This protection essentially consists of guaranteeing the right to transfer, assign, publish, sell, translate, present on the radio, television or movies the registered work. Moreover, the registration prohibits the embargo of the protected work.
The procedure for receiving this protection is as follows:
(i) The applicant fills out a "Registro y Protección de la Propiedad Intelectual" form.
(ii) the applicant deposits with the Legal department of the secretariat of Education: a) the form just mentioned; b) three sets or written explanations of the software to be registered, and c) two stamps of DR $1.00 and DR $0.25, respectively. Moreover, when the applicant is a foreign company, it needs to enclose an attorney power with the company seal.
(iii) The Intellectual Property Department essues a certification.
The law establishes a period of one year for the registration. If this registration does not take place, the work will be public property after five years.
In case of violation, the Law of Author Rights provides as penalties a fine of DR $50.00 to DR $500.00 or prison of 1 to 6 months or both punishments at the same time, depending on the case.
The law governing trademarks is Law No. 1450 concerning Registration of Trademarks and Business and Industry Names of December 30, 1937 and Law No. 5569 of July 7, 1961, which reestablished the fees.
Article 7 of Law No. 1450 establishes that the registration of a trade or commerce mark or of the name of business or industrial establishment done in the manner presented by the aforementioned Law 1450 is declarative of proprietorship and guarantees the excessive use of the mark or name during a period of tie equal to the period requested, without detriment to the renewals for same or larger periods, to which this registration may be subject.
The registration of a name or mark will be considered null and without any value if within the term of one year from the date of that registration the owner of the mark or name registered had made no use thereof. The owner of a trademark has the right of assignment or to grant licenses to third parties for the use of the trademarks. Said assignments and licenses must be registered at the Trademark Department of the Secretariat of State for Industry and Commerce of the Dominican Republic. The trademarks and the commercial name must be published in the "Boletin" for the Industrial Property.
Article 8 of Law 1450 prohibits the registration of marks containing:
1) The coat of arms, medallions of public or official insignias, national or foreign letters, words, names or distinctive marks used by the State provided that its use has not been duly authorized prior to this law.
2) A name or firm name which the applicant cannot use legally.
3) The indication of a specific address or establishment different from the one of the article's origin.
4) Words, pictures or representations implying an offense to individuals or to public decency.
5) Words, pictures or representations referring to any person, without the expressed authorization from that person.
6) The reproduction or another already registered for an article of the same type.
7) The complete or partial imitation of a mark already registered for a product the same type, which may create error or confusion to the consumer.
The Dominican Republic is signatory of various International Treaties about protection of copyrights, trademarks, etc. Among the most important conventions are: Union Convention of Paris of March 20, 1883 for the protection of the Industrial Property revised; the Pan American Convention concerning Patents of Invention, Drawings and Industrial Designs of Buenos Aires dated August 10, 1910; the Pan American Convention for the protection of trade, commerce and agricultural marks of Santiago de Chile dated April 28, 1923; and the convention concerning the International Deposit of Drawings and Industrial Designs of the Hague dated November 6, 1925.
Morover, Law 861 of 1978 of Foreign investment in Article 29, Title about Transfer of Technology, provides that licensing contracts for the exploitation of a patent, use of trademarks, leasing of machinery and equipment, and for providing technical know-how, must be submitted for study and approval or refusal to the Directorate of Foreign Investment, which will take into consideration the effective contribution to the country of the technology that is to be transferred and the specific ways of quantifying the effect of the technological transfer.
IX. DIRECT INVESTMENT
The Dominican Republic offers several options or methods to inventors. The main types of investment methods are the following:
A. Purchase of Stock or Assets of an Existing Company
A foreign investor can purchase all or part of the stock and/or assets of a company already established in the Dominican Republic. Under the first scheme, the investor acquires the property of the company by means of the transfer of shares, while under the second scheme the investor must acquire the property of some or all assets which were properties of the said company.
B. Branch
In the case that the investment wants to be done through a branch of a foreign company so that the legal person exists abroad and in the Dominican Republic, with all the financing and legal consequences.
C. Subsidiary
Another option available to foreign investors is the creation of a subsidiary or formation of a Dominican company. This is definitively the preferred alternative in business practice.
D. Types of Companies Recognized by Dominican Law
General Partnership (Sociedad en Nombre Colectivo): where two or more people form an association to undertake certain business activities in which all partners are jointly and severally liable for the firm's debts. The name of a general partnership must include the personal or business name of at least one of the trading partners, with the addition of the expression "y Compañía" (and Company) in full or in abbreviated form, & Cia.
Limited Partnership (Sociedad en Comandita): in which two or more persons form an association to undertake any type of business and having two types of partners with different liabilities and different methods of contributing to the partnership:
(i) active partners who are jointly and severally liable (without limit) to third parties and to the partnership itself for partnership debts, and who contributes both capital and personal services to the firm; and
(ii) sleeping partners who contribute only capital and whose liability is limited to the amount of their capital contribution to the firm. The name of a limited partnership may only contain the name or names of active partners, with the addition of the expression "y Corapañía" in full or abbreviated form.
Special Partnership (Asociaciones en Participación): which is a partnership established by two or more persons to carry out one or more specific business ventures and in which one, some or all of the partners contribute their individual efforts to attain a common profit. This partnership is not organized as a firm and thus has no legal identity to its own. The partners are of two kinds: (i) the ostensible partner or managing partner who must be a merchant and assumes liability for the partnerships' relations with third parties. Special partnerships has no name, no principal place of business and no capital stock, although they do have a special partnership fund.
The Compañía por Acciones: the corporate form more used nowadays and which most resembles a joint stock company or corporation. According to the provisions of the Commerce Code, the property of a company is divided among its shareholders, who participate in the profits and losses in proportion to the number of shares they possess. If no fraud nor deceptive practice occurs, then there is no personal ability compromised by a shareholder. As a general rule, the liability is limited to the extent of his investment in the company. The company has a separate legal personality from its shareholders at all times. Under the Dominican usage, the business are denominated by the chosen name and the denomination C. X A., S.A. and C. por A.; these designations are related to the same legal and administrative requisites.
Shareholders can be of any nationality. However, as it was explained in Section III, there are prohibited and restricted areas for a foreign investment to be registered. There are also special laws which require a minimum local participation, such as Law No. 409 that establishes a minimum of 51% of capital to be owned by local shareholders.
After the company has been formed, foreign participation can be registered in order to be able (i) to transfer abroad profits each year up to 25% of the registered amount, and (ii) to repatriate 100% of the capital invested upon liquidation. If the investment is not registered, the company where the investment is can operate normally, but it will not be able to repatriate profits and capital. It is worth mentioning that the free zone enterprises do not have to register their foreign investment and are not limited in the amount of profits they transfer abroad.
With regard to investment, the State will not endorse or guarantee, directly or through official or semi-official institutions, external credit operations effected by foreign enterprises. Likewise, foreign enterprises cannot obtain internal credit for a period greater than one year without authorization of the Monetary Board.
X. PURCHASE BY A FOREIGN CORPORATION OF BUSINESS IN THE DOMINICAN REPUBLIC
As it was stated the in previous section, foreign corporations can acquire local companies by buying all or part of the shares as well as by buying all or part of the company's assets.
This kind of investment can be done in any economic area, always in compliance with special laws and Article 23 of Law No. 861 as it appears in Section III.
There are no antitrust laws limiting acquisitions by foreign corporations. Furthermore, there are no taxes of any kind imposed on the transfer of the assets or stock.
XI. BRANCHES
Another method to invest in the Dominican Republic is through the establishment of a branch. When a foreign company declares to establish a branch in the D.R., it is generally recommended that the branch obtain Authorized Domicile in order to enjoy the same rights accorded a locally incorporated company and to assure full compliance with all formalities for branch operations. There is no affirmative obligation requiring a branch to obtain such authorization, and a number of foreign companies operate branches without it. However, in such cases, Dominican tax regulations change, as it appears in Section XVI. Moreover, the branch cannot bring suit in any legal matter, civil or commercial, unless it posts a litigation bond or owns real property in the D.R. or sufficient value to cover the legal costs and damage awards which may result from the litigation.
Prior to the 1978 modification of Art. 16 of the Civil Code, a litigation bond was not required in commercial or real property matters; now it is required in all lawsuits brought by a foreign plaintiff regardless of the issue involved. The only two exceptions to this rule requiring a litigation bond of a foreign plaintiff are:
(i) where the foreign company has obtained authorized domicile ln which case it is not considered a transient, and
(ii) where the foreign company owns real property in the D.R. whose value is large enough to cover the legal costs and possible damage awards which may result from the litigation.
It should be noted that lack of domicile, on the other hand, does not prevent the company from being sued in Dominican courts as a defendant.
The procedure to obtain an authorized domicile begins with submitting a written petition in letter form with supporting documents to the President of the D.R. The petition is processed through the Secretariat of State for Interior and Police. As of this writing, no standard application form exists; however, the specific requirements are outlined in a memorandum which may be obtained from the Secretariat of State, entitled "Requirements for a Foreign Company to Establish Domicile in the Country."
After the application has been submitted in proper form, it may take from two to six months to be promulgated.
It should be noted that authorized domicile can be obtained after branch activities have commenced.
XII. INCORPORATION
For a Dominican company (compañía por Acciones) to be incorporated, the following procedures and requirements should be accomplished.
The "Estatutos" is the basic document in a Dominican company. Comparing them to a company incorporated in the United States, the "Estatutos" are roughly equivalent to the charter and bylaws. They can be signed by the founders of the company and, at the early stage, the "Estatutos" constitutes a contract among the future shareholders. Dominican law provides certain special restrictions and characteristics which we would like to discuss in more detail:
a) Minimum Number of Shareholders. The Commerce Code prescribes that a company cannot be formed without having at least seven shareholders. Also, if at any given moment, all shares from the company are owned by only one shareholder, the company is automatically dissolved. In many cases, attorneys or other law firm personnel may serve as nominee shareholders. There is no restriction whatsoever to the nationality of shareholders.
b) Paid-in Capital. A company must have at least 10% of the authorized capital paid before starting operations.
c) Capital of Company. The company capital may consist of sums of money in cash or contributions in kind. When contributions in kind are made, the shareholders shall meet twice. In the first meeting, an appraisal of the value of such assets will be made, and in the second, prior to a written report, the meeting is called to approve the evaluation. The shareholders investing in kind do not have right to vote. When approved by the second meeting, the investment in kind is formally accepted.
d) Legal Reserve. Prior dividends being paid at a minimum of 5% of the amount available for dividends must be set aside as a general reserve. If this rule is attenuated when the legal reserve is equal to 10% of the authorized capital, then no additional amount must be added to the reserve.
e) Types of Shares. The law allows Dominican companies to emit common and preferred shares. Under the Dominican concept, preferred shares are entitled to receive dividends in any event and/or have a preferred status at the time of dissolution. Also, preferred shares may have greater or lesser voting right compared to common shares.
f) Par Value. The minimum face value of a share in the Dominican Republic is DR $5.00. Commonly, companies emit shares with a face value of DR $100.00.
g) Certified Financial Reports. Income tax law provides that all companies with DR $50,000.00 of authorized capital or more are required to present at close of the fiscal year a certified financial statement by a certified public accountant to the Income Tax Department.
h) Commissioners (Comisarios). One or more commissioners have to be elected in each annual shareholders meeting. The commissioners supervise the conduct and management of the company. A semiannual profit and loss statement must be prepared by management for the "Comisario." Also, the financial statements must be accompanied by a report from the commissioners prior to the shareholders' vote to accept the management's financial report.
i) Board of Directors. One of the duties of the shareholder's meeting is to elect a board of directors that will be in charge of managing the day-to-day administration of the company. Normally, a President, Treasurer and a Secretary are elected for periods that may range from one to a maximum of six years. The duties of those officers are set in the Estatutos. These officers may be appointed from the shareholders or from non-shareholders.
After signing the statutes, it is advisable to obtain a certification from the trademark department from the State Secretariat of Industry and Commerce stating that the name is available for use. A sworn declaration by the founder(s) must be prepared in which it is stated he had received, with an inventory, all funds and/or assets being transferred to the company. A Notary Public shall prepare the sworn declaration. At the moment of the declaration, the Notary must receive a list of the shareholders and a copy of the Estatutos.
At this point in time, a formation tax must be paid at the Internal Revenue Department. This capitalization tax is paid in accordance to the amount of authorized capital. Taxes range from 1% for the authorized capital of companies with less than DR $10,000.00 to 1/32% for companies with authorized capital above DR $500,000.00. An additional charge of 12% is imposed pending the result of the above calculation. Since the company will be applying for a free zone license, the local subsidiary will be exempted.
Civil Registration Fees are payable upon registration of the Estatutos and accompanying documents. They are paid in the form of Internal Revenue Stamps on the following basis:
From DR $.00 to DR $2,000.00 DR $8.00
Plus each DR $1,000.00 or fraction of the
authorized capital above DR $2,000.00 DR $1.00
There is also a DR $1.75 cash fee for each copy of the documents being registered, as well as other smaller taxes like Notary Fees, Taxing Authority approval, and deposit of documents.
The incorporation of the company is finalized when the shareholders meet in their first meeting, named in Spanish "Asamblea General Constitutiva." This first meeting acknowledges the content of the "Estatutos" and appoints the members of the Board of Directors and the Comisario.
Following this meeting, other requirements are prescribed, such as the filing of copies of documents in two courts and publication in a local newspaper.
XIII. EXCHANGE CONTROLS
In mid-1988, a foreign exchange shortage, caused in large part by low prices for important commodity exports, prompted the government to impose exchange controls under the Foreign Exchange Return System. This system requires firms to register with the Central Bank of the Dominican Republic and to purchase all dollars through the commercial banks with authorization of the Central Bank. This includes any foreign currency arising from the exports of goods and services, unilateral transfers of funds in foreign currency, investments in or purchase of movable and immovable properties, etc. Goods will be delivered from customs only after a certificate is submitted, testifying that the imports were purchased with dollars through the commercial banks and the Central Bank. The central Bank administers all incoming and outgoing foreign currency transactions made by commercial banks.
Foreign exchange can only be converted for an amount enough to cover the enterprise's operations. Profits up to 25% of the value of the registered foreign investment can be repatriated each year (Law 861, Article 44). In case of sale of shares, participation of rights, or in the case of liquidation of enterprises in which investment was made, the total amount of registered capital can be repatriated. In addition, capital gains of 20% calculated at the rate of 2% per annum over a maximum period of 10 years can be repatriated (Law 861, Article 22).
For free zone enterprises, the only obligation regarding the exchange of foreign currency is the one regarding the amount or currency necessary to cover their local costs and services in general. Furthermore, they are free to remit abroad any percentage of their annual profits.
XIV. TAX
In the Dominican Republic, as in many other countries, there are several types of taxes. Specifically, there are income taxes, import taxes, value added taxes, business taxes and others.
A. Income Tax
In the Dominican Republic, corporate and personal income taxes are regulated by Law 5911 of 1962 as amended. This law imposes taxes based on the source of the income, combining flat rates and progressive rates.
With regard to personal income tax, the law establishes a combination of a flat rate, which varies according to the type or category of income, and a so-called complimentary tax, which is progressive. This tax applies to individuals, estates, and unincorporated businesses. Non-residents who receive Dominican in source income pay only the flat tax, but at a higher rate.
There are five categories of taxes and each one of them there is a flat rate applicable. In addition to these flat rates, the individual taxpayer is also subject to the complementary tax, which is progressive and from which exemptions can be deducted. The complementary tax is applied at a rate varying from 3% in the income bracket below DR $2,000.00 to a maximum of 70% in the bracket above DR $900,000.00.
Apart from the category tax and the complimentary tax imposed by the Income Tax Law, there is also an additional tax levied under Law No. 48 at a flat rate of 1% of taxable income and a surcharge of 3% of the amount of the income tax itself under Law No. 190.
Laws No. 5911, 48 and 190 also regulate corporate income tax.
In case of a Dominican incorporated company, these laws establish the company's and shareholder's taxes. The taxes imposed on the company include: (1) a progressive tax which begins at a rate of 10% on the net taxable income of DR $5,000.00 or less and reaches a high of 46% on the excess over DR $250,000.00; (2) a flat rate of 2% on the net taxable income; and (3) a 3% surcharge on the total amount of the income tax itself. With regard to the taxes imposed on the shareholders, these include: for individuals with residency in the D.R., 12% of the dividends plus 1% of the net income is the amount exceeds DR $6,000.00 plus the 3% on the income tax itself; (2) for individuals without residency in the D.R., 20% of the dividends plus 1% of the net income if it exceeds DR $6,000.00 and 3% of the amount to be paid as income tax; (3) for legal entities which are shareholders of the company and do not have domicile in the D.R., 35% of the dividend plus 2% of the income plus 3% surcharge on the amount of the income tax; and (4) for legal entities which are shareholders of the company and have domicile in the D.R., 12% of the dividend plus 1% of the income plus the 3% surcharge on the income tax.
In the case of a foreign company, Laws No. 5911, 48 and 190 distinguish between companies with domicile in the D.R. and those without domicile in the D.R. For a foreign company with domicile in the country, our regulations establish the progressive corporate income tax ranging from 10% to 46% on net taxable income, the flat 2% on the net taxable income and the 3% surcharge on the amount of the income tax itself. However, if the company does not have domicile in the D.R., it will pay a 35% of the income and the 3% surcharge on the amount of the income tax.
B. Import Taxes and Duties
The tariff system of the Dominican Republic is based on several laws which function in an accumulative way. The main laws establishing import taxes and duties include: (i) Law No. 170 of Customs Tariff which charge a percentage of the ad-valorem of the imported good, varying with the type of goods; (ii) Law No. 173 of Unified Taxes which also impose a variable percentage of the ad-valorem of the product; (iii) Law 361 that creates a 20% of the product's ad-valorem at an import tax; (iv) Law No. 136 establishes a 4% on the three previous taxes and duties; (v) Law No. 74 imposing 6% of the sum of the C and F value of the product plus the total amount paid for the four previous laws. Besides these taxes and duties, an exchange tax of the 20% of the product ad-valorem must be paid. All these general import taxes and duties make our tariff system complicated and difficult to predetermine taxes before importing a product.
C. Value Added Taxes
This tax ... manufacturers, distributors, and retailers lvey 6% of the sales price on the taxable goods, but deduct the amount on the tax paid by his predeccesor in the distribution chain. As mentioned above, imported goods are also subject to the ITBT and, in that case, the tax is levied by the Customs Department.
D. Business Tax
This tax, called patent, is based on a flat amount or appraised basis of business inventory and varies depending on the type of business. It is payable semi-annually.
E. Other Taxes
There are several other taxes which include activities such as formation of a company, construction, airline tickets, casino gambling, insurance premiums, gifts and inheritances.
XV. LABOR
The Dominican Republic has a sizable and competitively priced work force. Workers are characterized as diligent and highly trainable. Only 12% of the labor force is unionized. The three main union confederations are: the Autonomous Confederation of Christian Trade Unions (CASC), the Confederation of Dominican Workers (CDT), and the General Confederation of Workers (CGT). The combined membership of these three confederations is greater than 253,000.
Labor unions may be formed with a minimum of 20 workers. The Government Labor Department will recognize a union upon notification of the union's bylaws and membership lists. Some unions are under collective bargaining agreements. These agreements bring together 2 or more unions with one or more corporations or employer associations to form a collective pact. Pacts must register through the government Labor Department for a period of no greater than three years. Pacts establish salaries, working conditions, and fringe benefits. If a company is under a pact, all employees, whether members of the unions involved or not, receive the same conditions.
The policies of using foreign employees is liberal, and permits can be obtained with relative ease. The percentage of foreign employees that can work in a company or industry is limited to not more than 30%. Seventy percent (70%) of employees must be Dominican under Labor Code 2920 of 1951, as amended. Additionally, during periods of layoffs, foreigners are the first to be laid off.
Accepted general terms and conditions governing labor apply inside and out of the free zones (Article 41, Law 8-90). Wages are set at DR $650 per month applying to firms in and out of the free zones. At the exchange rate of DR $7.30 to the U.S. $l.00, this equaled an hourly wage rate of U.S. $0.46 without fringe benefits. A normal work week is 44 hours. This time is divided between 8-hour days Monday through Friday and 4 hours of work Saturdays. Overtime payment varies according to the amount of overtime and the period in which worked. If taken Monday through Friday, with a time not averaging over 68 hours per week, overtime is set at a rate of 30% of the base salary. Overtime taken Sundays or for work of over 68 hours per week amounts to 100% of base salary.
Benefits for workers include social security, a Christmas bonus, vacations totaling 34.9% or 45% of a worker's salary, and an automatic vacation of two weeks per year for employees having completed one year of employment. All employees earning less than DR $797.33 per month are eligible for social security. Social security tax is paid 7% by employers and 2.5% by employees. Regardless of a workers salary, form 1-2 Mod. must be filled out and delivered to the Dominican Institute of Social Security.
Dominican labor laws recognize written and oral contracts, but termination of contracts must be given in writing. This written notification must be given six days in advance for employment having a duration of three to six months; twelve days in advance for six to twelve months of work; and twenty four days in advance for twelve months or greater of work. If notification is not given, an employer must pay the equivalent daily salary of the number of applicable advanced notification days.
XVI. DISSOLUTION
A. Causes for a Company's Dissolution
- Civil Code
- Commercial Code
- Partners' Agreement
- Bankruptcy
- Merge
- Court's Resolutions
B. Procedure
- Publication
- Liquidation
- Partition
XVII. INTERNATIONAL RELATIONSHIPS
A. Existing Relationships with Nations
B. Memberships in International Organizations
C. International Agreements
1. Multilateral Agreements
2. Bilateral Agreements (U.S. and other countries)
D. International Disputes
XVIII. DISPUTE RESOLUTION
A. Common Law Arbitration (conditions and procedures)
B. Commercial Law Arbitration (conditions and procedures)
APPENDIX
GOVERNMENT OF THE DOMINICAN REPUBLIC
Secretariat of State for Agriculture
Centro de los Heroes
Santo Domingo
Tel. 532-3221
Secretariat of State for Sports - Physical Education and Recreation
Estadio Quisqueya
Santo Domingo
Tel. 566-0991
Secretariat of State for Liberal Arts
Ave. Máximo Gómez # 10
Santo Domingo
Tel. 688-1512
Secretariat of State of Finance
Ave. México
Santo Domingo
Tel. 687-5131
Secretariat of State of the Armed Forces
Pedro Henriquez Ureña
Santo Domingo
Tel. 682-7473
Secretariat of State for Public Works and Communications
Ave. San Cristobal
Santo Domingo
Tel. 567-8251
Secretariat of State for Inudstry and Commerce
Ave. México
Santo Domingo
Tel. 685-5171
Secretariat of State of Interior and Police
Centro de los Heroes
Santo Domingo
Tel. 682-4654
Secretariat of State for Public Health and Social Assistance
La fe
Santo Domingo
Tel. 541-3121
Secretariat of State for Labor
Centro de los Heroes
Santo Domingo
Tel. 533-4222
Secretariat of State for Tourism
Ave. George Washington
Santo Domingo
Tel. 682-8181
Thecnic Secretariat of the Presidency
Ave. México
Santo Domingo
Tel. 689-9008
Administrative Secretariat of the Presidency
Palacio Nacional
Dr. Delgado
Santo Domingo
Tel. 682-0968
BANKS OF THE DOMINICN REPUBLIC
Banco de Reservas de la República Dominicana
Isabel La Católica
Santo Domingo
Tel. 688-2241
Banco del Comercio Dominicano (Bancomercio)
Ave. 27 de Febrero
Santo Domingo
Tel. 567-8871
Banco Popular Dominicano
Isabel La Católica 252
Santo Domingo
Tel. 682-9131
Banco Universal
Ave. 27 de Febrero esq. Tiradentes
Santo Domingo
Tel. 566-8191
Chase Manhatan Bank
Ave. John F. Kennedy
Santo Domingo
Tel. 565-4441
Banco Antillano
Ave. Abraham Lincoln
Santo Domingo
Tel. 541-3511
Banco Panamericano
Ave. Abraham Lincoln
Santo Domingo
Tel. 542-7661
Banco Regional Dominicano
Ave. San Martín 200
Santo Domingo
Tel. 567-5265
Banco Regional del Crédito (Bancredito)
Lope de Vega 95
Santo Domingo
Tel. 542-7566
Scotiabank
Lope de Vega
Santo Domingo
Tel. 566-5671
Banco Metropolitano
Lope de Vega esq. Gustavo Mejía Ricart
Santo Domingo
Tel: 562-2662
Banco Gerencial & Fíduciario
Ave. 27 de Febrero 50
Santo Domingo
Tel. 541-9600
Banco Dominicano del Progreso
Ave. John F. Kennedy 3
Santo Domingo
Tel. 566-7171
Banco Commercial B.H.D.
Winston Churchill
Santo Domingo
Tel. 562-7373
Banco del Caribe Dominicano S.A.
Gustavo Mejía Ricart
Santo Domingo
Tel. 562-2662
Banco Intercontinental
Abraham Lincoln
Santo Domingo
Tel. 535-5500
Banco Mercantil S.A.
Ave. Bolivar 308
Santo Domingo
Tel: 685-7151
Banco del Exterior Dominicano
Ave. Abraham Lincoln 756
Santo Domingo
Tel. 565-5545
TRADE OFFICES
I.P.C. Dominican Republic Investment Promotion Counsil
Ave. Abraham Lincoln, Edif. Alico, 2do. piso
Santo Domingo
Tel. 532-3281/Fax (809) 533-7029
P.O. Box 21291
Embassy of the United States
Commercial Attaché
C.N. Penson
Santo Domingo
Tel. 541-2171
American Chamber of Commerce of the Dominican Republic
Hotel Santo Domingo
Ave. Abraham Lincoln and Independencia
Santo Domingo
Tel. 533-7292
Dominican-Japanese Chamber of Commerce
El Conde No. 201
Santo Domingo
Tel. 687-8373
Asiex (Dominican Association of Foreign Investment Companies, Inc)
Ave. J.F. Kennedy No. 12
Edif. Barlotta, Suite 302
Santo Domingo
Tel. 535-6165
Cedopex (Council Dominican for the Promotion of Exports)
Ave. 27 de Febrero esq. Ave. Luperón
Santo Domingo
Tel. 566-9131
JACC (Joint Agricultural Consultative Committee)
Alberto Larancuent
Ensanche Naco
Santo Domingo
Tel. 541-6644
Dominican Chamber of Commerce
Arz. Nouel No. 206
Santo Domingo
Tel. 682-2688
Lex Mundi - Legal Guide Series
Copyright 1997 Inter-Am Database
