DOMINICAN REPUBLIC Law and Practice Contributed by: Luis Miguel Pereyra, Pereyra & Asociados
• books and libraries; • sectors involved in the textile chain; • renewable energies and special regimes; • pensioners and rentiers receiving from foreign sources • competitiveness and industrial innovation; and • promotion of tourism development and foreign investment. 2.4 Loss Relief Net operating losses may be carried forward for five years, but only up to 20% of the annual total net loss - es carried forward may be deducted. For the fourth year, the 20% deduction may not exceed an amount equal to 80% of taxable income; and for the fifth year, the 20% deduction may not exceed 70% of taxable income. For newly formed entities, losses from the first year of operations should be fully deducted in the second year. The carryback of losses is not permitted. Thin capitalisation rules limit the deduction of inter - est. The deductible amount may not be higher than the result of multiplying the total amount of interest accrued in the fiscal period by three times the annu - al average balance of equity divided by the annual average balance of all the taxpayer’s interest-bearing debt. After applying the annual permitted interest deduction, excess interest may be carried forward for deduction in the following three fiscal years (sub - ject to the same limitation). Interest paid to resident individuals and entities is not subject to the interest deduction limitation. 2.6 Consolidated Tax Grouping In accordance with the Dominican Tax Code, when the transfer of interest/shares is part of a reorganisation of entities in the same economic group, the income that may arise because of the reorganisation will not be taxed. There are also rules on the transfer of tax attributes from one entity to another in the context of a merger or spin-off approved by the tax authorities. Also, the Dominican Tax regulations recognise the existence of economic groups when a person or com - pany, or a group of people, regardless of whether they are domiciled in the Dominican Republic, carry out Other rules may also apply. 2.5 Deduction of Interest
their activity through companies whose operations are related and are controlled or financed by them. In this cases, the tax administration may attribute, allocate or assign gross income, deductions or credits among such organisations or companies if it determines that this is necessary to prevent tax evasion, or to clearly reflect the income of any of the organisations or com - panies. 2.7 Capital Gains Capital gains derived from the sale of assets, immov - able property or shares are included in gross income and are subject to the standard corporate income tax rate of 27%. The capital gain is calculated by deduct - ing the acquisition cost (adjusted for inflation) from the sales price and adding the accumulated earnings/ losses (other adjustments also may apply, depending on the case). Capital gains might be offset against any capital loss during the same fiscal period. Furthermore, if capi - tal losses exceed capital gains from a given period, those losses can typically be carried over to offset future capital gains. Note that capital losses can only be offset against capital gains, not against ordinary operational income. 2.8 Other Taxes on Transactions Other taxes that might be applicable are as follows. • Capital duty: Levied on the formation of a corpora - tion, or on a capital increase, at a rate of 1% of the capital amount. • Payroll tax: In addition to the normal income tax withheld from the salary of an employee, the employer must pay a monthly tax equal to 1% of the regular payroll to finance the National Institute of Technical and Professional Training ( Instituto Nacional de Formación Técnico Profesional – INFOTEP), a special training fund. The fringe ben - efits tax is levied at the corporate income tax rate and is payable by the employer on a monthly basis. • Real property tax: For corporations, this is basically an assets tax, payable under certain conditions. • Social security: Both the employer and the employ - ee must contribute to the social security system. Contributions are calculated based on the employ - ee’s earnings – ie, the basic salary increased by
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