The Notice confirms that 10% withholding tax applies to dividend distributions made by entities operating under the Free Trade Zone (FTZ) regime on or after October 5, 2016. Failure to withhold the tax on dividend distributions could result in interest and penalties.

The Dominican Republic Tax Authorities (DTA) published a Notice on the applicability of withholding tax (WHT) to dividends distributed on or after October 5, 2016, by entities operating under the FTZ regime.

In 2012, Law 253-12 modified Section 308 of the Dominican Tax Code (DTC) so that a 10% WHT applied to dividend distributions (and profit remittances)¹ made to shareholders by entities operating under the FTZ regime. However, the WHT only applied if the DTA could verify that another State signatory of the DR-Central America Free Trade Agreement (DR-CAFTA)² applied a WHT of similar nature to entities under an equivalent regime.

After more than three years of uncertainty, the Notice confirms that El Salvador and Honduras have enacted a similar tax on dividends paid by entities operating under an equivalent regime. Consequently, the 10% withholding tax will apply to dividends distributed by entitiesoperating under the FTZ regime on or after October 5, 2016. The tax must be remitted by the withholding agent (i.e., FTZ entity) to the DTA through Form IR-17, no later than the 10th day of the month following the distribution.

Withholding obligations are a taxpayer's responsibility and give rise to joint and several liability in the Dominican Republic. Failure to comply with this obligation may result in surtaxes, interest and penalties³ ranging from 5 to 30 minimum salaries (USD 1,071 to 6,427).

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ENDNOTES

¹ According to Section 308(II) of the DTC, the WHT on dividends is equally applicable to profit remittances made by a permanent establishment to other parts of the enterprise.

² i.e., United States of America, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.

³ Surcharges are calculated as (1) 10% of the total tax liability on the first month and (2) additional 4% over the total tax liability for the following months. Interest is calculated monthly, by applying a 1.10% rate over the total tax liability.