Agreement signed with the Dominican Republic in the city of Madrid on november 16, 2011
For a long time, international agreements have configured the fiscal policies of many countries, having become one of the main sources of Tax Law. Double Tax Treaties or Agreements (known as DTAs) belong inside this spectrum of international tax regulations. These agreements, often signed bilaterally between two countries, were born as an answer to globalization and the economic interdependence experienced in the 20th century. DTAs are used to avoid the harmful effects of the double international taxation phenomenon, which takes place when the same income is paid for twice during the same fiscal period, by the same contributor. This has a negative impact on international trade, as it increases the price tag on foreign investment.
The agreement to safeguard against double taxation between Spain and the Dominican Republic and prevent evasion on income tax was signed in Madrid, Spain on November 16, 2011. Its main goal was to strengthen mutual investment. Enforcing this agreement provides greater legal and fiscal security for people in both countries, and promotes the suppression of cases of double taxation and the reduction of certain taxes. This is barely the second agreement of its type that the Dominican Republic has signed —the first was signed with Canada on 1977.
Both the agreement to avoid double taxation with Spain and its protocol have been enforced since July 25, 2014, after the Dominican Constitutional Court, via Ruling TC/0014/12, declared the Treaty between the Kingdom of Spain and the Dominican Republic and its Protocol in agreement with the Constitution, affirming that it does not infringe the principle of legality in matters of taxation, nor does it aggravate the contributor’s current situation.
The provisions of the agreement to avoid double taxation with Spain will have an impact on taxes withheld at the source, based on the amounts paid or amounts due. These provisions will be applied to the residents of either or both countries involved regarding their respective demand of income tax, their levy systems notwithstanding.
According to Article 2 of the agreement, these taxes include:
- In Spain, Income Tax for Individuals, Corporate Tax, Income Tax for Non Residents and Local Income Taxes;
- In the Dominican Republic, the provisions only affect Income Tax.
Scope of the Agreement to Avoid Double Taxation with Spain:
It should be noted that the scope of the agreement includes high-sensitivity tax issues, such as residence for tax purposes, permanent residence, impositions to income and its types, business societies, taxes on dividends, interests, royalties and the provision of various services, as well as capital gains, among others.
In that sense, the agreement provides that the tax rate cannot exceed 10 percent of the gross amount of royalties when subjected to taxation in one of the contracting countries and the beneficiary thereof is a resident of another country. The same criteria will be used on the taxation for the provision of services —such as technical assistance, consulting, counseling and presentations, among others—, except in those cases where business agreements relate to the sale of goods. This same 10-percent reasoning will be used on any interest received by a resident of a contracting country in the other nation.
Likewise, the agreement to avoid double taxation in Spain indicates that, in the case of artists, musicians, actors and athletes, the tax rate will be exempted in the contracting nation where the activity takes place, provided that these activities have been financed wholly or partly by public funding from either country, and are being held as part of a cultural cooperation agreement.
In a similar manner, although the applicable rate to dividend payments remains at 10 percent, if the recipient of these dividends becomes directly involved with at least 75 percent of the capital of the company paying the dividends, then retention will be bypassed in the source country.
Furthermore, the agreement will also apply on any identical or similar taxes imposed after its signature, added to either current taxes or those that replace them. Therefore, the competent authorities in the contracting countries shall notify each other of any changes made in their respective taxation laws.
And lastly, the agreement to avoid double taxation with Spain also contains the terms on which the exchange of information between countries should be held, noting that «…each contracting country guarantees its ability to obtain and provide, upon request, information held by banks, other financial intermediaries and any person acting in an agency or in fiduciary capacity, including nominees and trustees».
The implementation of this agreement greatly benefits Spanish investment in the Dominican Republic, since it gives investors a wide range of possibilities upon closing fiscal periods; also, and more importantly, it provides both countries with legal security on their investments on taxation matters, which undeniably results in better investment terms in both countries for their respective residents.
That said, we can conclude that the aim of industrialized countries when signing an agreement of this nature is to eliminate any barriers that arise during the reciprocal movement of capital, goods and profits, thereby maintaining a neutral tax policy, with no interference in the matter of investments. The negative impact of the international double legal taxation phenomenon explains the attention placed on its correction, so as to promote the development of international economic relations. That is why it has become increasingly necessary to subscribe this sort of agreement, one of the cornerstones of economy and investment in the Dominican Republic.