Dominican Republic: Tourist Zones In The Dominican Republic: An Investment Opportunity

Last Updated: 24 July 2002
Article by Luis R. Pellerano

Originally published on 17 June, 2002

Located in the heart of the Caribbean, the Dominican Republic is well known on a worldwide basis as a major tourist destination. Now, following the enactment of a new law last Fall intended to promote and develop tourist zones within the country, the Dominican Republic is moving to further expand the growth of its tourist industry, especially in regions with great potential and locales attractive to tourists.

The Law

The objective of the new law is to focus investments in Tourist Zones, which are areas the country considers to be a priority for tourist development. The law specifically refers to eight particular zones, including zones in Jarabacoa and Constanza and in the province of Santiago and its vicinity.

The regional scope of the law includes areas from all parts of the Dominican Republic that have natural attractions such as white sandy beaches, desert zones with impressive dunes and sea winds for aquatic sports, fertile valleys and mountains and parks that are wonderful for ecological tourism and mountaineering. In addition to these natural resources, the areas have appropriate infrastructure including highways, privately-owned and managed airports, and seaports that have been recently constructed or that are under construction, so that easy air, land and sea access to the Tourist Zones is assured.

Tourism Incentives

Under the new law, persons or entities domiciled in the Dominican Republic that promote or invest capital in a "new project" in any of the specific tourism-related activities within the regional scope established by the law are eligible to benefit from the incentives it provides. The law defines "new project" to include specific tourism-related projects the construction of which has begun after the law was enacted.

Moreover, Specific Tourism-Related Activities (STRAs) are specified in the law as those to which the Dominican Republic has a special interest and that are undertaken by entities domiciled in the Dominican Republic. These activities are:

  • hotel installations, resort or tourist complexes;
  • construction of infrastructure for conventions, fairs, international congresses, festivals, spectacles or concerts;
  • enterprises that organize cruise activities, if the ports of origin and final destination are included under the regional scope of the law;
  • construction and operation of amusement parks, ecological parks or theme parks;
  • construction or operation of tourist infrastructure such as aquariums, restaurants, golf courses, sport installations and any other project that can be classified as tourist activity;
  • medium and small enterprises whose market is sustained by tourism, such as artworks, ornamental plants, tropical fishes, and reproductive farms for small native reptiles and enterprises of similar nature; and
  • infrastructure enterprises that provide basic services for the tourist industry, such as, for instance, water treatment plants, aqueducts, environmental clean-up or disposal of garbage and solid wastes.

The Benefits

The benefits established by the law are of a financial nature and essentially consist of tax exemptions and special deduction treatments.

In the exemption group, the following taxes are included:

  • income tax generated from the promotion, execution or equity investments on STRAs within the regional scope of the law;
  • national and municipal taxes levied on the use and issuance of construction permits, including the transfer tax on real estate (now standing at 4.48 percent of the sales price) when the latter is to be used to develop an STRA;
  • import taxes and other rates, rights, charges, and tariffs, including the Tax on the Transfer of Industrialized Goods and Services (ITBIS, which is a VAT equivalent now standing at a 12 percent rate), applicable on the equipment, materials and movable goods necessary to equip and carry out a tourist infrastructure;
  • any and all taxes, levies, and tariffs affecting the machinery or equipment necessary to achieve product quality;
  • income tax and withholding applicable on national or foreign funding, including interests in favor of enterprises that carry on STRAs (withholding rates stand at 25 percent of the gross amount as a general principle and 5 percent on the interest paid to financial institutions located abroad).

It is interesting to note that the application of the law itself has no time limit; therefore it will be enforceable as is until it is amended or superseded by new legislation. However, a limited 10 year period of exemption is applicable to each project. This period begins to run on the date that the construction for a project or the installment of exempted equipment is finished.

Regarding the special treatment for deductions, the law allows entities to deduct up to 20 percent of their annual utility costs if that amount is reinvested in any tourist project to which the law accords benefits.

Finally, the above-mentioned benefits can be lost or suspended. Violation of the law will generate the automatic loss of the benefits and the duty to pay any un-paid values because of said benefits. These sanctions are independent of any civil or penal liability under the nation's environmental statute.

In addition, the benefits may be lost when the investor violates the laws, statutes, regulations or norms that regulate the tourist activity as enacted by the State Department of Tourism; the investor violates any norm regarding a territorial organization plan issued by the State Department of Environment and Natural Resources; or the activities are hazardous to the environment or natural resources.

The suspension of the benefits can be recommended to the State Department of Finances via resolution of the State Department of Tourism or the State Department of Environment and Natural Resources, according to the characteristics of the action to be sanctioned.

Obtaining The Benefits

The law creates the Council of Tourism. The head of the Council is the State Secretary of Tourism and the Council includes representatives of the State Department of Finances, State Department of Environment and Natural Resources, State Department of Culture, State Technical sub-department of Tourism, National Associations of Hotels and Restaurants, Inc., and an environmental impact professional. All requests to obtain the exemption benefits must be addressed to the Council via the State Secretary of Tourism.

In general, the request must include an environmental impact study according to the characteristic of the project and the zone of developing, duly approved by the State Department of Environment and Natural Resources; a draft of the preliminary details on architecture and engineering for the project, prepared by a Dominican professional firm; and a contingency plan for the project relating to its energy requirements.

Notwithstanding the above, on every applicable project, prior approval of the plans from the appropriate municipal and urban planning authorities must be obtained. Also, all infrastructure projects must present a bank bond to cover all expenses of environment recovery in the event, because of negligence of the promoter, any harm is done to the environment. Finally, if the development of a project is to be executed within the limits of a protected area or a national park, the environmental impact study duly approved by the State Department of Environment and Natural Resources must demonstrate that said project will not represent a danger to the preservation of the natural resources nor a menace to the flora or fauna of the area.

The request must be approved or rejected, duly motivated, by the Council within a maximum period of six days. Once approved, the uninterrupted and sustained operation of the project must start within three years from the approval. If the operations are not begun under the conditions, all exemptions that were granted will be lost.

Conclusion

Even though limited to certain regions, the new law has included a great variety of business opportunities with diverse exemptions for project development in the Dominican Republic tourist industry.

This new piece of legislation will provide, jointly with other statutes such as those regarding foreign investment and the securities market, a healthy legal framework to encourage long-term investments and the expansion of the national tourist industry.

Ricardo A. Pellerano is a Partner with the Dominican Republic law firm of Pellerano & Herrera. He regularly represents foreign investors in transactions in the Dominican Republic and throughout the Caribbean and Latin America. Mr. Pellerano may be reached at r.pellerano@phlaw.com. The firm may be reached at www.phlaw.com

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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