Tax guide for Americans in the Dominican Republic

Known for its stunning beaches and vibrant culture, the Dominican Republic has become a popular destination for American expats. However, it is important to understand the tax implications of living in this Caribbean country.

Resident vs. non-resident of the Dominican Republic

In the Dominican Republic, tax obligations differ significantly depending on whether you are considered a resident or a non-resident. The main factor influencing this status is the amount of time an individual spends in the country.

This distinction is crucial as it determines how an individual is taxed - residents are generally taxed on their worldwide income, while non-residents are taxed only on their Dominican-sourced income.

Who can be considered a resident of the Dominican

The criteria for being considered a tax resident in the Dominican Republic are clear. Any individual who spends more than 182 days in the country during a calendar year is considered a tax resident. This period does not have to be continuous; the cumulative days within the tax year are taken into account.

Types of taxes and rates in the Dominican Republic

The Dominican Republic's tax system encompasses various types of taxes, each with its own set of rates and regulations. Understanding these is crucial for anyone living or doing business in the country, especially for expats who might be accustomed to different tax structures. Here, we delve into the specifics of these taxes, starting with personal income tax rates.

Personal income tax rates

Personal income tax in the Dominican Republic is governed by a territorial system, which means that residents are primarily taxed on income earned within the country. However, after three years of residency, global income becomes taxable. The rates for personal income tax are progressive, meaning they increase with the level of income. Here's a general breakdown:

Local income taxes

In the Dominican Republic, the approach to local income taxes is relatively straightforward. Unlike some countries where local or municipal governments levy their own income taxes, there are no additional local income taxes in the Dominican Republic on top of the national income tax.

Value-Added Tax

Value-Added Tax (VAT), known locally as Impuesto a la Transferencia de Bienes Industrializados y Servicios (ITBIS), is a significant aspect of the tax system in the Dominican Republic. It is a consumption tax applied to the value added to goods and services at each stage of the supply chain, from production to the point of sale.

The standard VAT rate in the Dominican Republic is 18%. This rate is applied to most goods and services, making it a considerable source of revenue for the government.

In certain cases, a reduced VAT rate may apply. For example, some essential goods and services might be taxed at a lower rate or exempted from VAT altogether to ensure affordability for the general population.

Businesses in the Dominican Republic are required to register for VAT if their sales exceed a certain threshold. Once registered, they must charge VAT on the goods and services they provide and can reclaim any VAT they’ve paid on business-related goods and services.

Real estate tax

Real estate tax is a key consideration for property owners in the Dominican Republic, impacting American expats who own property. This tax is based on the property value, which is periodically reassessed to reflect market conditions. The rate of real estate tax can vary, and there are thresholds below which no tax is levied, making it important for property owners to understand their potential tax liability.

Technical education tax

The technical education tax in the Dominican Republic is a distinctive levy aimed at bolstering workforce skills and training. Employers are required to contribute 1% of their total monthly payroll, and employees contribute 0.5% of their bonuses toward this tax. The revenue generated from this tax is allocated to programs for technical instruction and worker training, playing a vital role in the country's skill development initiatives.

Net wealth tax

In the context of the Dominican Republic's tax landscape, the net wealth tax is a topic of interest, particularly for American expats who have significant assets. However, it is worth noting that the Dominican Republic does not levy a net wealth tax. This means that individuals, including expats, are not taxed on their accumulated global wealth.

The absence of a net wealth tax can be a financial relief for expats with substantial assets, as it simplifies tax planning and reporting requirements.

This feature of the Dominican tax system can be particularly attractive to high-net-worth individuals considering relocating to or investing in the Dominican Republic.

Inheritance tax

In the Dominican Republic, inheritance tax is an important consideration for individuals, including American expats, who may inherit assets. This tax is levied on the transfer of assets from a deceased individual to his or her beneficiaries. Here are the most important things to know about inheritance tax:

The inheritance tax rate is set at 3%, which is relatively modest compared to many other countries.

Gift tax

Gifts to individuals are subject to a withholding tax at a rate of 27%.

When are the Dominican's taxes due?

The fiscal year in the Dominican Republic is the calendar year, ending on 31 December.
Taxpayers must file their income tax returns by 31 March of the following year.

This deadline is critical for those with sources of income other than or in addition to regular employment where taxes are withheld at source.

Types of income in the Dominican Republic

The Dominican tax system includes several types of income, each with its own specific tax implications.

Employment income

Earned income includes salaries, wages, bonuses, and other forms of remuneration received for services rendered.

Capital gains

Capital gains in the Dominican Republic are the profits realized from the sale of assets or investments.

These gains are taxed as ordinary income, which means they are subject to the same progressive tax rates as regular income.
The tax is calculated by deducting the original cost of the asset (fiscal cost) from the sale price.

This means that if you sell a property or investment for more than you paid for it, the profit is considered a capital gain and is subject to tax.

Dividend income

Cash dividends received from investments are generally exempt from tax, provided that a 10% withholding tax has already been applied by the company distributing the dividends.

Interest income

Interest earned on term deposits, savings accounts, and similar sources in Dominican financial institutions is generally tax-exempt.

Tax deductions for U.S. expats in the Dominican Republic

Navigating the tax landscape in the Dominican Republic can be a complex task. Understanding the tax deductions available is crucial to minimizing tax liabilities and maximizing returns.

Personal deductions

Expats can deduct educational expenses incurred for themselves and their dependent non-wage earners. This includes expenses related to primary, secondary, technical and university education. It's a significant deduction, especially for expats with children in educational institutions.

The education deduction is limited. It can only be claimed up to 10% of gross taxable income. This limit ensures that the deduction is used appropriately and in line with the individual's financial capacity.

Standard deductions

Standard deductions in the Dominican Republic are an easy way to reduce your taxable income. Here are the main points about standard deductions:

• The Dominican Republic offers a standard deduction of 416,220 DOP per year. This amount is adjusted based on annual inflation rates, so it is important to check the current deduction amount each tax year.
• Certain types of income, such as Christmas bonuses and severance pay, are exempt from tax and do not count towards taxable income.

Business deductions

For American expats doing business in the Dominican Republic, understanding business deductions is crucial to effective tax planning. Business deductions include

• Individuals engaged in commercial or industrial activities may deduct expenses incurred in the production of their business income. This includes costs such as office rent, utilities, employee salaries and other operating expenses directly related to the business.
• Business owners have the option of deducting actual expenses incurred or applying a fixed deduction of 40% to their gross income to arrive at their net taxable income. This provides flexibility in tax planning and allows business owners to choose the option that is most beneficial for their specific situation.

Special Tax Regime

The Dominican Republic offers a Special Tax Regime (STR) that can be particularly beneficial for expats.

The STR is available to individuals who perform independent industrial, commercial, or service activities. This includes expats who operate their own businesses or work as independent contractors in the Dominican Republic.

Under the STR, eligible individuals can benefit from reduced tax rates, exemptions, or credits on certain types of income. This can lead to substantial tax savings, making it an attractive option for qualifying expats.

To benefit from the STR, expats must apply and meet specific criteria set by the Dominican tax authorities.

Social Security in the Dominican Republic

Social Security in the Dominican Republic is a fundamental aspect of the country's welfare system, affecting both employers and employees, including American expats working there. Key points:

• Participation in the social security system is mandatory for all employees and employers in the Dominican Republic.
• The social security system covers various aspects such as health care, pension plans, and insurance against labor risks, providing a safety net for workers.

The Tax Treaty between the US and the Dominican Republic

Understanding the tax treaty between the United States and the Dominican Republic is essential for American expats to ensure they comply with tax laws and avoid double taxation. This treaty serves as a framework for tax and financial interaction between the two countries and aims to simplify and clarify tax obligations for individuals and businesses operating in both countries.

Totalization agreement between the US and the Dominican Republic

One significant aspect of the relationship between the US and the Dominican Republic in terms of taxation is the Totalization Agreement. Key points of the Totalization Agreement include:

• Preventing double taxation on Social Security: The agreement ensures that expats are not required to pay social security taxes to both the US and Dominican governments. This is particularly beneficial for individuals who split their working time between the two countries.
• Determining eligibility for benefits: The agreement also outlines how work periods in both countries are counted when determining eligibility for social security benefits. This is crucial for expats who may not meet the minimum contribution period required in one country but have combined contributions in both.

Most popular tax forms for US expats

For American expatriates living in the Dominican Republic, it is important to comply with both US and Dominican tax laws. This includes understanding and accurately filling out various tax forms. Some of the most commonly used tax forms for US expats include

1. Form 1040: This is the standard IRS form used by US citizens and residents to file their annual income tax returns. It includes worldwide income, which is an important consideration for expats.
2. Form 8938, Statement of Foreign Financial Assets: This form is required for expats who have certain foreign financial assets that exceed a threshold amount. It's part of the Foreign Account Tax Compliance Act (FATCA) requirements.
3. Form 2555, Foreign Earned Income Exclusion: US expats living in the Dominican Republic can use this form to exclude a portion of their foreign-earned income from US taxation. It's an important tool for minimizing US tax liability.
4. FBAR (FinCEN Form 114): Expats with foreign bank accounts that exceed certain thresholds must file the FBAR, reporting their foreign bank and financial accounts to the US Treasury Department.

Dominican Republic tax forms for US expats

In addition to US tax forms, American expats in the Dominican Republic must also be aware of local tax forms. These include:

1. Personal Income Tax Return (IR-1): Expats in the Dominican Republic must file this form if they have sources of income other than wages where taxes are withheld by the employer. This form is used to report income such as self-employment income, rental income or income from other Dominican sources.
2. Assets declaration form: This form may be required for expats who have significant assets in the Dominican Republic. It's used to declare property, investments and other valuable assets for tax purposes.
3. VAT declaration form (IT-1): For expats running a business or working independently, this form is used to declare VAT (ITBIS) on goods and services.