From a legal perspective and as established in Article 267 of the Dominican Republic’s Tax Code, we can define the Income Tax (ISR) as the annual tax based on the income obtained by individuals, legal entities, and undivided estates.
This tax, managed by the General Directorate of Internal Revenue (DGII), is essential for funding public services and the country’s development.
In this article, we will explore in detail what Income Tax is, when and where it is paid, how to calculate it for individuals and legal entities, declaration dates, who is required to pay it and who is exempt, as well as reviewing the current legislation and DGII guidelines updated to the year 2024.
What is Income Tax?
The Income Tax (ISR) is a tax applied to the income earned by individuals and legal entities. In the Dominican Republic, this tax is calculated on the annual net income, which is the total income minus the deductions allowed by law. The purpose of the ISR is to contribute to the financing of public expenditures and the socioeconomic development of the country.
Who pays Income Tax?
Every individual or legal entity residing in the Dominican Republic and the undivided estates of deceased persons domiciled in the country will pay the tax on their income from Dominican sources and income from foreign sources derived from investments and financial gains.
Today, we will talk about how income tax works in the Dominican Republic and its application to legal entities or corporations/companies. Income, in this case, is defined as any revenue that constitutes a profit or benefit derived from a specific economic activity.
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What is the income tax rate for corporations in the Dominican Republic?
It is important to note that the percentage is not the same in all countries, as it is determined based on government objectives and in proportion to its revenue-raising target.
In Latin America, for example, the percentage ranges from 10% in some countries to as high as 35% in others. In the case of the Dominican Republic, the income tax rate is 27%, keeping us very close to the regional average. Of course, the Dominican Republic is a developing country, and our legislation provides exemptions from this tax for certain types of companies in which the country seeks to develop, such as those exporting goods or services in some cases.
How to declare Income Tax?
As mentioned above, this tax must be applied after the company’s profit is obtained. To do so, a report must be submitted to the General Directorate of Internal Revenue (DGII), summarizing the company’s activities during the fiscal period, through an annual tax return report called IR-2.
The fiscal period ends with the close of the fiscal cycle, during which, according to the nature of their activities, taxpayers can set the end of their fiscal year on four different dates.
The Corporate Income Tax Return (IR-2) must be filed no later than 120 days after the company’s closing date, as detailed below:
- Closing date on March 31: July 29, 2024.
- Closing date on June 30: October 28, 2024.
- Closing date on September 30: January 28, 2024.
- Closing date on December 31: April 29, 2024.
The resulting tax must be paid on the same date.
How to calculate Income Tax in the Dominican Republic?
The calculation of income tax varies between individuals and legal entities, considering income, allowable deductions, and applicable tax rates.
Calculation for Individuals
For individuals, ISR is calculated as follows:
- Determination of Gross Income: Sum of all income earned during the year, including salaries, professional fees, rents, interests, among others.
- Permitted Deductions: Application of legal deductions, such as medical expenses, mortgage interests, and other allowable expenses.
- Taxable Net Income: Gross income minus allowable deductions.
- Application of the Tax Rate Scale: The progressive tax rate scale established by the DGII is applied to determine the tax to be paid.
Calculation for Legal Entities
For individuals, ISR is calculated as follows:
- Determination of Gross Business Income: Total income earned by the company during the fiscal year.
- Business Deductions: Includes operating costs, administrative expenses, depreciations, and other allowable expenses.
- Taxable Net Income: Income minus business deductions.
- Application of the Corporate Rate: The applicable tax rate for companies is fixed and applied to the taxable net income to determine the tax to be paid.
Income Tax Advances
On the other hand, and with a direct impact on income tax, we have advances. An advance is a mandatory prepayment of Income Tax (ISR), which is credited against the tax payable when the annual income tax return is filed. In our legislation, advances are regulated by Article 314 of the Tax Code, which provides the following scheme: The advance will be equal to the total ISR paid the previous year and applies from the first year the company has profits.
The amount of advances to be paid is determined as follows
- Legal Entities with an Effective Tax Rate (TET) greater than 1.5%: The previous ISR paid is divided into twelve (12) equal installments, after deducting the credit balance shown in the return.
- Legal Entities with an Effective Tax Rate (TET) less than or equal to 1.5%: 1.5% is applied to the declared income for the previous fiscal year, after deducting the credit balance. The resulting amount is divided into twelve (12) equal installments.
As a side note, it is important to remember that the best indicator for measuring the tax burden is the Effective Tax Rate (TET), which is defined as the amount of tax paid by a company as a percentage of its gross profits, directly measuring the total tax burden imposed by national regulations in proportion to the profits earned from its activities.
Returning to income tax advances, legal entities make the payment in 12 monthly installments, payable before the 15th of each month and generated 45 days after the corresponding tax return is filed.
For international corporations, the tax burden of each country is one of the most important factors when deciding where to establish their subsidiaries.
Hence the importance of proper tax planning, which allows the finance officer and business owner to take corrective actions in time and avoid excessive tax payments, either due to ignorance of tax regulations or a lack of organization in internal processes that unknowingly have a tax impact.
In addition to this tax, there is also the Asset Tax Return, which must be filed on the same deadline as the Corporate Income Tax Return in the Dominican Republic. The resulting tax must be paid in two equal installments, with the first due on the same deadline set for the payment of the ISR, and the second six (6) months after the first installment’s deadline.
It is important that both foreign investment companies and local businesses led by entrepreneurs in different industries are well aware of the implications of income taxes, as this is crucial for establishing a business plan properly adapted to their industry and that includes the payment of these obligations.
