Decree No. 408-10: Tax approach on Corporate Concentration Transactions
Published on:Decree 408-10 serves to clarify the criteria by which the Tax Administration classifies the operations and transactions made by corporations in order to arrange their assets or legal structure. This decree thoroughly defines and details every possible corporate concentration operation and the tax obligations pertaining to them.
Its objective is to amend several problems that arise for the Tax Administration when verifying the applicable tax treatment at the moment of executing some transactions, since the Dominican Tax Code treats several economic operations as corporate reorganizations, including the entities resulting from such operations.
In addition, Law No. 479-08 on Commercial Entities and Limited Liability Companies, was enacted on December 10th 2008, and though it served as an update of the corporate vehicles used for business within the Dominican Republic, it introduced new legal figures, such as the Limited Liability Companies, and made use of concepts such as economic group, parent companies, subsidiaries and affiliates, without properly defining the applicable tax treatment.
According to this decree, a corporate concentration by coordination is defined as the union of corporations, through verbal or written agreements, that maximizes their eventual mutual benefits, where each member keeps their economic and legal autonomy -e.g. consortiums and economic interests groups. These structures will have to identify their members, designating a single representative before the Tax Administration, who will be in charge of complying with the payment of taxes over the benefits or utilities mutually obtained by the consortium or economic interest group, in the activities set forth in their agreement.
Secondly, economic groups will be classified as corporate concentrations by subordination when they are formed by the union of companies under economic or legal control of one over the other, and the establishment of a unified management.
Decree 408-10 gives the Tax Administration the right to verify the relationship between the companies, as well as the type of control exerted over the group they form, be it legal or factual, in order to declare the existence of an economic group. This declaration, made by a properly motivated administrative resolution, can regulate every aspect of the economic group’s tax obligations, including the treatment of their accounting records and even how they will have to present their tax forms. An interesting aspect of this particular provision is the fact that the taxpayer, after providing sufficient proof, can request to the Tax Administration to be declared as an economic group. The declaration of an economic group will be considered ineffective as soon as the Tax Administration verifies that the legal or factual control ceased.
Regarding parent companies, these will be considered as such for as long as they are not exclusively dedicated to the management, direction or coordination of the activities of their subsidiaries or affiliates, or the ownership of their shares, in which case they will be considered as a holding company. Holding companies will only have to present the VAT declaration, since their income is considered as retained at the source by the companies which they manage, own shares or have invested in. If an operation is reported in the declarations of a holding company but the Tax Administration verifies that this was only to benefit or cover up the operations of another affiliate or subsidiary within the economic group, the Tax Administration has the right to reassign this operation to the correct entity and therefore it will have to comply with the payment of the applicable tax.
Mergers, spinoffs or transfer of assets or goods within an economic group will be considered as corporate reorganization activities and will therefore be tax exempt, for as long as there is a previous authorization from the Tax Administration on this regard, which is subject to the verification of aspects such as similarity of the operations of the involved entities, valid economic reason behind this reorganization [not just for the purpose of reducing their tax obligations or obtaining tax advantages], and last but not least, that the entities involved were operational during the last year before the execution of the reorganization, which will be verified based on their last tax declaration.
