Tax Guide for US Expats Living and Working in the Dominican Republic
Who Is Liable For Income Taxes in the Dominican Republic
Individuals who are residents are subject to tax on their Dominican Republic-source income as well as on their foreign-source income from investments and financial gains. Income tax paid abroad with respect to foreign-source income may be credited against the Dominican Republic tax liability. However, such credit is restricted to the portion of Dominican Republic tax allocated to the foreign-source income that is taxed abroad.
Nonresident individuals are subject to tax on their Dominican Republic-source income and on income derived from technical assistance provided to residents in the Dominican Republic, regardless of the location where the technical assistance is provided.
Individuals who become residents of the Dominican Republic are subject to tax on foreign-source income after the third year of residency. In addition, individuals who become residents may qualify for a special retirement regime if certain conditions are met. This regime may exempt foreign-source income from income tax and provide other tax benefits.
Individuals who spend more than 182 continuous or non-continuous days in a fiscal year in the Dominican Republic are considered residents of the Dominican Republic for tax purposes.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Annual employment income exceeding RD$371,124 (approximately US$9,766) is taxable. Employment income includes salary, bonuses, premiums, commissions and allowances (for example, housing and education allowances). Allowances are considered taxable compensation only if they are paid in cash to the employee. Benefits in kind are subject to fringe benefits tax, which is payable by the employer.
Self-employment and business income. Income derived from self-employment or from a trade or business is subject to tax.
Investment income. Dividends paid in cash or credited by local companies to resident and nonresident persons are subject to a 29% withholding tax.
Interest paid to foreign financial institutions is subject to a 10% withholding tax. Interest received from abroad is subject to tax in accordance with the tax rate schedule.
Royalties from franchises, technical advice and similar payments made or credited by local companies to nonresidents are subject to a 29% withholding tax.
Directors’ fees. Dominican-source director’s fees paid or credited to an individual who is a nonresident or non-domiciliary of the Dominican Republic are subject to a 29% income withholding tax.
Capital gains. Under Dominican Republic law, capital gains are taxed in accordance with the rules discussed below.
Individuals are taxed at the individual income tax rate of 25%. Entities and corporations are taxed at the ordinary corporate income tax rate of 29%. The tax base for capital gains’ purposes is the difference between the transaction value (sale price) and the asset’s historical cost adjusted by local inflationary rules.
Deductions
Personal deductions and allowances. Employee contributions to social security may be deducted for income tax purposes. Individuals may deduct education expenses for themselves and their dependents up to a maximum of 10% of the individual’s taxable income. This does not apply to self-employed individuals.
Business deductions. All costs and expenses that are necessary to generate taxable income and protect investments are deductible.
B. Other taxes
Individuals who own real estate with a value exceeding RD$5 million (approximately US$131,579) are subject to a 1% tax on the excess value.
Legal entities or sole proprietors are subject to an asset tax of 1% on the book value of assets. The asset tax may be credited against income tax for the same tax year.
Gifts are subject to donation tax at a rate of 25%, which is payable by the recipient.
C. Social security
Retirement contribution. A social security retirement contribution is payable on salaries at a rate of 7.1% for employers and 2.87% for employees, with a ceiling of 20 legal wages per month. The monthly legal wage is RD$6,481 (approximately US$171).
Health contribution. A health contribution is payable on salaries at a rate of 7.09% for employers and 3.04% for employees, with a ceiling of 10 legal wages per month.
Labor risk contribution. Employers must pay a labor risk security contribution at an average rate of 1.2%, depending on the classification of the activity of the employee. This contribution consists of a fixed 1% tax and a variable tax at a rate of up to 0.6%. The social security law provides a ceiling of 10 legal wages for this contribution, but, in practice, a ceiling of 6 legal wages is applied.
Contribution to the Institute for the Development of Technical Professionals. A contribution of 1% of payroll is payable by employers to the Institute for the Development of Technical Professionals (Instituto de Formación Técnico Profesional, or INFOTEP). Employees contribute an additional 0.5% on allowances and profits granted.
Totalization agreement. The Dominican Republic and Spain have entered into a totalization agreement regarding social security contributions.
To learn more about the history, culture, economy and other information about the Dominican Republic
We have been preparing US income tax returns for US Citizens and permanent residents living in the Dominican Republic for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in the Dominican Republic and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the Dominican Republic tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Dominican Republic Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in the Dominican Republic, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in the Dominican Republic.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email