The Dominican Republic as investment jewel of the Caribbean

Author: | Published: 25 Sep 2012
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The Dominican Republic is the largest recipient of foreign direct investment in the Caribbean, with companies from around the world, including a significant number that are headquartered in the United States, the European Union, Canada, and Latin America – especially in Brazil, Colombia, and Venezuela – now participating in more and more mergers and acquisitions, financing transactions, and other kinds of investments in the Dominican Republic than ever before. The country is, indeed, the investment jewel of the Caribbean.

Promoting growth

There are many reasons for the country's explosive growth as a top investment destination in the region. Importantly, the Dominican Republic is one of the most stable and democratic countries in all of Latin America. Danilo Medina, the newly elected president, is an economist who has pledged to continue to improve the already-welcoming investment environment, as well as the day-to-day lives of all Dominicans.

Financing often is available for large Dominican projects through the World Bank and institutions such as the Multilateral Investment Guarantee Agency, the Overseas Private Investment Corporation, the European Investment Bank, and many other international banks, which have operated in the country for years – and which know it well and trust it. Moreover, project finance is becoming increasingly common in the Dominican Republic, with lenders typically including commercial banks, multilaterals, and export credit agencies from the project sponsors' jurisdictions.

Other key factors

Other factors that in recent years have led, and continue to lead, to the multiple business and investment opportunities in the country include its enviable geographical location, legal framework, economic stability, and infrastructure.

The Dominican Republic is located in the centre of the Caribbean, which allows it to access the North, South, and Central American markets with relative ease, as well as to serve as a bridge between those markets and Europe to trade goods and services.

In recent years, the Dominican economy has been supported by a continuous process of regulatory modernisation, with new laws in areas as diverse as energy, renewable energy, telecommunications, infrastructure, and finance, as well a new corporate law system and laws relating to specific industries, ranging from the country's securities markets to its film industry. These measures have been aimed at opening and commercially integrating the economy into international markets. Having recognised that the Dominican economy depends on international economic integration, the Dominican government for many years has opted to create and support a legal system that allows for sustained economic stability and growth as well as for freedom and security in the commercialisation of goods and services to the economy's different participants.

Additionally, the Dominican Republic has a widespread, developed, and growing physical infrastructure that is adjusted to the requirements of a society focused on the production and commercialisation of goods and services. The Dominican roadways are among the best and most up-to-date in the region, connecting practically all areas of the country. There are modern and efficient airport and port systems – including eight international airports and a dozen significant seaports that are located close to key production centres. The Dominican Republic's modern telecommunications system is one of the country's main competitive advantages.

Significant transactions

The breadth of recent mergers and acquisitions in the Dominican Republic is truly astounding, including transactions in the energy, tourism, cable, food, and healthcare industries. Six recent mergers and acquisitions in which the author and his firm represented and counselled a party clearly reflect the interest of leading international businesses and businesspeople in Dominican companies:

First, Brazil's largest brewer recently acquired an indirect majority interest in the Dominican brewer Cerveceria Nacional Dominicana for over $1 billion – the largest acquisition as of that date to have ever taken place in the Dominican Republic.

Another Brazilian company recently acquired the leading Dominican supplier of optical equipment and services in the ophthalmic industry.

In the first leveraged buyout in the Dominican Republic, Advent International, the global private equity firm, recently acquired 100% of Aeropuertos Dominicanos Siglo XXI, the leading airport group in the Dominican Republic and one of the largest airport operators in Central America and the Caribbean.

In the hospitality field, Barceló Crestline Hotels acquired five Dominican hotels on the country's eastern and northern coasts.

In the consumer goods industry, Brazil's Companhia de Bebidas das Americas-AMBEV acquired the largest distributor and manufacturer of soft drinks and flavoured beverages in the Dominican Republic.

And in the mining industry, Perilya, an Australian-based metals, mining, and exploration company, acquired the exploitation and exploration rights of various copper, silver, and gold mines located in Maimon in the Dominican Republic.

A closer look

Beginning over two decades ago, the Dominican Republic initiated the first wave of reforms to modernise the country's legal system and the economic framework under which businesses operate in the country. The government's goals were to promote the flow of foreign capital into the country, adapt the economy to international competition, and facilitate regional competition. This process is on-going, with a more recent second wave of reform that has continued to modernise the country's regulation of specific industries, such as the banking and monetary systems, while strengthening the rules relating to corporate governance, competition, and consumer protection.

For instance, the Dominican Republic's corporate law system has been significantly modernised and updated. For one thing, it now permits a greater variety of corporate vehicles – from corporations and simplified companies to limited liability companies and small business enterprises. It also contains fewer regulatory requirements than before and provides greater flexibility for investors seeking to start new businesses in the country.

The principal reforms that have taken place recently include new laws with respect to industrial property, intellectual property including copyright, exports, the environment, fiscal and customs reform, trusts and the development of low cost real estate projects, and risk prevention in financial institutions. The country also amended its constitution recently to modernise the government's organisational structure as well as essential regulations.

Two new laws – one regarding mortgages and one regarding the film industry – illustrate how the country continues to make an effort to improve investment conditions and to attract new foreign investment.

Mortgages and housing

The new mortgage law is helping the country's mortgage market develop while providing significant opportunities for investors – and a boost to the country's efforts to expand its housing stock. Under the law, a trust may be established for any legal purpose or objective, including for "real estate investment" or "real estate development," the primary objective of which is investing in real estate projects in various stages of design and construction. The law also recognises a trust for the public offering of securities, which has the primary goal of backing up public offerings of securities made by the trustee, with the trust property as security for the debt. Another important kind of trust is a collateral trust, which is designed to secure compliance with certain obligations by the settlor for the benefit of a third party or third parties.

Significantly, under the new Dominican law, all property and rights that are part of a trust constitute a separate and independent estate, separate from the settlor's property – and separate from any other trust property that the trustee of the trust also is managing. Also, as might be expected, creditors of a beneficiary of a trust may not seek to enforce their claims against trust property, except that they can pursue revenues and profits generated by the trust that the trustee is required to deliver to the beneficiary. By the same token, creditors of a settlor may not seek to enforce their claims against property transferred by the settlor to a trust unless their claims relate to the transfer of the property to the trust. A trust's creditors are permitted to enforce their claims against trust property, and trust property can be pursued where the trust has been fraudulently created.

As the new Dominican law recognises, a trust may issue securities. Moreover, the law specifically authorises a trust to issue securities to raise funds for mortgage financing for Dominican housing and the Dominican construction industry. The kinds of securities that a trust may issue include mortgage notes, mortgage bonds, mortgage certificates, mortgage participation agreements, endorsable or non-endorsable mortgage loans, participations in closed investment funds and mutual or open funds, trust securities, and mortgage-backed securities.

The new Dominican law authorises mortgage insurance to provide coverage for mortgage loan losses as a result of default by a debtor. Financial institutions, in their discretion, may insure all or part of their mortgage loans with this type of insurance. Similarly, financial institutions may obtain private insurance to cover financial losses generated as a result of a default by a debtor or debtors. These policies may be bought from insurance companies that are authorised to operate in the Dominican Republic.

The process of securitisation of a mortgage loan portfolio is subject to the provisions of the Dominican Republic's Securities Exchange Law and, where applicable, the provisions of the country's Monetary and Financial Law. There are minimum capital requirements for securitisation companies. Financial institutions may participate in securitisation transactions and may purchase these kinds of securities without the need to obtain regulatory approval where a transaction meets certain conditions.

The new Dominican law also contains special provisions relating to the development of low-cost housing through public-private partnerships, which the Dominican government believes can help solve the country's housing problems. To benefit from the incentives created by the new law, the low-cost housing projects must be duly authorised by the National Housing Institute.

The new law also provides that low-cost housing projects may be developed with investments from both the Dominican government and the private sector through the creation of a trust for purposes of its construction. The law provides that the real estate property contributed to a trust for that construction may be subject to a conventional mortgage in favour of the entities financing the project.

Finally, the law creates a special foreclosure procedure available to creditors, such as local or foreign financial institutions, securitisation companies, and trustees, as long as the mortgage has been granted by a contract and regardless of the kind or nature of the debt that is secured. The foreclosure process is commenced with a formal request for payment, which is carried out pursuant to the terms and conditions specified in the law.

The new Dominican law creates a market for securitised mortgages that will significantly enhance the country's housing and construction industries while offering institutional investors an important investment opportunity.

Silver screen benefits

About 40 years ago, film director Francis Ford Coppola went to the Dominican Republic to film the memorable Cuba scenes for The Godfather Part II. As hospitable as the country was to the director, his crew, and the actors at that time, things are now even better. The film industry in the Dominican Republic has substantially expanded since then, in large measure because the country has different and diverse natural scenery, from beaches to mountains, and buildings that were constructed in colonial times as well as more recently. Costs to film and produce films are lower in the Dominican Republic than in many other places, too.

But one of the main reasons for the significant expansion of the Dominican film industry has been the Dominican government's interest in supporting it – in particular, the country's recent adoption of a law to promote and encourage the industry.

One of the goals of the Dominican Republic's new Film Industry Law was to modify the country's tax system so that it stimulates the film industry and encourages domestic and foreign investment in the industry. Toward that end, the Film Industry Law contains a number of tax incentives for the film industry itself, and for domestic and foreign investment in the industry.

For one thing, investors in Dominican feature film projects approved by the newly-created General Directorate of Films may deduct 100% of their investment for purposes of calculating their income tax for the period in which the investment is made, subject to a cap of 25% of the income tax otherwise payable.

Another income tax benefit is available for producers and distributors of films in the Dominican Republic. This tax benefit provides that income that is capitalised or reserved for new films or investments in films is completely exempt from income tax. In addition, income earned by individuals or businesses domiciled in the Dominican Republic for providing technical services for all films that are shot in the country is exempt from income tax.

Moreover, all foreign films produced in the Dominican Republic are exempt from paying the value-added tax applicable to the transfer and importation of most goods and services. Foreign films also are essentially exempt from all other municipal taxes with respect to filming, film equipment, and general production, except for taxes relating to the National Film Information Registry.

The new Dominican Republic Film Industry Law also provides that any individual or business that establishes a film studio in the country is entitled to a complete income tax exemption for income earned by the studio for 15 years from the law's effective date. Additionally, the new law provides that capital goods may be imported duty free for a decade from the law's effective date.

In addition to establishing financial incentives for the film industry and for foreign investment in the film industry, the Dominican Republic's Film Industry Law helps smooth the way for the production of films. It reaches that goal in a number of ways.

For example, the law creates a General Directorate of Films under the Dominican Ministry of Culture that is empowered to do everything from promoting the production of films and policies encouraging Dominican and foreign financing of the film industry, to executing partnership agreements with Dominican and international organisations for the purpose of promoting the film industry's activities. The General Directorate of Films also can provide financial support to the industry through a Film Promotion Fund and other incentives. Additionally, the General Directorate of Films is authorised to facilitate and encourage imports of raw materials, capital, equipment, and services relating to the film industry, and to support the growth of the technical businesses required by the film industry.

To further encourage the production of films in the country, the new film law facilitates customs procedures and administrative systems, and establishes a special tariff schedule for the production of foreign films in the Dominican Republic.

The Film Industry Law does more than just create financial incentives and eliminate bureaucratic difficulties for filmmakers – although those certainly are its primary purposes. In addition, the Film Industry Law reflects the country's respect for films and the industry, and its eagerness to welcome both filmmakers and foreign involvement and investment in the industry.

Toward that end, the law creates the Dominican Cinematheque, an agency of the General Directorate of Films, with its own institutional status. Its functions are to: (i) safeguard the country's audiovisual heritage and promote national and international films; (ii) disseminate programs to promote films, both classical and contemporary; (iii) create a centre for film documentation; (iv) create the technical conditions necessary to rescue, preserve, and protect movies and negatives; (v) search for and collect so-called visual memories of the heritage of the Dominican Republic; (vi) create events such as festivals or film presentations to promote the country's interest in cinema; and (vii) promote research on film matters.

In addition, the Film Industry Law creates an Intersectoral Council for the Promotion of the Film Industry in the Dominican Republic under the General Directorate of Films. The Council is empowered to allocate resources from the Film Promotion Fund, created by the law; advise and consult with the Ministry of Culture on matters pertaining to the determination of a film policy for the Dominican Republic; approve programmes and projects submitted to the General Directorate of Films; and request information from public and private entities and collaborate as necessary for the exercise of its powers.

The Film Promotion Fund, created and operating under the auspices of the Council, is intended to offer financial support, guarantees, and investments for the benefit of producers, distributors, and exhibitors as well as for educational policy development in the film industry.

The Film Promotion Fund receives funds from, among other places, the Dominican Republic's general budget; taxes on ticket or entrance fees to cinemass; revenues generated by the tax on transfer of goods and services on sales and rentals of movies; revenues generated by the tax on the sale of goods inside cinemas; resources generated by the fund's operations; and donations, transfers, and national or international contributions.

In particular, the Film Promotion Fund's resources may be used to promote, encourage, and develop educational plans and programmes relating to films; create, develop, produce, promote, and disseminate local films and support related educational activities; conserve and preserve films; conduct research about films for the purpose of developing national policies in this area, and incentives for training in different areas of filmmaking; take actions against those who violate the rights of copyright holders in the marketing, distribution and exhibition of films; establish a National Film Information Registry; and promote the Dominican Republic as a destination for foreign film production.

The Dominican Republic could not be a more welcoming environment for the film industry. With tax incentives, industry and government support, and an industry-friendly atmosphere, filmmakers and the film industry as a whole are finding the Dominican Republic to be an exceptional location in which to operate.

Bouncing back

For quite some time, the Dominican Republic has seen remarkable economic stability. Over the past year, the country's GDP jumped 7.8%, the exchange rate between the Dominican peso and the US dollar has remained stable, and the accumulated inflation rate has been a relatively low 6.2%. In recent times, the country has entered into trade agreements with the European Union, the United States, and Central America, among others.

The bottom line is that the Dominican Republic's economy has rebounded strongly from the global recession, and the country remains one of the fastest growing – and most welcoming – in the region.

Luis R Pellerano
 

Pellerano & Herrera

Luis R Pellerano, a partner with Pellerano & Herrera, concentrates his law practice in banking law, corporate, free trade agreements, energy, telecommunications law, mining, tourism, foreign investment, intellectual property, and dispute resolution. He is the partner in charge of the firm's foreign investment and international practice group, and he has substantial experience counselling established and emerging enterprises in highly-regulated industries, such as energy, mining, pharmaceutical, and financial services companies. He also is regularly called on to advise clients on matters as diverse as organisational structure, corporate and securities law, and has particular experience with international project development and finance, mergers and acquisitions, joint ventures, and corporate finance. Pellerano has counselled leading international financial institutions in the project financing of significant economic developments in the Dominican Republic, has acted as local counsel for foreign and local banks and companies in the most important debt restructuring deals in the country, has assisted multinational companies in their entry process to the Dominican market, and has advised on the registration of the first Dominican company listed on the New York Stock Exchange. Pellerano is resident in the firm's office in Santo Domingo.


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