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Income tax withholding agents suspended

Ricardo A Pellerano

On September 5 2011, the General Internal Revenue Office of the Dominican Republic (DGII) issued General Rule No. 13-2011 appointing financial institutions as withholding agents with the obligation to withhold 1% of interests to be paid to their corporate clientele.

Pension fund managers, securities intermediaries, investment fund managers, and securitisation companies are excluded from this obligation.

The rule provides that the amount withheld and paid to the DGII by such institutions shall be considered as an advanced payment on account to the client's final income tax payment at the end of the corresponding fiscal year.

Such rule was issued, in accordance to the DGII, based on the following:

(i) all income received by legal entities as interests of any nature, is deemed to be taxable income of Dominican source, as provided under Articles 272 and 299 of the Dominican Tax Code.

(ii) the DGII understands the importance of creating the corresponding withholding mechanisms at the source to enable tax authorities to effectively collect income tax from taxpayers; and

(iii) the DGII is empowered by law to appoint withholding agents.

After such rule was issued, the commercial and banking sectors challenged such rule on the basis of its alleged illegality because it violates legal provisions concerning banking secrets, and its implementation would create irreparable damages on both the banking and commercial sectors in the country.

The Administrative Court with jurisdiction to review this matter has suspended the application of rule 13-2011 pending a definitive and final decision on this matter.

Ricardo A Pellerano

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