MISCONCEPTIONS

MISCONCEPTIONS.


What role does experience play in the legal scope? We ask the question to call the attention on the fact that the legal dynamics are always changing. In our case, we work with the specialty in the area of investment in real estate properties with special concentration in the tourist sector. In this sphere, our laws have changed quite a lot from 1998. We have had five or six tax reforms and one law of incentives, as well as changes in the construction regulations. For that reason, we repeat the question: What role does experience play?

We understand that it is vital to have the knowledge that gives the studies of cases and the practical insight but, for us, most important in investment consultancy is the modern wonder of synergy. This capacity to unite efforts with financial consultants, accountants, surveyors and other lawyers is what truly allows us to concentrate the best ideas in guiding those people who wish to invest in our wonderful island. The concept of synergy is intimately related to the concept of proaction or proactivity. As well, opposed to proaction or proactivity, there is the concept of reaction or reactivity. Synergy implies that one plus one is equal to three. That is to say, the whole is greater than its parts when proactive forces are united after a well-defined common goal.

Within these ideas there are the organization of the properties or the protection through companies by shares, the opening of banking accounts in the Dominican Republic, and the signing and consultancy of document for the purchase of properties, such as promises of sale and transaction (buying and selling) contracts.

The object of this article is to sum up as much as we can the ideas which we consider that can help to define the business goals of the investors and their level of risk. What is the main or cardinal rule to be able to evaluate if some type of risk in the purchase of a property in the Dominican Republic exists? We are going to try to offer guidance on this law - or rather laws- through the aspects that we consider that are handled in an incorrect way even by some Dominican lawyers. This is what we call “misconceptions”. These are criteria that do not go hand in hand with the practical or legal reality.

In all the areas of life a series of criteria or principles exists for getting what we call good performance. In golf, for example, we must start off a series of foundations to manage to direct the ball to the objective. This is what we called directionality. This sense of the goal is what it really constitutes the matter of investment. If we want something, we must ask ourselves the right questions, and soon we will get the answers. In this sense, I try to reunite some laws or foundations of real estate investment for our reading investors; foundations that without a doubt will allow them to come to orient their goals and to make their investments with greater awareness of the surrounding risks. It is necessary to take into account that directionality is different from intentionality. For example, the intention can be to travel towards a city that is located towards the East, but if we go towards the West, we will never get to that city.


Misconceptions:

I. - I MUST BE DOMINICAN, LIVE IN THE COUNTRY OR CREATE A DOMINICAN CORPORATION TO BE ABLE TO BUY A PROPERTY IN THE DOMINICAN REPUBLIC.

We suggest you to review -for greater information on the options to get the Dominican residency as a foreign investor- the Decree 950-01, of September, 2001, and also the recent Law 171-07, of July, 2007, on Incentives for Pensioners and Revenue Earners of Foreign Source (this last document is published at http://freddymiranda.blogspot.com in English).

This is one of the most common mistakes of some foreign investors; to think that we do not have a legislation that regulates foreign investment. In our website, which can be visited at www.freddymiranda.com and our blog at http://freddymiranda.blogspot.com, we have summarized the principles that govern foreign investment. The main objective of this legislation, number 16-95, is to grant an equal treatment to foreigners. Consequently, a foreigner, physical or moral person, has the same rights granted to the Dominican citizens; among them, the right to acquire real estate properties.

This allows us to answer the question about the need of acquiring properties through Dominican companies. It is not mandatory for a foreigner to buy through Dominican companies. A known principle like the one about territoriality - according to which in order to acquire rights in a territory it is necessary to have some type of legal bond with that territory- is not applicable because -as we indicated- the law of foreign investment protects the real estate investment or of another type made by foreigners in the Dominican territory.



Which would be then the limitation? The only control to which the foreign investors are put under is to the registry of their investment when they have the intentions to repatriate their capitals. In the case of the investment in real estate properties, the property registries (Registries of Titles) keep a list of the foreign companies that acquire real estate property in the country. So that in most of the cases the investment as such is not registered. This explains on a great scale this misconception, its origin and its lack of understanding in some foreign countries; especially in the United States.

II. - THE OPTION TO PURCHASE.

The option is well-known as a promise of sale. It is a contract by means of which the developer or the seller is committed to sell real estate property or to give real estate property in agreement with blueprints, specifications and a special design in benefit of another party that is called the buyer, in this case the foreign investor.

With respect to this case, as we are going to explain ahead, a definitive purchase does not take place, or that one in which the sale price is given and the developer or seller, according to the case, gives a property. What it does take place is an obligation to give this real estate property in a certain time, and the buyer must pay a difference of the price at that time.

Generally, this contract modality takes control of a deposit that in our Law it is named as signal or earnest (“arras”), and must in principle establish obligations for both parties. It is what we recommend to the foreign investors; that is to say, to demand that the promise of sale is not only for the investor to buy the property, but for the seller or developer to sell or to give, according to the case (the houses in pre-construction will have to be constructed to be given) the promised or offered goods in the promise.

Being clarified this point and starting off to our recommendation to demand bilateral promises (those in that both parties must conduct the operation) it is left the question about this promise in this contract, if it constitutes a true business, which takes us to the following mistaken criterion.

III. - THE OPTION TO PURCHASE IS NOT A COMPLETE TRANSACTION AND, THEREFORE, IT DOES NOT HAVE A CLOSING.

This is a misconception that has been extended by the practice stimulated by some lawyers who include restrictive clauses (“restricted covenants”) in the writing of the options in the contracts to the transfer of the property rights.


In the matter of already registered rights and finished goods, houses, villas, or apartments this makes sense because everywhere in the world the buyer must pay the price of the sale to have absolute rights on the real estate property. However, as far as it deals with rights that are based on properties to be built, whose object is a blueprint, that is to say, the pre-construction market, can we come up with the same logic taking into account that the goods must be previously built? This is the story of the hen and the egg, or the egg and the hen. In first term, the buyer seems not to have a way out because he would not be a proprietor of the goods until he pays, but it is the case that to settle the sale price in principle there must be a real estate property that constitutes an object of a selling and buying operation. So that in our opinion the investor must firstly demand that the builder or developer has to commit himself/herself to finish the goods that are the object of the real estate property so that its acquisition can be delayed or the operation is closed at that moment.

This it is a complex subject, but our message related to this topic is simple. In our Law, the union of two people to decide the purchase of goods it is a true closing of the transaction in the sense that the buyer acquires a special right on those goods although he/she has not paid, at least in principle (there are exceptions like the clauses that exist to which we have previously called as “restricted covenants”), and therefore, the buyer can demand to the seller the completion of the goods or the delivery or execution sometimes of the definitive contract only with the signature of a promise of sale.

The ideal scenario is that your lawyer advises you on the content of the promise of transaction (buying and selling) being essential in order to write the following clauses in benefit of the investor: a) a final price without variation, especially in pre-construction; b) a delivery and date to sign the definitive contract, or at least a calendar of payment with dates of building; and c) in principle, the acceptance that the promise - if it is for both parties- will be subjected to what it is established in the Dominican Civil Code (Código Civil Dominicano).



IV. - OPTIONS AGAINST THE BREACH OF CONTRACT BY THE DEVELOPER.


Another one of the frequent questions and also a source of great confusions is the completion of the option contract of purchasing in the face of a breach of contract on the part of the builder or developer in the conditions of the promise of sale. This happens in a collapse of the project that prevents to finish or to build the goods object of the promise; that is to say, a villa, town home, or apartment.

Here we are before a classic case of possible scenarios: a) legal proceeding on a registered land; b) rescind the contract by mutual consent with the builder or developer; c) establishment of measures that prevent to the builder or developer to sell the land on which would be constructed the real estate property, villa, apartment, or house.

Let us begin with option (b) for being the easiest to explain. In an ideal system, it is recommended to proceed in revoking the transaction (buying and selling) contract, in order to get the return of the paid sums in advance and to negotiate a penalty by the resulting damage of the loss of possible banking interests suffered by you as an investor. However, the problem appears when the transaction (buying and selling) has been made with the sums paid in advance not as a payment of the price of transaction (buying and selling) but as “arras” or signal (“earnest deposit”). In this case and except for restrictions in the contract, the one who has received the signal or deposit as earnest will be forced to give back the double of the sums. This is one of the matters that are preferable to negotiate with the developers before the signature of the promise.

As far as options (a) and (c), we want to unite them for the aims to offer our ideas and recommendations. In the first place, the purpose is in both cases of trying to prevent the transfer of land or lot that would serve as the basis of the construction. In that case, when a legal proceeding is opened or a civil lawsuit begins, the first thing that we do, after beginning the lawsuit of course, it is to take an act before the Recorder of Titles (Registrador de Títulos) in order to restrain the possible sale of the real estate property and a fraud to the rights of the investors. This means that if we prevent the sale of the real estate property, we would be allowing that the buyer keeps his/her proportional rights on the real estate property; proportional because you have only paid (“earnest deposit”) a part of the price. This instalment does not mean that you can claim absolute rights on the real estate property, but to legally act against the development company, since you are deserving or has rights on all of the property to recover the part that you paid for or deposited for the sale of the real estate property.[1]

In summary, you have options to protect yourself from the breach of contract by the developer/seller in the promise of sale. The Dominican law has a very advanced system. However, keep in mind that the ideal is to avoid the legal processes, since the courts worldwide operate with slowness.

V. - TO INCORPORATE OR NOT TO INCORPORATE ABROAD OR IN THE DOMINICAN REPUBLIC.


We have covered elsewhere in our website the subject of the incorporation of companies (www.dr-realestateinvestment.com.do/dr_investor.html), and the fact that in our opinion they continue to be the best option in order to protect that money that so hard has been earned by you and that you try to invest in the Dominican Republic. So we will concentrate ourselves in the steps necessary to incorporate a company in our country first and abroad in a second term.


In our mission as lawyers, and in our vision as a law firm, the idea of being a little irreverent is assumed, trying to look for ways that although they have already been walked (we do not want to reinvent the wheel) are for a greater benefit to our clients; the game is a little like that of an anti-guru. In effect, in our country, we have found the recommendation of some lawyers and law firms -some of them with good prestige- that advise without no type of doubt as a first option the constitution of a Dominican company in order to buy real estate property. We feel aversion towards that advice due to the difficulty in constituting a company in the Dominican Republic.

The incorporation of a Dominican company requires by law the participation of at least seven (7) shareholders. These shareholders may not have an equal participation, being some of them practically “nomines” or “partners” who only participate in the company to complete the legal quorum. However, this supposes a tremendous degree of difficulty for you, foreign investor, who are buying your second home or who simply want to acquire goods to sell and do not want to be bound to other shareholders. In some cases, these companies already are constituted (“shelf companies”), but this supposes at least the transfer of stocks and change of the directors, which has to be registered in the Registry of Companies (Registro de Sociedades) by the Law of Mercantile Registry (Ley de Registro Mercantil), and the new shareholders must as well be registered in the General Directorate of Internal Taxes (Dirección General de Impuestos Internos) (DGII) (“Internal Revenue Service” –IRS- in the United States). In synthesis, a true setback and an inconceivable obstacle for an investor mainly specialized in the area of real estate.

Once that this decision has been surpassed about submitting oneself to the joint control of other people whom have nothing to do with the purchase of one’s property, but that they would be used simply to fulfil the Dominican law, we are faced with the true bureaucratic proceeding that allows the incorporation of a company in the Dominican Republic.

The following steps have been baptized as a critical route for the incorporation of a company in the Dominican Republic:

1) Availability and Registry of Commercial Names. This is the preliminary registry, which allows to know if a chosen corporative name for constituting a company is free to be used. This proceeding, made with ease in almost all Central America and the Caribbean, takes at least three days.
2) Elaboration of the social articles of incorporation. Once we have the name available, a project of articles of incorporation is put under the consideration of the members. Like in the rest of the world, these articles of incorporation can be standardized, and they can be submitted according to the general practice. Nevertheless, in our country the partners sign it, as well as the list of subscribers or shareholders with their participation in the company; this is, the number of stocks that they will have in the company.
3) Payment of taxes on capital.
4) Elaboration, signature and registry of the certified declaration by the Notary Public. This is the document that serves to certify that the shareholders have the capital necessary to constitute the company.
5) Elaboration and signature of the Constituent Assembly.
6) Submitting of the documents in the Chamber of Commerce, “Law of Mercantile Registry”, or registry of companies.
7) Submitting of these documents at the General Directorate of Internal Taxes (Dirección General de Impuestos Internos) (DGII) (Internal Revenue Service - IRS- in the United States).

It is easy to notice the difficulty for a foreign investor who has just a short time to analyze his/her investment, and to see the acquired property, to wait for this type of such a slow process. The only possibility of accelerating the process for a foreign investor is the acquisition of a “shelf” company or previously constituted company. However, in this case, it is necessary to register the changes of shareholders and of the proprietor and this also takes some time to be done; at least seven (7) working days.

Now we are going to compare the incorporation of a company abroad:

1. If the company has been previously founded, the change of shareholders and Board of Directors can be made in a day, and the delivery of the company from the foreign State takes other two or three days, which means that you can have your company in a maximum of seven (7) working days.
2. In case that the client decided to constitute a company with a name of his/her preference, the availability of the name can be had in a maximum of 24 hours, and the incorporation will follow the same process, and you, investor, can have your company in the same previous term, or perhaps in one more day, but always less than the time taken to incorporate a company in the Dominican Republic.
3. The steps to follow would be the following ones: a) To give an address for the Board of Directors and the company, although this can be facilitated by the lawyer; b) To determine the amount of participation of each shareholder in the company; that is to say, if it will be a company of a sole shareholder (100% of the stocks in the name of one person) or, in the case of spouses, if the stocks will be divided on a 50/50 basis between each one of them; c) Finally, it is enough with determining the person who will take the position of Director of the company or if a board or group of people is going to be in charge of the day-to-day working routine of the company. The Directors, for those ones who are not familiar with the handling of societies, are those physical people or companies represented by physical people that control the signature of documents, the payment of accounts and, in short, all the administrative aspects in a company. In our country the companies are controlled by several people. Abroad, especially in the tax havens, such as Belize, British Virgin Islands, Panama, Anguilla, etc., these companies can have up to a single Director for the handling of the corporative subjects in the case of you, investor interested in buying properties in the Dominican Republic, the signature of corresponding contracts, definitive option or as we previously explained.

Surely you will ask about the disadvantages to incorporate a foreign company to buy a real estate property in the Dominican Republic. In effect, two inconveniences or disadvantages exist that, in our opinion, are surmountable: a) the foreign companies require of an annual payment to maintain themselves in good order or “good standing”; and b) the company must be registered in the country for the aims to transfer the property and payment of the property tax.

a) Annual rate. The average annual rate, as well as the wages and expenses of the offices that maintain the registries of your company, oscillates between US$1,200 and US$1,500; these values can be reduced still more depending on factors that are not the object of this article. Nevertheless, if you compare the fact that in our country it is mandatory in our country for the Dominican companies to keep or to submit monthly declarations although they are not operating, to register the company in the social security, and other obligations, you will notice that you have to pay to an Authorized Public Accountant the wages for this work plus the payment of the annual declaration. Consequently, it is more advantageous in my opinion to defer this cost. Up to what moment? This takes us to the second of the disadvantages to incorporate a company in a tax haven.
b) The registry in the country. Your company must be re-addressed in the country to be able to fulfil the diverse tax commitments such as payment of taxes on the property and tax transfer. This proceeding represents for you, intelligent investor, an additional cost. So you will ask: So why to incur in this additional cost? The answer is that being the option to purchase the more frequent document, or the main contract to buy properties in development (pre-construction) it is not convenient to document or to make transparent its operation in the Dominican Republic. It is for this reason that we recommend to defer the moment from registry of your company. Once having an address in the country, your company is subject to formal duties with the General Directorate of Internal Taxes (Dirección General de Impuestos Internos) (DGII) (“Internal Revenue Service” –IRS- in the United States). The formal duties mean reports that will have to make your company on its status; this is so if it is operating or making businesses in the country or not.

VI. - ANOTHER MISCONCEPTION: SIGNING OF DOCUMENTS ABROAD.

One of the most common practices in the modern world is the signing of documents anywhere in the planet to make them valid in a certain country. It is frequent nowadays to be sleeping whereas their buyers or sellers are abroad discussing and signing documents related to the purchase and sale of properties or products.

This world-wide practice has in the Dominican Republic an important limitation: our country is not a signatory State to the convention of apostilles; agreement that allows to the consulates or diverse offices to guarantee the signature of documents when these are signed abroad. This generates a tremendous confusion among most of the foreign investors. How do you proceed then?

Firstly, you will have to understand that -although in our country there is a law that protects the digital signature of documents- this legislation is not still so well recognized in practice. Consequently, you will have in principle to follow the tedious consular proceeding when you want to validate the signing of documents that will be executed or will be valid in the country. This is very important because if you, intelligent investor, have to take your case before the courts it is not convenient for you to have documents of purchase of your real estate property, apartment or house, that it is not properly certified and executed with the validity required by the Dominican laws. And which are those requirements of validity? Simply it is one, and it is that the document that serves as a prove is legally signed by the person against who you want to make it valid. This is what it is known as prove requirement. This means that your contract can be accepted, but if the signature of the seller (promotional agent or developer) in this case is under debate you will have a risk on your investment, because the operation could be rejected by the Dominican judicial system.

Secondly, and to follow with our recommendations, you must make sure to guarantee the signature of documents proceeding with their legalization, at least in principle by a Notary Public of your State or country of origin. Do not trust the apostille system of documents because not all the Dominican instances, offices or courts will accept them as valid. Once obtained this legalization, the most common accepted practice according to consular laws that control the consular and diplomatic offices abroad is the one to have the Dominican Consul to certify the signature of this Notary Public through the confirmation that has to be made by an office of your State in favor of this Notary Public authorizing him/her to sign valid documents, as a general rule the secretary of your county (County Clerk).



Finally, thirdly, if you were to proceed to the digital signature of documents you must make sure that the same ones (the companies of the developer and the buyer) are in encrypted documents or programs that do not allow their modification and can soon prove in the Dominican courts with ease the authenticity of those documents. This is so for the improbable case of a legal action against the seller or developer in the case of real estate in pre-construction.

VII. - THE PAYMENT OF TRANSFER AND PROPERTY TAXES.


We have already said that our country has experienced strong changes in the structure of taxes and the amounts to pay or taxable rates. Within those reforms, the most recent affects -but in a positive sense- the transfer tax of real estate property.

The transfer of property is a topic of confusion for certain investors, mainly those of an American origin. The source of this confusion is the poor quality of information received, and in addition, the fact that both systems of registry of the property differ.

The basic differences, continuing with the American market (probably the greatest investor in the matter of houses in pre-construction) are in the tax basis, that is, the amount to be calculated on the payment of taxes and in the system of registry.


Our system is not based on a chain of acquirers, but in a true registry and title issuance where it matters little who was the last acquirer. The registry has a list or information mainly on that which can affect the transfer, sales transfer or getting the certificate of the title.

The buyer has, then, to get a certificate of title that is issued through the Registry of Titles of the place where the real estate property is located. To such aims a definitive contract of transaction (selling and buying) with the value of transfer is due to be registered. This value is the one that creates the greatest confusions to the investor.

Our tax system offers in many cases a true advantage to the national or international investor. This is the one that -although it does not allow it specifically- admits that the value for the payment of the tax of transfer is the value registered by them (the investors), appraised by themselves (the investors) for the payment of the tax to the property, today so much changed and with so many names that we do not know how to really call it, but that in summary, It would be taxed on the Assets of appraised value the companies and Tax on the Real Estate Property (Impuesto a la Propiedad Inmobiliaria -IPI-) for the physical people.

This tax is paid on the basis of the value of appraisal of the real estate property that -as we said- represents certain type of advantage because it can be (and thus it happens in many cases) that the value of transaction of the real estate property is greater than the value of appraisal of the real estate property and as an investor you take the advantage of this reduction in the payment of taxes. The way of taking advantage of this advantage supposes experience and practical knowledge, so it is the reason why you are advised to contract the services of a good accountant or an experienced lawyer.

The tax to the property for the investors who follow our gold advice to protect their real estate properties through the incorporation of national or foreign commercial companies is called Tax on the Assets (Impuestos sobre los Activos), and it implies to maintain the company in order regarding to its accounting or financial registries, this is, expenses and income. The aid of an accountant to benefit from the few advantages that grant the tax laws and norms is essential in our opinion.

VIII. - MAINTENANCE OF COMPANIES.

We have insisted on synergy, proactivity and directionality, and in the coordination of two disciplines like the accountant and the lawyer so that you can leverage on the advantages (the very little advantages) that you could receive from the Dominican tax system. One of the reasons in our opinion that it is in the limits of stubbornness, is that -after the changes in the tax legislation- the commercial companies, which have not escaped to those changes, must be kept in good order and with their registries of accounting operations fit to the norms of the General Directorate of Internal Taxes (Dirección General de Impuestos Internos) (DGII) (“Internal Revenue Service” –IRS- in the United States).

Why does this topic of the maintenance of companies create so much confusion? The reason is in the routine. In the past one got used to presenting the declarations of income tax of companies that were created to protect real estate property as companies without operations. This practice supposed that the company hid part of its real tax situation, such as income and expenses.

In the last change introduced to the system of tax payment to the property settled down that the companies reported without operations, this is without taxes to pay on the income (Impuesto Sobre la Renta (ISR) -Income Tax in the United States-) are forced to pay at least 1% on its assets like a minimum payment.



The direct consequence is that you must: a) make sure that your real estate property appears registered correctly in the accounting registries of your company; b) that in principle you can report the greatest amount of real expenses of the company, in special those that can be subject of the total tax deduction to be paid; and c) guarantee and indeed verify that the tax is paid on the real estate property so that it can benefit from the possible reduction of the income tax, or the revenue earned.

We recommend that you get legal advice, because we have not dealt with this subject here with all its depth, but –moreover- it is good that you, intelligent investor, get aware of what the laws have changed, and nowadays you will take advantage of, perhaps, we do not guarantee it, more of the order than of the lack of control in the registries of the necessary operations for the maintenance of your property. Do not be satisfied with a routine answer, and you will surely find routes to get the greatest benefit from your money and your main assets: the real estate property, your second home, or your investment.

In another article that will count with the collaboration of one of our partners, we will approach the topic of the Dominican residence for investors and the opening and handling of banking accounts.

LEGAL DISCLAIMER: The present document and its opinions do not constitute a definitive legal advice. The opinions that contain this article are based on the experience of the author, and the fact of wisely having made all the diligences necessary to obtain the legal data that it contains making sure that this information corresponds with the reality of the market and, by all means, comply with the laws. If you wish greater protection, we always advise you to contract the services of a lawyer, so that you may prefer our law firm or another legal adviser.
[1] Some conditions to establish a lawsuit about real estate properties when it deals of future developments are found in the new law of lands, but we don’t refer to them because they are not the object of this article.