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Alfredo Guzmán-Saladín, Fabio J Guzmán- Saladín and Alberto Reyes Báez
1) How common is project finance in your jurisdiction? In what sectors is project financing most common?
Project finance is very common in the Dominican Republic. Most of the projects develop by international or local investors are financed through multilateral banks, international banks or private banks, both individually or, in most cases, through financing pools due to local regulatory banking limits for single bank financings on large projects.
In our opinion, the lenders obtain the required assurance based on the project itself and the parties involved. It is not solely based on the funds disbursed but also on the know-how and administration of the project, which is provided by the investors, shareholders, lawyers or a third party hired to that end.
Over the years, project financing has evolved from areas that usually involved public services such as energy, telecommunications, transportation, health and water supply, to private sectors that include construction and infrastructure.
2) What kinds of institutions typically act as sponsors and lenders in your jurisdiction? Why?
The DR works on a regular basis with multilateral banks for investments, the Inter-American Development Bank, private entities and public debt through bonds in the capital markets.
Private projects are usually sponsored by related entities that are controlled by the same shareholders’ groups and also, through equity and debt with local and international banks. Local publicly traded closed-end funds have recently joined the market in financing major developments.
As to the reason why multilaterals and financial institutions are the most common borrowers of the projects, this is mostly due to credibility, reputation and good standing, which creates a better environment for the investors and facilitates the negotiations. On the other hand, multilateral institutions provide an aggregated value to the project that excels mere funding, being able to provide holistic support in the execution of the process.
The DR has ambitious projects on deck (new railways, renewable energies, port facilities renovations) which have called the attention or are being sponsored by China; however, up to this date, all projects are in the exploration and analysis phase. The Dominican Republic just in 2018 established diplomatic ties with China.
3) What structures are most common?
The structure to be used for the execution of the project is usually determined by its nature, which results in the Dominican Republic having used almost all the available structures.
In most of projects that involve the building and operation of a public service – transportation – the BOT model is the preferred structure to finance the project. In other cases, where there is no infrastructure involved –telecommunications – the BOO structure is the most common one.
PPPs have been an option in the past mainly for energy production and in the present for low income social houses projects and affordable housing, as well as Tolls and Highways. Currently, a bill to regulate PPP is in Congress, but has not yet been approved; hence the PPP legal system is based on the Public Procurement Law 346-06.
4) Does local law require (or is it advisable) that the project company be organised under the laws of your jurisdiction? What is the typical legal form of a project company and why? Does local law require that any of the project company’s equity be held by local investors?
Under certain regulated sectors, such as telecommunications, banking and insurance, the project company needs to be organised under the laws of the Dominican Republic, even though in most cases there are no limits or restrictions on their shareholders’ nationality. Organisation under DR Laws is also required if the project seeks to benefit from tax-exempt regimes, such as the Tourism Industry CONFOTUR Tax Exempt Regime.
Subject to certain limitations, the same applies when the project is state-owned. Pursuant to local law, in some public procurement cases, a percentage of the company’s equity must be held by a local investor in state-owned projects.
The typical forms of corporate entities under which projects are organised include limited liability companies, simplified per-share corporations and per-share corporations, which is, among other corporate vehicles, the entity that offers the strictest corporate governance, bringing a perception of safety to both the lenders and the sponsors.
Limited liability is well established in our laws and is offered by all above-mentioned entities; corporate veil piercing may take place when a company is set up for fraudulent purposes or conducts its activities with the objective of defrauding third parties.
5) Please describe the foreign investment regime in your jurisdiction.
In the Dominican Republic, foreign investment is ruled by Law No. 16-95 enacted on 20 November 1995, and its enabling regulations, eliminated all barriers formerly imposed on international investments in the Dominican Republic. Investors contributing capital to companies operating in the Dominican Republic are granted unlimited access to all sectors of the Dominican economy, except to those related to national security and certain sensitive industries; also, with those same limitations, the Constitution grants the same rights and liberties to foreigners and locals. This includes foreign investors.
Furthermore, in 2013 the Centre for Exports and Investment of the Dominican Republic (CEI-RD) was created. The main purpose of this agency is to support foreign investment in the country and streamline all central government procedures under a one-stop shop programme.
There are no nationality restrictions, residency limitations, nor registration requirements for foreign persons or entities to incorporate local subsidiaries in the Dominican Republic.
6) Are there any restrictions on payments abroad or repatriation of capital by foreign investors?
No restrictions or controls apply to the remittance of investment returns or loans repayments abroad. The foreign investor has the right to remit abroad in foreign currency all capital invested, as well as capital gains and dividends, after complying with the existing tax legislation.
As for taxes, the general principle is that Dominican source income (income derived from investments or interests located in the Dominican Republic) is subject to taxation. In that regard:
There are no restrictions onrepatriation of earnings or currency conversion.
7) Is it permissible for a project company to maintain offshore foreign currency (eg, US dollar) accounts?
Yes, they may establish and maintain foreign currency accounts in other jurisdictions as well as locally. Only US dollar and euro accounts are available at local financial institutions.
8) What recent measures has your government implemented to make projects in your jurisdiction more attractive to foreign investors? Has this involved making government or other local sources of co-financing more available for projects?
According to the equal treatment principle set by Law 16-95 on Foreign Investment and the Dominican Constitution, foreign investors are entitled to the same rights and obligations available to national investors.
Generous tax incentives are granted in the Dominican Republic to projects in the following sectors: tourism, renewable energy, free zones, film production, among others.
9) Will any of the financing or project agreements need to be registered or filed with any government authority or otherwise need to comply with local formalities to be valid or enforceable? Even if not necessary for enforceability, is there any special advantage in complying with local formalities?
All security agreements must be executed or translated into Spanish, notarised, and registered according to the Dominican legal regime of the collateral.
If executed abroad, agreements must be apostilled.
The financing agreement only needs to be translated if it will be enforced pursuant to local laws. Government debt is subject to Congress approval.
10) Are there any advantages in having the project company issue promissory notes that are governed by local law in addition to the credit agreement governed by New York (or other law)?
Yes, it is advisable to have local documents. For instance, in the DR a notary public authenticated promissory note (Acto Auténtico) allows the creditor to initiate foreclosure procedures over the assets of the debtor without going to court to validate the debt. The dame will apply to duly registered mortgage or chattel pledge agreement.
In other hand, Law 189-11 on Trust and Development of the Mortgage Market offers the option of warrantee trusts, which allows the creditor to directly execute the debt with the guarantees or assets given in trust by the debtor.
11) Must any agreements (finance or project) be governed by local law?
As a result of the principle of contractual freedom, and according to International Private Law 544-14, foreign law may be chosen as the applicable law to an agreement to the extent that such a choice of law is not contrary to public policy. New York law
and the laws of England and Wales are frequently chosen for finance agreements. As for matters governed by domestic law, it should be noted that securities involving real estate assets and moveable assets (chattel mortgages) located in the Dominican Republic are subject to Dominican law as a matter of public policy order, although overlying credits agreements can be subject to foreign law.
12) May a collateral agent act as the sole secured party for the benefit of a group of lenders whose composition may change from time to time?
Yes. A sole collateral agent may act as the only secured party on behalf of several borrowers. First, second and third-tier banks as well as any other financial institution that is duly authorised by the local agency – Junta Monetaria y Financiera – can act as a collateral agency.
However, there is a limitation as to who can serve as collateral agent given that it is only possible for legal entities that are authorised as collateral agents under their social object.
Trust companies are also allowed to act as the only secured party and are a very secure and transparent vehicle to do it.
13) May a security interest be granted with respect to all of a project company’s assets? Are any types of property considered personal in nature (eg, permits that are granted to an entity that has satisfied certain specific requirements) or “of public interest” such that granting a security interest therein (or foreclosure thereon by the lenders) would not be permissible?
Under Dominican laws security interests, such as mortgages, liens, privileges, encumbrances, pledges or endorsements, may be granted on the following assets:
It is important to note that Dominican law does not recognise the possibility of granting blanket security interests over an entire business; security interests must be granted over specific assets.
However, with the enactment of Dominican Trusts Law No. 189-11, a single collateral instrument denominated warranty trusts can now be created, comprising all or some of the assets listed above.
Foreclosure procedures over mortgages, boats or ships, aircraft, registered assets such as pledges and chattel pledges are supervised by the court and must be done under regulated procedures that are deemed of public order.
Other foreclosure procedures have legal requirements of public order and a court can intervene if the debtor challenges it.
14) What costs are associated with registering collateral security interests in your jurisdiction? Are such costs determined with respect to the obligations secured or the approximate value of the property?
Fees for filing real estate mortgages amount to 2 per cent of the mortgage amount.
Securities over aircraft are also subject to an administrative registration fee, and filing fees for the registration of the security at the National Institute of Civil Aviation.
Securities over ships and boats also generate a registration fee, in this case according to their size and tons. Other securities, such as pledges, will generate minimal stamp duties and other fees.
There is no legal technique to minimise the impact on taxes and fees applicable to the registration of mortgages and other securities, aside from not registering them, which would leave the creditor unprotected with regard to third parties and would prevent him or her from foreclosing on the collateral until taxes and fees are paid and the collateral registered.
15) Does your jurisdiction require lenders to stipulate the value of their collateral security in the relevant security documents? If so, what happens if at the time of foreclosure the property is worth more? Must such amount be stated in local currency even if the financing is in a foreign currency? If so, what protections may be implemented against devaluation of the local currency?
Local laws and regulations require that creditors indicate the amount of the debt that is secured by the collateral. Regarding the obligation of indicating the value of the collateral, this is required for movable assets, whereas in the case of real estate, there is no need to indicate the value of collateral.
If at the time of a foreclosure the value of the property exceeds the accrued amount, two possible scenarios can occur;
(i) either the property is bought by a bidder who pays the price or (ii) the creditor is declared awardee of the property. If the first scenario occurs and the price paid by the bidder exceeds the accrued amount, the creditor has to pay the debtor the remaining amount after clearing the debt; on the other hand, if the creditor results awarded with the property, there is no obligation of paying back to the debtor, even if the property value exceeds the amount of the debt.
As to the currency, in accordance with the dispositions of article 24 of the Financial and Monetary Code, parties can convene in a foreign currency, including euros and United States dollars, the most common foreign currencies used in transactions and the ones recommended. Even though the risk of devaluation is not very high, these kinds of transactions normally include indexation clauses.
16) Does each item of collateral (eg, equipment) need to be individually identified (whether by serial number or otherwise) in the security document to grant a valid security interest in that item? Or would a general description of the types of collateral covered be sufficient?
Yes, pledged properties need to be described in detail; the extent of the detail will differ from the kind of property being pledged.
For instance, in the case of properties that are government-registered (vehicles, boats, real estate) the description of the asset has to be in accordance with its registration. In some other cases, such as inventory pledges, there is no need to individually identify the collaterals. In this last scenario, the mechanism that is frequently used when drafting the agreements should indicate the characteristics of the pledged assets as well as a minimum inventory that has to be available.
17) How do lenders satisfy themselves with respect to the absence of other liens on their collateral? Are liens centrally recorded or searchable? May contractors file mechanic liens? If so, are lien waivers enforceable?
In general terms, creditors may conduct a title search at the appropriate public registry to ascertain the legal status of the assets of a potential debtor, before agreement to receive said properties as collateral.
For example, for real estate properties, a certification of liens and encumbrances from the Land Registry Office of the jurisdiction where the property is located can be obtained. This certification will identify the recorded owner of the property and if there are any registered mortgages, liens, or other third-party rights, etc, on that property.
For movable assets, the certification is issued by the Justice of the Peace of the jurisdiction where the assets are located or from the domicile of the debtor, if they are not the same.
For motor vehicles, aircraft and boats, creditors can obtain information at the government offices where pledges on these assets are recorded, and also the Tax Administration.
For intellectual property rights, the creditor may obtain information at the National Office of Intellectual Property.
In the case of securities over shares, information is available at the office of the Mercantile Registry of the jurisdiction of the registered office of the company.
As for contractual rights and receivables, creditors must keep on file a copy of the notice given to the debtor.
Finally, for financial instruments and securities, the creditor must require its debtor to authorise the bank to disclose such information, when a bank is involved, or can search for it at the registry of the corresponding authorities.
Title insurance is not available by local companies. Some foreign locally registered companies do offer title insurance but they are not very useful in our jurisdiction and are seldom requested, given the number exclusionary clauses included in their contracts.
18) What steps must a lender take to foreclose on a collateral security interest in your jurisdiction? How does a beneficiary of a guarantee provided by a local entity or granted under local law enforce such guarantee? Are any self-help remedies available? Is a public or private sale permissible or required? Is a judicial sale necessary? May lenders participate as buyers in any such sale, including by bidding the debt owed by the project company to them in lieu of cash? May any such sale (private or public) be for foreign currency? Is foreclosure on a pledge of the ownership interests of the project company more efficient and less time-consuming than a foreclosure on individual assets of the project company?
According to local regulations, creditors do not have self-remedy options available.
It is mandatory for creditors to initiate a foreclosure or collateral execution process, being explicitly prohibited to take the collateral as payment of the debt – known as pacto comisorio.
The foreclosure or collateral execution process will be determined based on the kind of collateral at hand.
The only common denominator in all foreclosing or collateral execution processes is that the creditor has to (i) notify the debtor of its default; (ii) initiating a judicial process for the execution of the collateral, which leads to a public bidding, and if there are no bidders, the creditor will be awarded the property of the collateral to clear the debt. The only foreclosure procedure that is done without court intervention is the seizure of movable assets with a local judgment or notary promissory note.
Even though it is possible to agree in foreign currencies, when foreclosing the collaterals, the amount of the debt can be paid in pesos at the exchange rate of the day.
The creditor cannot bid or buy the foreclosed item at public auctions under a foreclosure or collateral execution process. The foreclosure procedure timing is the same for a person or company; the difference resides in the type of procedure.
Execution of a mortgage takes the longest, while the execution of a pledge or movable asset can be done, if no legal incidents are presented, in under a month.
19) What creditors would enjoy a higher statutory priority with respect to the collateral security than the lenders?
According to local regulations, there are several privileged creditors that will have priority when collecting a debt.
The highest privilege is granted to the local tax authority, followed by employees with accrued amounts and, lastly, several privileged creditors listed in the Civil Code. The latter include:
The mortgage legal regime of a recorded property allows the first lien mortgagor to collect even before a privileged creditor per the above list.
20) Would the lenders incur any liabilities upon foreclosure relating to project assets (as opposed to equity)?
Creditors or lenders would not incur in any liability upon foreclosure. However, if the foreclosure process is not done per the dispositions of local laws or it is done to harm a third party, the creditor could be held liable for the foreclosure.
21) What legal restrictions exist with respect to the operation of the project post- foreclosure by the lenders or their designee?
In principle, there are no legal restrictions regarding operation of the project after a foreclosure process has been undertaken. However, if the foreclosed project provides public services or are part of a regulated sector, it is usual that continuity of the service is agreed on the initial contract due to the nature of these kind of services. Additionally, it may be requested that the new operator or buyer of the process has the same expertise as the original service provider.
22) Would the agreement by a project company’s equity holders to make capital contributions to the project company (or directly to the lenders in satisfaction of the debt) be enforceable by the lenders (assuming such rights have been collaterally assigned by the project company to the lenders) in bankruptcy proceedings of the project company?
Yes, but the contribution done by shareholders are usually considered as subordinated debt and therefore, the last in the list when collecting within a bankruptcy procedure.
23) Can a project company organised under local laws validly submit to the jurisdiction of a foreign court?
Yes, it is possible to submit any conflict to the jurisdiction of a foreign law. However, it would be advisable to discriminate what kind of conflicts would be resolved in a foreign country, given that if a matter regarding debt collection is resolved in a different jurisdiction, the enforceability of the decree would be subject to a prior process in the Dominican Republic to pursue local assets.
24) Is service of process by mail recognised in your jurisdiction or would the project company need to appoint a process agent? If so, does the project company need to grant the agent a power of attorney?
Service of any legal procedure must be done by a bailiff (there are a very few exceptions in the law, for instance, service to a hearing before the Supreme Court).
The power of attorney is presumed in the Bailiff Act.
25) Are foreign judgments and arbitral awards enforceable in your jurisdiction? If so, does any process of ratification or additional review need to be carried out in the local court system as a condition to such enforcement? Do sovereign or quasi-sovereign entities (eg, a counterparty to a major project document to which the project company is a party) have the capacity to arbitrate as a matter of local law?
The Dominican Republic has been a member of the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards since 2001. Also, the country has been a signatory since 2008 to the Inter-American Convention for International Commercial Arbitration. Local courts are bound to recognise arbitration agreements as well as the mandatory referral of disputes relating to these agreements to arbitration.
According to Law 489-08, judicial enforcement of foreign arbitral awards are subject to a court order called an exequatur, issued by local courts. The main requirements for the Dominican courts to grant an exequatur are that the legal requirements in the country of origin have been correctly applied, due process of law was respected, and that the ruling has been authenticated, apostilled and has complied with the formalities required by the law of origin.
Yes, subordination of debt is recognised under our jurisdiction. Secured credits would only succumb to a privileged credit as indicated hereinabove. Payment on a pari passu basis would only occur if senior lenders waive their preferred creditor status.
27) Are there laws in your jurisdiction that regulate how tariffs payable to a service provider (eg, a power plant or pipeline company) must be calculated? If so, please describe briefly.
There are some sectors that do create regulated tariffs (energy, fuel) and others are freely contracted.
28) Do environmental, tax or other liabilities relating to the project extend beyond the project company to the direct or indirect owners of the project company or to the lenders?
In principle, these kinds of liabilities remain with the company project, and shareholders are shielded under limit liability rules.
While the rule established under our Tax Code states that the corporate entity is the one that is liable for the payment of its taxes, the Tax Authority (DGII) under a lax interpretation now considers that entities and its managers and shareholders are to be considered as jointly liable for the entity’s tax liabilities.
In environmental matters, if it is proved that the damage was caused intentionally by the company directors or stockholders.
There are no restrictions applicable to the importation of project equipment to the Dominican Republic, provided that the applicable custom duties are paid. There are laws, such as the Competitiveness and Industrial Innovation Law 392-07, that grant classified and registered companies some exemptions to import equipment and machinery necessary to carry out their industrial processes.
Under our local regulation, foreigners may freely own land. As to natural resources, the State is the sole owner, however if a third party undergoes the required process, it is possible to grant them the right to exploit, use or grant a concession over said natural resource, as long as it is not explicitly prohibited by law.
31) Please describe any other relevant legal considerations relating to project finance in your jurisdiction.
If the project at hand is destined to provide a public service, there are certain formalities that must be considered regarding those related to public sector initiatives. Among those, the compliance with Law No. 340-06 regarding public procurement, which dictates that the adjudication of a party must be preceded by a public bidding. The public bidding process guarantees that the party’s selection is transparent and based on the best economical and technical offer that guarantees durability of the public service that will be provided.
32) Has specific PPP-enabling legislation been passed in your jurisdiction? If so, and if applicable, has it been passed at the federal, state or municipal level and is it sector- specific?
No, the Public Private Partnership (PPP) bill is still in Congress under review.
33) What legal limitations, if any, are there (whether constitutional or otherwise) on PPP transactions in general or with respect to particular sectors? Are there any limitations on the contracting power of the state, the state’s ability to incur long-term fiscal obligations, or the extent to which certain government functions may be performed by the private sector?
Most of the limitations derive from the state’s ability to fulfil its obligations or delegate functions, which, under the Dominican Constitution, are subject to congressional approval.
34) Please describe the most significant PPP transactions that have been closed to date, including identification as to whether they were closed under existing or prior legislation?
The DR does not have a law to regulate PPPs. There is a bill in Congress pending review.
In this sense, what the DR has so far developed are Concessions and public-private companies in some sectors.
One relevant case worth mentioning is the only oil refinery in the country, which is a corporation owned by the Dominican state (51 per cent) and a foreign entity.
35) Does your jurisdiction have a national or regional centre of excellence or other authority with responsibility for developing PPPs and best practices? If so, please describe this authority and its role.
No, although the bill in congress proposes the creation of an entity destined to regulate PPPs.
36) What are the most common PPP financing structures in your jurisdiction and why?
PPP as a regulatory legal figure is still pending in the Dominican Republic.
In the meantime, the assignment of third parties to provide public services is done through public concessions usually in the infrastructure, telecommunications and mining fields.
37) What are the most common procurement processes for a PPP transaction in your jurisdiction?
38) What do you see as the primary impediments and drivers, both legal and commercial, to the development of PPP in your jurisdiction?
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We appreciate your interest in our services. If you wish to consult us, please fill out the form below with your personal information and send us your questions. We will answer you as soon as possible.