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COVID-19 Pandemic Impact on Real Estate Operations in the Dominican Republic

As most of the productive sectors in the country, the Dominican Republic’s real estate sector has not been able to escape the COVID-19 outbreak’s impact. Amidst this new reality, it is indispensable to weigh in how this pandemic as well as the measures taken by the Dominican authorities to respond to it, will affect ongoing real estate transactions, whose normal course has been interrupted by the pandemic. The analysis of these transactions will always depend on the purchasing method and negotiation, and the effects on the negotiation terms that the state of emergency decreed by the Dominican state on March 19th 2020 and subsequent measures could have on them.

Obligations derived from any negotiations made prior to the date of the state of emergency’s decree (March 19th 2020), could be influenced by the statement of emergency. However, if the negotiation had been closed after the declaration of the state of emergency, there would be no place to point out this situation as an excuse by either party to comply with their respective contractual obligations, because for a contracting party to benefit from force majeure based on the state of emergency and the measures taken afterwards, these events should have been unpredictable and unavoidable to them. It is evident that any closing, final or preliminary, executed after the beginning of the pandemic in the Dominican Republic or after the measures taken by the Dominican state in its response could never be considered as unpredictable for the purposes of this discussion.

In the following lines we will evaluate some typical real estate transactions that could have been affected by the current status, taking into account that each situation must be analyzed on a case-by-case basis in the event of disagreement between the parties, especially if the contracts contain clauses addressing the suspension or termination due to force majeure or any other external reason which may impact their agreements. Some of the most common cases include:

  • Off-Plan purchases: This is the most affected case by the pandemic because, in the Dominican real estate market, developers are engaged not only in selling and marketing their properties, but also in constructing them. The property’s construction involves a working timetable whose progress is completely stalled at this moment, due to the measures taken by the Dominican Republic’s government, which limit all traffic and movement of people and have shut down operations of private sector companies that do not offer basic services. In tourist areas, most real estate developers classify their projects under the country’s Tourism Incentive Tax Law (CONFOTUR) which allows them to access tax and customs exemptions, especially for the import of building materials and initial furnishings. Constructions classified under this law have also been affected by measures taken locally as well as internationally, due to restrictions on international trade and domestic policies issued by the countries of origin of those products. It is quite  likely that these constructions will be put on hold for as long as the state of emergency remains effective and until the international trade is reactivated. However, this interruption may not be opposable to buyers if it comes from elements or matters related to the developer or his internal structure, such as labor issues or liquidity or cash– flow problems. In many cases, when buyers accept the construction quality assurance report, they have prior knowledge of the materials’ origin, under these conditions, suspension of the purchase agreements due to issues sourcing said materials given worldwide restrictions on trade could be opposable to them. Finally, it is important to take into consideration that the suspension of the execution of the parties obligations under the contract must be reciprocal: the buyer could withhold the payment of any installment of the purchase price that becomes enforceable during the emergency period, especially if the construction is interrupted.
  • Real estate’s reservations: It is common that at the beginning of a negotiation for purchasing real estate, a reservation agreement is signed to take the property out of the market by means of a payment from the buyer, a deposit that is usually made in the hands of a third-party escrow agent (brokers/lawyers). This type of instruments are known for having relatively short terms (from 30 to 60 days), within which the seller usually undertakes to provide all the documentation required by the buyer’s lawyer, including certifications issued by governmental and judicial entities, in order to carry out legal and tax checks prior to the purchase of the property. If the reservation period expires during the emergency period without the seller or the obligated party being able to meet the requirements of the reservation because he or she has been unable to do so as a consequence of the State of Emergency measures taken by the government, it is reasonable to consider that the period should be suspended from the date on which those measures came into force and resumed when the state of emergency is lifted.

  • Option-to-purchase agreement: The case of the purchase option is quite similar to the case described above, considering that the binding nature of the purchase generally depends on the exercise of option for an agreed period and subject to the confirmation or delivery of the seller of certain information or documents that are largely issued by governmental or judicial institutions, indispensable for the buyer to decide whether or not to proceed to the acquisition of the property. Perhaps, some of these documents may not be obtained during the emergency period due to the closure of certifying institutions, which must undoubtedly be sufficient cause to extend the term of the option if the buyer does not have enough elements to form his conviction on the purchase. However, if the term expired BEFORE the entry into force of the measures issued by the Government or if, notwithstanding the measures taken, it is possible to obtain the relevant information or documents, there will be no reason to justify the breach of the agreement.

It should be noted that each specific case must be examined individually in order to correctly determine the obligations undertaken, the scenarios which may have been already foreseen by the parties and whether such obligations could be suspended by the current state of emergency. Guzman Ariza is at your disposal to evaluate your case.

The National Export Free Zone Council (CNZFE)’s Announcement on Companies Reactivating their Operations

The National Export Free Zone Council (CNZFE) announced on April 7th , 2020, that all companies within the sector planning on reactivating their operations would have to formally submit a reactivation of operations' request before the CNZFE on company letterhead with the following information:

  • Date of reactivation of operations.
  • Justification for the re-opening.
  • Workers who will be reinstated.
  • Workplace area measures.
  • Distancing and hygiene protocol to be enforced to contain the spread of the COVID-19, such as: mandatory temperature monitoring, use of face masks, workplace clean-up and hygiene measures in all areas and including for employee transportation companies. The CNZFE has 48 hours to process the request.

The Dominican Tax Office (DGII) Temporarily Exempts VAT (ITBIS) Payment on the Following Medical Products

  • Hydrogen peroxide (oxygenated water), even solidified with urea.
  • Rubber surgery gloves and disposable gloves for use in medical examinations and laboratories.
  • Non-woven fabric masks and clothing used exclusively in hospitals, including disposable ones.
  • Medical, surgical, or laboratory sterilizers.
  • Breathing devices (resuscitators) and tomography equipment managed by an automatic data processing or treatment machine.
  • Thermometers for clinical treatment or data processing.

This measure is effective as of 4/14/2020 and will remain in force during the state of emergency period.

New Tax Relief Measures by the DGII to Lessen the Economic Impact of COVID-19 in the Dominican Republic

1. New deadlines for filing and payment the following obligations:

  • Other Withholdings and Supplemental Wages (IR17) dated 4/13/2020 are extended until 4/24/2020.
  • The following payment obligations extended until 5/29/2020: The Corporate Asset Tax’s second installment, Individual Persons and Undivided Estate Income Tax (IR-1) and the first installment of Income Tax under the Simplified Income Tax Regime based on income, natural persons and agricultural sector as well as the Income Tax based on income, legal persons and purchases as of 4/30/2020.

2. Taxpayers may pay their March VAT (ITBIS) in up to 3 installments, without any interest or surcharges. These new authorizations for payments will be generated automatically when the VAT Affidavit with deadline 4/20/2020 is filled.

3. Taxpayers may pay their March excise tax on alcohol and tobacco products in up to 3 installments, without any interest or surcharges. Authorizations for payment will be generated automatically when the excise tax on alcohol and tobacco products Affidavit with deadline 4/20/2020 is filled.

Income Tax Advance Exemptions and Deferral of Both Payment Agreements and the Entering Into Force of Law 46-20

  • Taxpayers, including corporate entities and sole proprietorship, with monthly obligation to pay Income Tax advances are exempt from payment of said advance for the March 2020 fiscal period. This provision does not apply for large taxpayers, except for those whose business have been ordered to shut down during the State of Emergency.

 

  • A three-month extension is granted for taxpayers with payment agreements in force as of 3/19/2020, applicable to installments with closing dates in April, May and June 2020.

 

  • Law 46-20 on Voluntary Wealth Disclosure is deferred until further notice. This statute establishes a special and transitory tax amnesty for taxpayers to voluntarily disclose or reassess all their movable and real estate properties located in the country or abroad.

President Danilo Medina Issues Decree That Modifies the FASE Program

1. The FASE program will grant a maximum financial aid of RD$8,500 to employees in companies who have shut their operations and have had their employees furloughed, as long as their employers are up to date with their Social Security contributions for the period of February 2020. Employees in the following sectors will not able to benefit from the FASE program:

  • Supermarkets, grocery stores, pharmacies and any commercial store dedicated to the sale of raw food, medicines and hygiene products.
  • Logistics, distribution and transportation companies of raw materials and finished products for the agro-industry and food.
  • Agriculture, livestock and fishing companies.
  • Food industry.
  • Private security companies.
  • Mining.
  • Financial sector, pension fund administrators, labor risk administrators and insurance sector.
  • Energy sector.
  • Healthcare industry.
  • Telecommunications.
  • Among others.

2. Manufacturing companies and micro, small and medium-sized companies, which continue to operate with the Ministry of Labor’s authorization, will temporarily receive RD$5,000 per employee to help them meet their payroll obligations. The rest of the salary must be covered by the employer.
3. To qualify for the FASE program for the benefit of employees which will be kept on payroll, companies must not furlough employees during the following month. Furloughed workers, on the other hand, will be allowed to take advantage of the program’s benefits.
4. The Ministry of Labor may authorize FASE benefits to companies that have shut down their operations but have kept all their employees on payroll and are up to date with their Social Security contributions.
5. For furloughed employees, employers must start the process online by filling the DGT-9 form at the Ministry of Labor’s website, while that for the reduced working hours can fill out the DGT-4 form; both at the SIRLA site.
6. FASE will be active for a maximum of 60 days from 4/2/2020.

Restructuring and Insolvency Procedures in the Dominican Republic During COVID-19

The exponential spread of CODIV-19 is seriously affecting the financial standing of businesses and individuals at a global scale, many of which have already expressed the likelihood of a potential insolvency in view of the significant reduction of their operations. In view of this situation, both corporations and individual businesspersons alike are evaluating their options and next steps to be taken both in the face of their possible insolvency as well as that of their debtors.

Restructuring Law No 141-15 regulates restructuring and judicial liquidations of both national or foreign corporations, as well as individual business persons, domiciled or with a permanent presence in the Dominican Republic. The law offers a feasible process for the restructuring of insolvent companies to ensure their operational continuity while protecting the rights of its creditors, within a framework of transparency and equality.

An application for restructuring or liquidation may be made by either the insolvent debtor itself, or by any creditor whose claims represent at least 50 minimum wages when the requirements set out in article 29 of the law are met, under the following grounds:

  • Failure to comply for more than ninety (90) days with at least one liquid and enforceable payment obligation in favor of any creditor or failure to pay Tax Debts to the Tax Administration for no less than six (6) tax periods;
  • When current liabilities exceed its current assets during a period of more than six (6) months;
  • When it has failed to pay at least two (2) consecutive salaries to its employees.
  • Should there be an open restructuring, bankruptcy, insolvency or cessation of payments procedure in a foreign jurisdiction where the parent company or its main establishment or center of interest is located;
  • Should there be active embargoes, judgments or execution proceedings that affect or could affect more than fifty percent (50%) of its total assets.
  • In the event of a restructuring and for the duration of the conciliation and negotiation stage of the restructuring plan, all judicial, administrative or arbitral actions against the debtor’s assets are suspended, thus safeguarding the assets and the continuity of the business along the course of the process.
  • The law also provides for the possibility of authorizing the debtor to seek new financing, allowing the banking institution to register a special lien for its security.

Previous Plan Agreement

Another possibility for both corporations and individual businesspersons facing actual or imminently financial difficulties in the face of this health crisis and ensure the continuity of their operations is to submit a prior plan agreement to the restructuring court before the start of any restructuring process. This plan can be made with respect to all creditors or only with respect to a selected group of them, such as financial institutions, labor creditors and suppliers. In each case, the agreement requires the acceptance of creditors representing at least 60% of the total creditors or any creditors’ class in order to be approved.

This plan may address any lawful restructuring plan for the debtor’s liabilities and assets or reorganization of its business, as well as the negotiation of partial write-offs and deadline changes for the payment of the debtor’s obligations.

Once the plan has been approved by the creditors and the court, it will have the same effects as those derived from a restructuring plan. In addition, the court may order, among other things, the suspension of any enforcement proceedings against the debtor’s assets and rights. Similarly, from the time of its submission and until the application is granted or rejected, creditors cannot apply for the restructuring of the debtor.

New Measures for Employers and Employees 

  • During the months of April and May, the Ministry of Labor authorized the Security Treasury not to apply additional charges or interests to employers that are not able to make the corresponding contributions to their employees on time.
  • During the emergency period and up to 30 days later, a waiver will be granted for employers to register their workers without the escalation provided in Resolution 471-02 of the National Council for Social Security Fund.

This measure will also apply to those who will benefit from the FASE program established by the government to support workers who have had difficulties to maintain their operations.