In the following article, we will explore how donations and contributions, both from companies and individuals, can have a significant impact on taxation. We will analyze how these actions can influence taxes while contributing to social and economic well-being.
Requirements
1. Treatment of Donations and Contributions:
Companies can deduct part of their taxes for the donations they make, as long as they follow certain established rules. This deduction is limited to a maximum of 5% of their net profits after offsetting losses from previous years, especially when it comes to donations to higher education institutions. Cash donations sent abroad or to non-residents are subject to a 27% income tax withholding unless their deduction is approved. In the case of in-kind donations, these are taxed at 18% VAT, and the donor is responsible for paying this tax. Additionally, donations must be made to nonprofit organizations duly registered with the General Agency of Internal Taxes.
On the other hand, cash contributions, payments for medical expenses, educational support such as scholarships, travel, and food granted to individuals residing in the Dominican Republic are considered “other income subject to tax withholding ” of 10% income tax. It is important to note that if the company did not make a profit in that fiscal year, it cannot deduct these donations. However, donations made to PRO-INDUSTRIA are fully allowed, even in cases of tax losses.
Examples:
▪ Deductible Donations: A technology company donates to a foundation that promotes education in rural areas. It can deduct the donated amount from its taxable net income if it meets legal requirements, up to a limit of 5% of its net income.
▪ In-Kind Donations: A supermarket donates food products to a food bank. It must pay 18% VAT on the acquisition cost of these products.
▪ Donations to Higher Education Institutions: A construction company donates to a local university for the construction of a new laboratory. In addition to the general 5% deductible, it can deduct an additional 5% for this specific donation.
2. Other Requirements for Donations:
Donations can be made in different forms, such as money, tangible assets, real estate, services, among others. It is essential that the value of these donations matches the donor company’s accounting records. Additionally, the donor must have receipts supporting the donations made. On the other hand, beneficiary entities must be properly registered in a special registry managed by the corresponding authority. It is important to highlight that cash donations are only considered valid, computable, and deductible when effectively delivered to the receiving entity.
Example: If a company donates computers to a school, the value of the donation must match the book value of those equipment. Additionally, they must have a receipt from the school to be able to deduct that donation on their tax return.
3. Operations Subject to VAT:
Non-profit organizations are subject to paying VAT on certain commercial activities similar to profitable companies, unless they are exempt. However, if they generate income and use it for their non-profit purposes, they are exempt from paying taxes on those profits.
Example: If an NGO sells T-shirts to raise funds, they will have to pay VAT on those sales unless they are exempt by law. As would be the case if the profits are used for their non-profit objectives, they are exempt of tax payment on those profits.
4. Operations Subject to Income Tax:
Non-profit institutions are exempt from income tax, but they can be taxed if they generate income unrelated to their purpose.
Example: A foundation that sells books to fund its educational programs will not pay income tax on those revenues, but if it invests in businesses unrelated to its mission, those incomes could be subject to taxes.
5. Foundations and NGOs in General:
Non-profit organizations (NPOs) are exempt from paying taxes on the funds they generate if these are used for their specific objectives. However, if they engage in commercial activities, profits derived from these activities may be subject to taxes.
NPOs must comply with certain legal and tax requirements to receive tax-deductible donations, such as being registered in enabled records for these organizations, submitting an annual sworn statement to the General Agency of Internal Taxes including detailed information about their income, expenses, disbursements, assets, liabilities, goods, received donations, the obligation to be withholding agents and information for tax administration, among others.
Additionally, they must issue fiscal receipts in accordance with current regulations. These measures ensure that donations made to NPOs are eligible for tax deduction by donors, up to a maximum of 5% of their taxable net income after offsetting previous tax losses.
Example: An NGO dedicated to environmental conservation receives a donation from a corporation. This donation is deductible for the corporation up to the limit of 5% of its taxable net income.
6. Tax Obligations and Formal Duties:
Non-profit organizations have formal duties that include being withholding agents and filing tax returns, among other obligations.
Example: An NGO must withhold taxes on its employees’ salaries and file annual tax returns, among other obligations.
In summary, donations are tax deductible, but there are specific rules that determine how much you can deduct and how. It is important to follow these tax and legal regulations so that donations are effective for both the donor and the beneficiary, allowing companies to obtain tax benefits and ensuring that aid reaches its destination correctly.
*This summary contains only general information on the topics covered, so this document does not constitute legal advice. Ulises Cabrera recommends seeking specific legal advice for each case.
Author:
Katherine Stefan, Associate
