Dominican Republic Continues Efforts To Encourage American Investment

By Ricardo A. Pellerano

INTRODUCTION

The Dominican Republic has a wide range of business opportunities for United States-based companies, including in tourism, ecotourism, mining, transportation, energy, agriculture, technology, electronics and telecommunications. Indeed, over the past decade, a wide range of new laws and initiatives enacted by the Dominican government has led numerous American corporations to successfully begin operating in the Dominican Republic.

Recently, in fact, a number of American health, finance, and banking companies have discovered -- and have begun to fill -- an interesting business niche resulting from a new law that many Dominicans had believed affected only Dominican workers.

The law creates a Dominican Social Security System. Recognizing an opportunity, American companies have established affiliates to handle the medical, insurance and pension issues arising from the new law. The relative ease with which these U.S. businesses entered a new market, in a new field, in the Dominican Republic illustrates the value that the country places on attracting U.S. and other foreign investment.

SOCIAL SECURITY LAW

The new social security law regulates the rights and duties of the Dominican government and its citizens with respect to the financing necessary to protect workers against the risks of old age, disability, old-age severance, survivorship, illness, maternity, infancy and occupational hazards.

In particular, the social security system offers three types of insurance. These are:

• Old Age, Disability, and Survivorship: to compensate for the loss or reduction of income for old age, death, disability, old age severance, and survivorship.
• Family Health Insurance: aimed at protecting the integral physical and mental health of workers and their families.
• Occupational Hazard Insurance: intended to prevent and provide coverage for accidents occurring in the workplace and occupational diseases.

The "Social Solidarity Fund" has multiple purposes. For example, the fund is intended to ensure that every person in the system enjoys a pension at the end of his or her working life, in cases where for one reason or another the person's individual account does not have enough funds. It also is intended to ensure that those individuals most in need, who for some reason do not have a job or any other income source, can receive the necessary benefits from the system provided for the rest of the country's citizens.

ENTITIES OPERATING IN THE SYSTEM

The law creating the social security system mandates several bodies to operate within the system. These institutions are required to manage, regulate, finance, and monitor the system; another group has obligations relating to risk management and service delivery. The functions of managing, regulating, financing, and monitoring are carried out, basically, by the following institutions:

• National Council of Social Security (CNSS);
• Social Security Treasury;
• Pension Superintendency; and
• Health and Occupational Hazard Superintendency.

The following institutions operate within the system with the functions of risk management and service delivery:

• Pension Fund Administrators (AFP);
• Health Risk Administrators (ARS);
• Health Service Providers (PSS);
• Public Pension Fund Administrators;
• National Health Insurance (SNS);
• Dominican Institute of Social Security (IDSS);
• State Secretariat of Public Health and Social Assistance (SESPAS);
• National Council for the Elderly;
• National Council of Child-Care Facilities; and
• Pension and insurance funds instituted by special laws for specific sectors or created through agreement between private institutions (associations, clubs, foundations, enterprises, and others).

Some of these institutions are public entities while others are privately owned. The system also permits the existence of mixed entities: public and private at the same time. These entities may operate as stock companies or as non-profit organizations, but in every case, to operate within the system they have to be authorized in conformity with the provisions of the law.

GOVERNING PRINCIPLE

The social security law contains several important governing principles. These include:

• Universality: requiring that the social security system protect all Dominicans and every resident of the country.
• Freedom of choice: individuals have the right to choose any accredited manager and provider of services, as well as to change it when they consider it convenient, in accordance with the conditions established in the law.
• Mandatory participation: all citizens and employers must participate in the social security system, whether they have two or more jobs or emigrate out of the country.

Every Dominican citizen has the right and the duty to choose an AFP, an ARS, or a PSS, as determined in his or her own discretion. No one may affiliate with more than one AFP or ARS, even in the case of a person serving more than one employer or performing other productive activities. With respect to the contribution system, if a worker does not affiliate within the given period stated by law, the worker's employer must register the employee in the AFP and in the ARS to which the majority of its employees have registered.

Individuals have the right to receive information every six months on the status of their individual account, stating clearly the contributions made, variations of account balance, profitability of the fund, and commissions charged. Every individual is to be assigned an identification number.

It should be noted that contributions to social security and to the reserves and profits of the investment generated from pension funds are exempt from taxes.

CONTRIBUTION BASIS

The law also contains a formula for determining the amount of contributions that must be made by employees and their employers. The Social Security Treasury is in charge of the collection, distribution, and payment process. For this task, the Social Security Treasury is assisted by the Social Security Collection and Computing Board (PRISS), which in turn controls the Consolidated Affiliation and Information System. The process is as follows:

• Companies act as retention agents of the workers' applicable wages. They submit contributions within the first three working days of each month to one of the entities accredited to receive such contributions;
• The CNSS, together with the Consolidated Affiliation System, authorizes the national banking system and other selected and authorized entities to act as collectors of contributions for the companies as well as for the self-employed workers;
• After receiving the contributions, in the following two working days, the Treasury will transfer the payment to the AFPs, in the respective entries of Personal Account, Life Insurance, and AFP's Commission;
• The AFPs apply the resources to the Personal Accounts;
• The AFPs then invest the resources; and
• Within the same period, the Treasury transfers to the public AFP the "Social Solidarity Fund" entry into an account opened to that effect.

HEALTH INSURANCE BENEFITS

The social security system pays health insurance benefits in one of two ways: in kind, or in money. The basic health plan provides primary health care including coverage for emergencies, specialized care and complex treatments; hospitalization; surgical assistance; diagnostic tests; dental care; and ambulatory pharmaceutical pay (the beneficiary must only contribute 30 percent of the consumer price).

In the case of a non-occupational disease, if the individual has been contributing for 12 months, the social security system begins payments on the fourth day up to the 26th week of an amount equal to 60 percent of the applicable wages for the preceding six months if provided ambulatory assistance, and 40 percent if hospitalized. The law also contains a maternity grant, equal to three months of applicable wages, so long as the individual contributed during at least eight of the 12 months prior to the birth date. This grant exempts the employer from the full wage payment established by Article 239 of the Dominican Labor Code.

The new Social Security Law also provides two types of pensions from which individuals can select at the time of their retirement. The first is a pension under a planned retirement, keeping his or her funds with the AFP, in which case the individual preserves ownership of those funds and takes the risk of longevity and future profitability. The second is a pension under a life annuity plan, in which case the individual yields full ownership of his or her personal account to the insurance company and in exchange the insurance company assumes the longevity risk and profitability, guaranteeing the individual the life annuity agreed upon. Insurance companies offering these services must be duly authorized and audited by the government's Pension Department in coordination with the Insurance Department.

NONCOMPLIANCE

Employers that fail to meet their obligations under the law risk a fine and or imprisonment. They therefore recognize the necessity for appropriate advice to comply with the rules. It is clear that significant opportunities exist for American companies skilled in handling these matters.

BIO: Ricardo A. Pellerano is a Partner with the Dominican Republic law firm of Pellerano & Herrera. He regularly represents foreign investors in transactions in the Dominican Republic and throughout the Caribbean and Latin America. Mr. Pellerano may be reached at r.pellerano@phlaw.com. The firm may be reached at www.phlaw.com.

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