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Improving Access to Finance by Local Private Sector and the Enhancement of Local Investment Environment
Commonwealth of Dominica
Review of the Investment-Related Legislative Framework
of the Commonwealth of Dominica
7 October 2014
Page | i
Improving Access to Finance by Local Private Sector and the Enhancement of Local Investment Environment
Commonwealth of Dominica
Contract No: C14027-044
Project No: WP2.13.1-1.044
Region: Commonwealth of Dominica & OECS Countries
Submitted by:
EDRC GmbH
Nymphenburgerstrasse 4 80335 Munich, Germany
T: +49 89 288 90 489 F: +49 89 288 90 45
E: [email protected] W: www.edrc.eu
BizClim is a programme of the ACP Secretariat funded by the European Union. This document has been produced with the financial assistance of the European Union. The views expressed herein can in no
way be taken to reflect the official opinion of the European Union nor the ACP Secretariat.
Page | ii
REPORT COVER PAGE
Report title: Review of the Investment-Related Legislative Framework of the
Commonwealth of Dominica
Report date: 7 October 2014
Project title: Improving Access to Finance by Local Private Sector and the Enhancement
of Local Investment Environment, Commonwealth of Dominica
Project no: WP2.13.1-1.044
Country: Commonwealth of Dominica & OECS Countries
Contract
signature:
7 April 2014
Project
completion:
7 October 2014
Contracting Authority Project Partner Contractor
Name: BizClim - Programme
Management Unit
Invest Dominica
Authority
EDRC GmbH
Address:
Rue Belliard 205
1040 Brussels
Belgium
1st Fl. Financial Centre
Roseau
Commonwealth of
Dominica
Nymphenburgerstr. 4
80335 Munich
Germany
Tel: +32 2 669 9825 +1 767 448 2045 +49 89 288 90 489
Fax: +32 2 669 9786 +1 767 448 5840 +49 89 288 90 45
Email: dominique@acpbusine
ssclimate.org
msavarin@investdomini
ca.dm
u
Contact
persons:
Ms. Dominique
Bourgault
Mr. Michael Savarin
Mr. Tomas Felcman
The content of this report is the sole responsibility of the authors. The views expressed herein can in no
way be taken to reflect the official opinion of the beneficiary or the BizClim programme.
Page | iii
TABLE OF CONTENTS
Executive Summary ...................................................................................................... 1
Legislative Review ........................................................................................................ 2
I. Current Legislative Framework with Respect to Investment in Dominica ..... 3
II. Legislative Reforms Moving Forward .................................................................. 6
Page | iv
Abbreviations & Acronyms
ACP African, Caribbean and Pacific
BizClim EU-ACP Business Climate Facility
EC European Commission
ECIC Eastern Caribbean Investment Corporation
ECCB Eastern Caribbean Central Bank
EDRC EDRC GmbH
EIB European Investment Bank
EU European Union
EUR Euro
ICT Information and Communication Technology
IDA Invest Dominica Authority
IPO Initial Public Offering
OECS Organization of Eastern Caribbean States
PE Private Equity
PMU Project Management Unit
SMEs Small and Medium Enterprises
STR Secured Transaction Reform
TORs Terms of Reference
VC Venture Capital
Page | 1
EXECUTIVE SUMMARY
As part of the implementation of Project no WP2.13.1-1.044, a team of
international experts led by Prof. Funmi Arewa from the University of California, Irvine
School of Law undertook review of the business- and investment-related legislation
of the Commonwealth of Dominica. The purpose of the review was to identify salient
deficiencies and provide recommendations for reforms that will enhance the
sustainability of a venture capital (VC) ecosystem in Dominica. The following pieces
of legislation were analyzed: (i) the Companies Act (1994); (ii) the Real Property Act
(1873, as amended); (iii) the International Business Companies Act (1996); (iv) the
Fiscal Incentives Act (1973, as amended); (v) Offshore Banking Act (1996); (vi) the
Income Tax Act (1982, as amended); and (vii) the Hotels Aid Act (1958, as
amended).
The review undertaken by the experts revealed that while Dominica has made
great strides in creating an inviting atmosphere for investment in the country, there
are several major components that are missing to enable the creation of a viable
VC ecosystem. In particular, Dominica needs to introduce reforms to existing laws
and introduce new legislation that conforms to the international VC ecosystem and
establishes a framework to make Dominica more attractive to international venture
capitalists. More specifically, Dominica should give careful consideration to revising
the Companies Act and the International Business Companies Act to provide for
Limited Partnerships (LPs)/Limited Liability Companies (LLCs), the two business forms
most commonly utilized in VC transactions. Dominica also should consider adopting
a Secured Transaction Act as well as a discrete Venture Capital Act to “set the
table” for more bank lending and venture capital inflows to the country.
Additionally, Dominica's current Income Tax Act will need to be revised as
follows:
There needs to be a capital gains tax exemption specifically relating to VC
investments; and
There needs to be “flow through” treatment of the income of limited
partnerships that are used as vehicles for making VC investments.
It will also be necessary to amend the current Fiscal Incentives Act, the Hotel Aid
Act, the Income Tax Act, the Offshore Banking Ac, the International Business
Companies Act and the Real Property Act to “gel” with the proposed Venture
Capital Act.
The key consideration in the reform of Dominica's legislation is to ensure that the
country's effective regulatory framework fully conforms to international best
practices with respect to VC investment. Although venture capitalists embrace risk,
they will not invest in Dominica unless it is a controlled risk. They need to know that
the necessary infrastructure is in place to protect their investments. The legislative
recommendations provided in this document are instrumental in bringing about this
result.
Page | 3
I. CURRENT LEGISLATIVE FRAMEWORK WITH RESPECT TO INVESTMENT IN
DOMINICA
Overview
The Government of the Commonwealth of Dominica (Dominica) strongly
encourages foreign direct investment (FDI), particularly in industries that create jobs,
earn foreign currency, and have a positive impact on its citizens. The Government
has instituted a number of investment incentives for businesses considering locating
in Dominica, encouraging both domestic and foreign private investment.
Government policies provide liberal tax abatements, duty-free import of equipment
and materials, exemption from value added tax on some capital investments, and
withholding tax exemptions on dividends, interest payments and some external
payments and income. Fiscal incentives are provided under various laws to
encourage the establishment and expansion of both foreign and domestic
investment; however, to encourage additional significant investment, additional
legislation is necessary.
Local Dominican enterprises generally welcome joint ventures with foreign
investors in order to access technology, expertise, markets, and capital. There is no
general limit on the amount of foreign ownership or control in the establishment of a
business, but it is subject to a Government approval process. To successfully start a
business in Dominica, the general process for an investor is to: 1) register or
incorporate the business; 2) register with the Inland Revenue Division; 3) apply for a
value-added tax registration number; 4) register with the Dominica Social Security; 5)
obtain an Alien Land Holding License (if applicable); 6) seek permission from the
Physical Planning Division (if applicable); 7) seek permission from other Government
agencies (if applicable; for example, if the investment is in the tourism sector,
Discover Dominica Authority and the Environmental and Health Unit provide
certifications as to standards, etc.); and 8) apply for work permits.
If fiscal incentives are being sought, depending upon the sector, an application
is filed with the Invest Dominica Authority (IDA), where a Screening Committee
reviews the application and makes a decision on the incentive application. The
decision-making process is relatively fast, with the investor receiving a clear answer
of approval, disapproval, or a request for more information within two to four weeks.
The purpose of the approval process for fiscal incentives is to ensure consistency with
national interest policies, legal requirements, and net economic benefit. Where the
investment is less than EC$2 million, the decision is made by a subcommittee of the
Cabinet called the Approval Committee. If the investment is more than EC$2 million,
the matter is submitted to the Cabinet for consideration and approval. It normally
takes one month for the Cabinet to make a decision.
The International Business Companies Act
In order to encourage foreign companies to do business and invest in Dominica,
companies registered under the International Business Companies Act, No. 10 of
1996, are exempt from the payment of taxes, duties, and similar charges for a period
of twenty (20) years from the date of incorporation. The Act allows foreign investors
Page | 4
in Dominica to repatriate all profits, dividends and import capital. There are no
restrictions on the repatriation of dividends for totally foreign-owned firms; however,
a mixed foreign-domestic company may repatriate profits only to the extent of its
foreign participation. There are no exchange controls in Dominica and the invoicing
of foreign trade transactions may be made in any currency. Importers are not
required to make prior deposits in local funds and export proceeds do not have to
be surrendered to Government authorities or to authorized banks. There are no
controls on transfers of funds. Dominica guarantees the free transfers of profits and
repatriation of capital.
The Fiscal Incentives Act
In an effort to increase investment, Dominica has implemented a series of fiscal
investment incentives. The Fiscal Incentives Act provides a list of such incentives,
including:
Tax abatement of up to twenty (20) years for approved hotel and resort
developments;
Exemption from customs duties on material and equipment deemed
necessary to establish or update an enterprise;
Withholding tax exemptions on dividends, interest payments, and other
relevant external payments;
Exemption from payment of import duties on plant, machinery, equipment,
spare parts, raw and packaging materials, and vehicles;
Exemption from income tax on any income accrued from a source outside
Dominica to a retired person who, prior to retirement, was not resident in
Dominica;
Exemption from provisions of the value added tax for capital investments for
the initial investment up to commencement of taxable activities, for direct
imports of approved items on the master list consigned to the approved
enterprise; and
Other incentives, which may be granted where appropriate.
There are also corporate tax incentives in the Fiscal Incentives Act. Under Act,
four (4) types of enterprise qualify for tax abatements. The length of the tax
abatement for the first three depends on the amount of value added in Dominica.
The fourth type, known as enclave industry, must produce goods exclusively for
export outside the CARICOM region.
Enterprise Value Added Maximum Tax Abatement
Group I 50% or more 15 Years
Group II 25% to 50% 12 Years
Page | 5
Group III 10% to 20% 10 Years
Enclave Enclave 15 Years
Companies which qualify for tax abatements are allowed to import into
Dominica duty-free all equipment, machinery, spare parts and raw materials used in
production.
The Tourism Act
The Tourism Act of 2005 provides for the creation of standards for Dominica's
tourism sector. The Government, through the Discover Dominica Authority, regulates
and certifies certain tourism services, such as food and hotel services, vendors, travel
agents, taxi operators, hair braiders, tour operators, tour guides, and water sports
activities.
The Hotels Aid Act/The Income Tax Act
Under The Hotels Aid Act, Chap. 85:04, and the Income Tax Act, Chap. 67.01,
Dominica allows the granting of a tax exemption of up to twenty (20) years for
approved hotel and resort developments. The Act also provides relief from customs
duties on items brought into the country for use in construction, extension, and/or
equipping of a hotel of not less than five bedrooms. Additionally, withholding tax
exemptions are allowed through the Income Tax Act, Chap. 67.01. Approved
projects are allowed exemptions from payment of withholding taxes on dividends,
interest payments, and other relevant external payments.
Right to Private Ownership and Establishment
Foreign investment in Dominica is not subject to any restrictions, and foreign
investors are entitled to receive the same treatment as nationals of Dominica. The
only restriction is that there are some special license requirements as to acquisition of
land, development of buildings and expansion of existing construction, and special
standards for various aspects of the tourism industry. Individuals or corporate bodies
who are not citizens and who are seeking to acquire land may require a license prior
to the execution of the transactions, depending upon the amount of land in
question. An alien may hold less than one acre of land for residential purposes or less
than three acres for commercial purposes without obtaining an alien landholding
license. If more land is required, then a license must be obtained, and the applicant
must pay a fee equivalent to 10% of the market value of the land. Licenses are
granted once properly submitted to the Cabinet for consideration.
Protection of Property Rights
Civil law protects physical property and mortgage claims. Dominica is a member
of the World Intellectual Property Organization (WIPO), the World Trade
Organization, and a signatory to the 1994 Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS Agreement). Dominica’s intellectual property (IP)
laws appear to be TRIPS-compliant. Article 45 of the Protocol Amending the Treaty
that established CARICOM commits all 15 members to implement stronger IP
Page | 6
protection and enforcement. The administration of IP laws in Dominica is under the
responsibility of the Attorney General. The registration of patents, trademarks, and
service marks is administered by the Companies and Intellectual Property Office.
Efficient Capital Markets and Portfolio Investment
Dominica is a member of the OECS, and as such, it is also a member of the
Eastern Caribbean Securities Exchange (ECSE). The ECSE is a regional securities
market established by the Eastern Caribbean Central Bank and licensed under the
Securities Act of 2001, a uniform regional body of legislation governing securities
market activities to facilitate the buying and selling of financial products for the eight
(8) member territories. Dominica is a member of this stock exchange, and is open to
transactions in equity securities and debt securities.
Conclusion/Current Legislation
While Dominica has made great strides in creating an inviting atmosphere for
investment in the country, there are two major components that are missing to help
create a viable venture capital (VC) ecosystem. Dominica needs to institute new
legislation that conforms to the international VC ecosystem and establishes a
framework to make Dominica more attractive to international venture capitalists.
More specifically, Dominica should give careful consideration to revising The
Companies and International Business Companies Acts to provide for Limited
Partnerships/Limited Liability Companies. Dominica also should consider adopting a
Secured Transaction Act and a Venture Capital Act to “set the table” for more bank
lending and venture capital inflows to the country. The Income Tax Act, as well as
other business-related legislation, will need to be revised to “gel” with the proposed
Secured Transaction Act, Venture Capital Act and new business entity structures.
II. LEGISLATIVE REFORMS MOVING FORWARD
Secured Transaction Reform
In a highly competitive and global environment, with cross-border lending
activity becoming increasingly prevalent, access to secured credit provides a key
source of capital for economic growth. To promote and facilitate adequate access
to—and maintain the flow of—secured credit to the private sector, a modern
secured transactions law is a fundamental legal mechanism for financing business,
consumer, and commercial transactions. In developing markets like Dominica, a
system that would enable, for example, a farmer to pledge cows for a tractor loan
from a bank would be a major milestone to economic development because it
would increase levels of credit and at the same time decrease the cost. Secured
Transaction Reform (STR) would provide the infrastructure by which movable assets
could become collateral for bank loans.
While credit is the lifeblood of business, access to credit can be constrained,
especially in countries like Dominica. According to the World Bank, more than half of
private firms in emerging markets have no access to credit. As mentioned during the
Stakeholder Forum held in Roseau on 5-6 August 2014, some Dominican businesses
Page | 7
do not even bother to apply for bank loans because they lack the real estate and
land collateral that banks in Dominica typically require for a loan. Unfortunately,
these banks generally do not view movable assets—which include capital stock,
inventory, and receivables—as adequate sources of collateral. In developed
economies, the opposite is true. Asset-based lending based on movable property
accounts for nearly 70% of small business financing in these countries, according to
a 2010 study by the World Bank’s International Finance Corporation.
STR would provide the legal and institutional infrastructure through which
movable assets could be used for lending, resulting in increased bank funding of
SMEs. Dominica should consider adopting a Secured Transaction Law similar to the
Organization of American States (OAS) Model Inter-American Law on Secured
Transactions. The Secured Transaction Act should ideally include provisions
recognizing negotiable electronic warehouse receipts and bills of lading (including
truck, air, and sea waybills) as well as manuals of best practices for lending
(including “blue books” to establish the value of various types of collateral).
Dominica also may also need to adopt an e-commerce law to make sure that what
formally could only be stated in a binding fashion by means of paper-based
document can be said by means of an electronic document, message, or record.
Once the STR is place, behavioral changes must also occur—lenders and
borrowers must be willing to learn a new form of lending. Bankers, for example, will
need to realize that the inventory and accounts receivable that their steady and
reliable account debtors owe is usually more liquid collateral than real estate, and
therefore more valuable. They must be willing to give consideration to SMEs that
show the ability and willingness to repay. As to borrowers, they need to be
transparent with respect to their finances and need to disclose their income to bank
lenders.
Banks are not entities that take on significant risk because they must have funds
to pay back the depositors who provide the funds for their loans. The global
standards and bank capital requirements make it increasingly difficult and costly for
banks to undertake riskier activities. The STR is a good start with respect to increasing
the flow of lending from traditional banking sources, but in order for Dominica to
have a successful VC ecosystem, more is needed.
Limited Partnership/Limited Liability Company Revisions to Companies and
International Business Companies Acts
In order to develop a viable VC ecosystem, Dominica must put in place a
favorable legal structure for its implementation and growth. Laws can govern many
aspects of the VC industry, from the protections given limited partners through
compensation for employees to deal structures. In order to attract venture capital,
Dominica needs to implement revisions to the Companies Act, which is already in
place. There also needs to be complementary revisions to the International Business
Companies Act to ensure international venture capitalists can be limited partners.
Limited partnerships are formed by two or more people, with at least one person
acting as the general partner who has management authority and personal liability,
Page | 8
and at least one person in the role of limited partner who is a passive investor with no
management authority. All partners—both general and limited—must enter into
limited partnership by either oral or written agreement. Under Dominica’s proposed
legislation, it is recommended that written limited partnership agreements be
required. Limited partnerships are managed and controlled by general partners who
have authority to bind the partnership. Limited partners normally do not participate
in managing the business. The general partners are liable for partnership obligations
to the same extent as partners of general partnerships. Limited partners, however,
are generally not liable for partnership obligations; their only risk is their agreed
capital contribution, or as provided in the limited partnership agreement. However, if
limited partners participate in the management of the partnership business, they
may lose their protected limited partner status and become liable for all risk.
A Venture Capital Limited Partnership is an agreement between a VC firm and a
start-up company in which the VC firm provides funding and, in exchange, receives
a certain percentage of ownership in the company. In other words, the VC firm is
the limited partner and the start-up is the general partner, which manages the
company. This structure gives the VC firm limited liability; that is, if the company goes
bankrupt, the VC company can lose no more than the amount it invested. It also
provides the start-up with capital necessary to continue operations and perhaps
become profitable.
There should also be a Limited Liability Company (LLC) revision to the
Companies/International Business Acts. Many VC general partners like to choose
this form for the general partner. An LLC is a hybrid type of legal structure that
provides the limited liability features of a corporation and the tax efficiencies and
operational flexibility of a partnership. The "owners" of an LLC are referred to as
"members." Under the Act, the members can consist of a single individual (one
owner), two or more individuals, corporations or other LLCs. Unlike shareholders in a
corporation, LLCs would not be taxed as a separate business entity. Instead, all
profits and losses are "passed through" the business to each member of the LLC. LLC
members would report profits and losses on their personal tax returns, just like the
owners of a partnership would. With the establishment of Dominican LLCs,
Dominica’s Income Tax Act would have to be amended to provide for this pass-
through tax treatment.
Limited partnership offers the critical benefit of restructuring the investors’ liability.
If the start-up fails, the investors will lose the money they have invested but, in
general, disgruntled employees will not be able to pursue the investors for general
damages. A Limited Partner is only liable for capital he/she puts in, as long as
he/she does not take part in the management of the business. With losses limited to
invested capital, the possible gains from a successful enterprise look attractive.
While clever venture capitalists have figured out ways to organize when limited
partnerships are not available, none of these structures have the benefit of both
limited liability and a restricted lifespan. For limited partners, a restricted life span
means that at some point, the general partners will have to wind up the fund, exit
the positions, and return at least some of their money. Limited partnerships are how
most VC deals are structured and conform to international norms.
Page | 9
Venture Capital Act/Conformance with International Norms
Major private equity investors operate globally. They invest where the
opportunities are best, and where it is easiest and most familiar. It is thus important
that Dominica provides a familiar setting in which the firms can invest. To attract
these players, Dominica must “set the table.” Tax and regulatory regimes should be
compatible with international norms. Even the appearance of irregularity can
dissuade a venture capitalist from establishing a presence in Dominica. In order to
attract international venture capitalists, Dominica needs to codify international
venture capital norms into a “Venture Capital Act.“ Under Dominica’s proposed
Venture Capital Act, proposed revisions to other legislation, and incentive legislation
already in place, Dominica can attract these international venture capitalists.
The prime objective of the Venture Capital Act is to increase the supply of risk
capital to Dominica’s entrepreneurial SME sector, thus fostering the expansion and
preservation of SMEs as well as creating new jobs. This objective is achieved by tax
credits that are granted to investors in qualifying companies. The Venture Capital
Act will govern Dominica’s VC ecosystem, whereby those companies seeking to
make investments in a small or medium business venture must first be registered as a
Venture Capital Investor (VCI) in order to receive tax credits. Those entities seeking
to obtain financing from a VCI must first obtain Qualifying Venture Capital Limited
Partnership (VCLP) or Early Stage Venture Capital Limited Partnership (ESVCLP)
status. Qualifying VCLP and ESVCLP will have access to advisory services and pre-
investment technical support through IDA, which is already in place. This assistance is
necessary for VCLPs and ESVCLPs to secure funding for their projects and to ensure
they are prepared for the responsibility to take on this additional capital infusion.
Another concern is the availability of timely and reliable data. Investing in
emerging markets—especially over the four-to seven-year timeframe of the average
VC investment—is a risky endeavor. Investors seek some sort of reliable data, ideally
on the economy. The presence of a local venture capital association (through the
IDA) that collects industry data and can advocate for the asset class is also
attractive. A government program that supports the establishment of such an
association can provide an effective accreditation to the fledgling group and give
the program itself a “quick hit” to show that it is making progress. Furthermore,
transparency around everything from opening a business and hiring workers to
accounting rules and stock market listing regulations is critical.
Proposed Framework of the Dominica Venture Capital Act
The following table represents the framework of the proposed Dominica Venture
Capital Act:
VENTURE CAPITAL ACT
Part 1—Preliminary
Division 1—Preliminary
1-1 Short title
1-5 Commencement
Page | 10
1-10 Interpretation
1-15 Identifying defined terms
Division 3—A guide to this Act
3-1 What this Act is about
3-5 Registration of limited partnerships (Part 2)
3-10 Registration of eligible venture capital investors (Part 3)
3-15 Determinations by Invest Dominica Authority concerning certain
investments (Part 4)
3-20 Review of decisions (Part 5)
3-25 Miscellaneous (Part 6)
Part 2—Registration of limited partnerships
Division 7—A guide to this Part
7-1 What this Part is about
Division 9—Registration requirements
9-1 Registration requirements of VCLPs
9-3 Registration requirements of ESVCLPs
9-4 Allowing a partner’s committed capital to exceed the 30% limit
9-5 Registration requirements of DFOFs
9-10 Meaning of permitted loan
Division 11—Application for registration
11-1 Application for registration
11-5 Determination of further information to be included in application
11-10 Further information may be requested
11-15 Period within which application must be decided
Division 13—Registration
13-1 Registration
13-5 Conditional registration
13-10 When registration is in force
13-15 An ESVCLP’s approved investment plan
13-20 Deciding whether investment plans are appropriate
Division 15—Obligations while registered
15-1 Annual return
15-5 Determination of further information to be included in returns
15-10 Quarterly returns
15-15 Further information may be requested
15-17 Annual reports for ESVCLPs
15-20 Other information may be requested
Division 17—Revocation of registration
17-1 Revoking registration for not meeting investment registration
requirements etc.
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17-3 Revoking registration of ESVCLPs for not meeting divestiture
registration requirement
17-5 Revoking registration for not meeting other registration
requirements
17-10 Revocation at discretion of the Invest Dominica Authority
17-15 Notice of revocation
17-20 Date of effect of revocation
17-25 Revocation on application by partnership
Part 3—Registration of eligible venture capital investors
Division 21—Registration of eligible venture capital investors
Guide to Division 21
21-1 What this Division is about
Operative provisions
21-5 Registration as eligible venture capital investors
21-10 Period within which application must be decided
21-15 When registration is in force
21-20 Annual return by eligible entity
21-25 Revocation at discretion of the Invest Dominica Authority
21-30 Revocation on application
Part 4—Determinations by Invest Dominica Authority concerning certain
investments
Division 25—Determinations by the Invest Dominica Authority concerning
certain investments
Guide to Division 25
25-1 What this Division is about
Operative provisions
25-5 Invest Dominica Authority may determine a shorter period
25-10 Invest Dominica Authority may determine that a requirement
does not apply
Part 5—Review of decisions
Division 29—Review of decisions
29-1 Decisions reviewed
29-5 Notification of right to seek internal review
29-10 Internal review of decisions
29-15 Review of decisions by Administrative Appeals Tribunal
Part 6—Miscellaneous
Division 33—Miscellaneous
33-5 Meaning of form approved by the Invest Dominica Authority
33-10 Regulations
This proposed Act provides for some administrative measures that are needed
for the operation of: (a) the capital gains tax exemption relating to venture capital
Page | 12
under the applicable revisions of the Income Tax Act (and the related provisions
about similar income gains and losses); and (b) the “flow through” treatment, under
the applicable revisions of the Income Tax Act, of the income of limited partnerships
that are used as vehicles for making VC investments. The Invest Dominica Authority
would be responsible for the operation of these measures.
Part 2 provides for: (a) the registration requirements for venture capital limited
partnerships, early stage venture capital limited partnerships and Dominican venture
capital funds of funds; (b) applications for registration; (c) registration of limited
partnerships by IDA and/or a Registrar, including conditional registration; (d) the
obligations imposed on general partners of partnerships that are registered; and (e)
revocation of registration.
Part 3 provides for the registration of entities as eligible venture capital investors,
their obligations while registered, and revocation of registration. Part 4 provides for
IDA to make determinations that are relevant to whether certain investments can be
eligible venture capital investments. Part 5 provides for review of the Invest Dominica
Authority’s decisions under the Act. Finally, part 6 deals with miscellaneous matters.
Salient Regional Reform Initiatives
The Eastern Caribbean Central Bank (ECCB) is currently reviewing existing
banking legislation in the OECS Member States and is expected to produce a report
shortly. This report will focus on, among other things, the following: (i) foreclosure
legislation to address the current difficulties experienced by banks in acquiring
collateral properties when clients have defaulted (extra-judicial sale of property will
be emphasized, which is anticipated to shorten the time it takes to dispose of
property); and (ii) recommendations to address the high costs impeding the use of
legal mortgages and other proposals to facilitate their increased utilization. It is
essential for Dominica to review and, where appropriate, take advantage of the
recommendations and proposals set forth in the forthcoming ECCB report, as well as
of regional and international best practices facilitating enhanced capital access by
SMEs.
Conclusion
From a legislative perspective, Dominica has a significant amount of work to do
to in order to provide the legal framework to support increased bank funding for
SMEs and a viable VC ecosystem. Dominica will need to establish Secured
Transaction Reform to provide the legal and institutional infrastructure through which
movable assets can be used for lending to SMEs, resulting in increased bank funding
to SMEs.
With respect to the venture capital ecosystem, the current Income Tax Act will
need to be revised as follows:
There needs to be a capital gains tax exemption specifically relating to VC
investments; and
Page | 13
There needs to be “flow through” treatment of the income of limited
partnerships that are used as vehicles for making VC investments.
It will also be necessary to amend the current Companies Act, the Fiscal
Incentives Act, the Hotel Aid Act, the Income Tax Act, the Offshore Banking Act, the
International Business Companies Act, and the Real Property Act to “gel” with the
proposed Venture Capital Act and provide for Limited Partnerships/Limited Liability
Companies. It is difficult to articulate the specific amendments that will be
necessary to the aforementioned legislation until after the proposed Venture Capital
Act is drafted.
The key is to conform to the international norms with respect to venture capital
investment and to have Dominica’s existing legislative framework “gel” with the
proposed Venture Capital Act, and the specific revisions articulated with respect to
the Income Tax Act, the Companies Act, and the International Business Companies
Act. Although venture capitalists embrace risk, they will not invest unless it is a
controlled risk. They need to know that the infrastructure is in place to protect their
investments. These legislative recommendations are instrumental in bringing about
this result.