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

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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: contact@edrc.eu 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.

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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

tomas.felcman@edrc.e

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.

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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

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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

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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.

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Legislative Review

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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

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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

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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

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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

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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,

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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.

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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

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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

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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

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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.

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