Contributed By Fiorio, Cardozo & Alvarado
In Paraguay, investment funds can be found under two regulatory frames, as described below.
Firstly, if the participation in the fund is made via a public offering of securities, the fund will be regulated by the National Securities Commission, according to Law 5452/15 on Investment Funds, Law 5810/17 on Securities Market and Resolution 1/19 issued by the National Securities Commission. Under this scheme, funds will require a prior approval by the National Securities Commission. The investment fund shall be managed by a special purpose entity (Sociedad Administradora de Fondos Patrimoniales de Inversión), that must be incorporated as a corporation (Sociedad Anónima) and be registered at the National Securities Commission.
Secondly, if investors participate in the fund by a mechanism that does not constitute an offer of securities, the fund could be formed as a trust (fideicomiso). In this case, Law 921/96 on Trusts, and Resolution 12/11 enacted by the Central Bank will be applicable. The trust established to manage the fund should be administered by a financial institution, duly authorised by the Central Bank, acting as a trustee.
The private placement of securities is an exception to the registration requirement that has been recently authorised by Resolution 1/19. On this third possible scenario, the offer is not considered as a public offer, as the securities can only be offered to certain kinds of investors. As a consequence, issuers and securities are exempted from the prior registration requirement. This private placement must comply with some strict limits (should be offered to qualified investors or to no more than 35 non-qualified investors, and up to a global limit). Under this regimen, investment funds not located in Paraguay can be sold in the jurisdiction. In any case, the placement should be made through a local brokerage firm (Casa de Bolsa).
Even though capital markets in Paraguay are not fully developed, there has been a sustained growth during the last decade, coinciding with a stable macroeconomic performance (low inflation, low national debt, controlled public spending) and free flow of capitals and currencies, within a regional context that often does not behave in this way.
The preferred type of investment for local investors are fixed income securities offered by local corporations. Other investments are also growing in preference, such as real estate investment funds, infrastructure development, accompanied by the stronger presence of institutional investors.
In Paraguay, capital markets still offer a conservative array of securities for investment. The main investment offers are fixed-income securities offered by local corporations to local investors. These offers are channelled through fund managers that are usually tied to local securities brokers (Casas de Bolsa), which allows local brokers to broaden the scope of products that they offer to investors.
Beside the offers made through the securities market, the investment structures are more flexible: the sectors of the economy involved and the ways in which the investment is structured are more varied.
The difficulty, however, comes from the fact that these investments fall under the supervision of the Central Bank, which can be burdensome in some aspects.
By far the most commonly used structure is open-end funds for investments on fixed-income or mixed-income titles, either in local currency (Paraguayan guarani, PYG) or US dollars (USD). In Paraguay there is free convertibility of foreign currencies. Hence, it is common to denominate investment opportunities both in PYG or USD.
Apart from open-end or closed-end funds, when the capitalisation structure does not entail an offering of securities, investment funds can be set up as trusts, in which financial institutions act as trustees.
Even though the final responsibility of managing the trusts falls on the financial institutions, they will delegate some of the administrative duties on the project promoter (who will act as settlor).
The investors will be designated as beneficiaries of the trust, and as such entitled to limited auditing capacities and to the benefit according to the trust’s bylaws.
Resolution 1/19 of the National Securities Commission contains a list of the assets in which open-end or closed-end funds can be invested:
The same resolution provides, however, that closed-end funds can invest in other types of assets, provided that such possibility is contemplated in their by-laws, prospectus or form as applicable. On the other side, investment funds established via trusts can pertain, in principle, to three different types: (i) monetary market; (ii) real estate; and (iii) private capital.
Monetary market funds can invest in:
Monetary market funds’ portfolios cannot consist of more than 10% of securities from the same issuer, except for very specific cases. Real estate funds should have at least 60% of their investment portfolio in local or foreign property. Private capital funds are set to acquire other type of assets not registered at the National Securities Commission. Finally, trusts for other kinds of investment can be set with prior authorisation from the Central Bank.
Local regulation does not prohibit funds from originating loans. However, it is possible that this activity could be considered as financial intermediation and trigger a licensing requirement and Central Bank supervision.
The Central Bank issued a resolution stating that cryptocurrencies are not regulated nor backed by the government. In consequence, funds are free to invest in cryptocurrencies, as long as they comply with applicable regulations, such as incorporating to their by-laws, prospectus or form as applicable that they will invest in cryptocurrencies/non-traditional assets or obtaining the Superintendency of Banks’ authorisation to invest in such assets.
Depending on the structure of the fund, the process of obtaining the required authorisation may take one to six months.
There is not a requirement to have local investment managers. However, local immigration law requires that foreigners obtain a residence permit prior to participating in commercial activity in the territory. Thus, foreigners can act as investment managers in the territory, as long as they obtain a residence permit.
Alternatively, international funds looking to offer investment opportunities in the territory may do so by means of the private placement of securities, by complying with applicable local regulations and through an authorised brokerage firm.
There is no requirement to have local directors/employees. However, local immigration law requires that foreigners obtain a residence permit prior to participating in commercial activity in the territory. Thus, foreigners can act as investment managers in the territory, as long as they obtain a residence permit.
According to local regulation, funds must be managed by special purpose corporations. These managing corporations must have an external auditor, a BOD composed of three directors, and a principal place of business where investors could access registered documentation.
Besides their managing body, fund management corporations, should at least have external and internal auditors, and an anti-money laundering (AML) compliance officer.
The law does not establish a restriction with respect to where other service providers should be located. However, the organisation of the manager should be informed to the National Securities Commission when filing for approval. In this capacity, the Commission can raise any objection to the outsourcing of some of the functions.
Non-local service providers need to comply with local immigration laws that require obtaining a residence permit in Paraguay. The National Securities Commission carries out preliminary background checks that include going through the service provider’s resume, judicial records, etc.
Investment funds are subject to the same corporate tax regime as corporations.
Net income is taxed at a 10% rate over local source income. Corporate tax affects distribution of profits at a 5% rate and remittance of profits abroad at a 15% rate. The applicability of the profit distribution and foreign remittance taxes will depend on the particular characteristics of the fund.
Income from investments in fixed-income securities are exempted from corporate tax.
Paraguay has double-tax treaties related to corporate taxes with the following countries: Chile, Uruguay, Taiwan, United Arab Emirates (UAE)
However, the applicability of the double-tax exemption to investment funds is not clearly stated in the treaties and this particular issue has not been properly ruled yet.
There is no prohibition in using subsidiaries for investment purposes. However, this could end up in a more severe tax burden, taking into account that the parent company will be subject to taxes on the profits received from the subsidiary (that had already paid taxes over the profits).
Currently, the majority of offers for investment funds are local. There are also some regional promoters from neighbouring countries in the Mercosur trade bloc, mainly from Uruguay and Argentina.
Investors are mainly local corporations and individuals. There are also an important number of investors from neighbouring countries, primarily from the Mercosur trade bloc (Argentina, Uruguay, Brazil and Chile).
The investments made by funds established in Paraguay are typically located within the jurisdiction.
There is still a lot of space for market development, in line with what is happening more generally in the market for capital resources during the last decade.
On the one hand, the National Securities Commission is on the track of incorporating more sophistication on the regulatory landscape. To that end, the Commission incorporated the possibility of offering securities via private placement, defined the category of qualified investors and opened the possibility of over-the-counter operations. In this respect, we believe that the Commission could extend such sophistication to the regulatory regime of alternative investment fund managers.
On the other hand, the anti-money laundering (AML) authority has been strengthening the regulations applicable to financial entities and insurance companies. Since the AML regulation concerning firms under the scope of the National Securities Commission hasn’t changed over the last ten years, it is very likely that the AML authority will in the future enact further regulation to the sector.
As with any other entity under the supervision of the National Securities Commission or the Central Bank, funds managers are obliged to report to the AML authority any transaction that could be considered suspicious or unusual.
The National Securities Commission is working on modifications to the regulatory regime in order to facilitate the participation of small-to-medium companies in the capital markets. However, as yet there are no details on how these changes could affect the investment funds regulation.
Investment or mutual funds that capitalise by making public or private offers must be managed by special purpose corporations.
Funds that do not capitalise by offering negotiable instruments are managed by financial institutions. Financial institutions assign part of their functions to the promoter, but they still retain responsibility over the project.
Fund managers are ruled by the same regulations as the funds in general – Law 5452/15 on Investment Funds, Law 5810/17 on Securities Market and Resolution 1/19 issued by the National Securities Commission. Additionally, Law 921/96 on Trusts, and Resolution 12/11 will rule those funds not capitalised through public offers.
Fund manager corporations will also be subject to the corporate income tax, and as such will be taxed at the following rates:
There is no exemption to the obligation of fund managers to have a permanent establishment in the jurisdiction. The only alternative is offering participation in the funds through a private placement of securities, provided that the limitations set in the regulations are met.
In principle, carried interest is considered a part of the taxable income for the fund manager, and as such it will be taxed under the same regime. In Paraguay there is no separate legal framework applicable to income generated via capital gains.
In principle, there is no restrictions imposed on funds to outsource some of their functions or business operations.
However, it should be noted that fund managers must include a description of their organisation, human and technological resources as part of their filing for approval. In this case, the Commission could raise objections if it considers that some of the functions are non-outsourceable.
Fund managers must have local presence in the jurisdiction. The board of the fund should have three members acting as directors. The fund must also have both external and internal audit, and an AML-designated officer. The fund manager corporation should have at least a paid-up capital of USD450,000.
Directors of the managing corporation are subject to local immigration laws that require a residence permit prior to engaging in any commercial activity in the jurisdiction.
Investors in Paraguay are mainly retail, both corporation and individuals. The role of the institutional investors is starting to grow, particularly with the increasing involvement of the national pension manager (Instituto de Previsión Social).
There is no restriction on whom the funds can be marketed to, provided that they are managed by a fund management corporation registered at the National Securities Commission.
Earlier this year, the Commission modified the criteria of what is considered to be a public offering of securities. In this light, the Commission authorised the private offering of securities to qualified investors and also to groups of up to 35 non-qualified investors. In these cases, the private placement can be offered via letters, emails, phone calls, access to restricted websites and other types of communications provided that these are addressed to an individualised person.
In no circumstances can the securities be offered to the general public via mass media (printed press, radio, TV, internet), even if the offers are broadcast from foreign places.
The private placement of securities cannot be bigger than USD3.5 million per issuer/year (or up to USD10 million for real estate projects) for qualified investors, and only up to USD350,000 per issuer/year for non-qualified investors.
According to the new regulation, the following are considered to be qualified investors:
Note: USD amounts are approximate (since the regulation refers to Paraguayan monthly wages).
As a general rule, any prospect or information addressed to the general public by the fund managers should be truthful, efficient and appropriate. The information cannot contain misleading or deceptive affirmations or promises and cannot guarantee in any case the result of the investment.
Every fund prospectus must include a warning stating that the investment is not a deposit or savings account and is not guaranteed. The investment is an exclusive risk of the investor.
Local investors can invest in alternative funds in the jurisdiction.
Fund managers are obliged to make available on their website, updated monthly, information about the portfolio of the different funds.
Any publicity to be made by fund managers and their agents should be previously communicated to the National Securities Commission.
Fund managers should also file quarterly and yearly an updated version of their financial statements to the Commission.
Fund manager corporations must inform the National Securities Commission about any substantial event that can affect either themselves or the funds under management. Moreover, fund managers must disclose any fact or information in respect to companies in which the funds are invested.
There are tax advantages to investors in the jurisdiction. The rules will differ according to the type of investor. For corporations, the income derived from investment in fixed-income securities is exempted from corporate tax. For individuals, interest on securities is exempted from personal income tax; furthermore, individuals can invest up to 15% of their yearly income on publicly traded shares and deduct that amount from the taxable income.
Compliance with FATCA and CRS is done mainly through local banks.