Businesses in Paraguay predominantly adopt a corporate form, as it offers limited liability for owners and a general, clear legal framework. The most common structures are the sociedad anónima (SA), the sociedad de responsabilidad limitada (SRL) and the more recent empresa por acciones simplificada (EAS).

Each entity type requires at least two shareholders, except the EAS, which permits single shareholder companies and has a faster incorporation process if standard by-laws are used.

In contrast, SRLs and SAs generally require more formalities to be met and may be better suited to larger or more complex undertakings. The SA is the only vehicle that is eligible to list its shares on the local stock exchange, while an SRL can issue securities (bonds) but not shares. EASs are not allowed to list their shares nor issue securities in the local stock exchange market.

All of these corporate entities are taxed as separate legal entities, subject to Paraguay’s corporate income tax or IRE regime, which is typically 10% on net profits. A further distribution tax applies when profits are paid out to shareholders, at varying rates depending on whether the shareholder is a resident or non-resident and whether a double tax treaty is applicable or not. Rates range from 5% to 15%.

This structure allows businesses to clearly separate corporate obligations from those of their owners, aligning with international norms on corporate taxation.

In addition, unlike SAs and SRLs, EASs may pay IRE at a maximum effective rate of 3% of their gross income if their gross income does not exceed approximately USD250,000 per year. This regime is called “IRE Simple” or “Simple”.

Finally, the partner of a single-member EAS may not be subject to the dividend and profits tax (impuesto a los dividendos y utilidades – IDU). However, the tax administration has not yet approved this interpretation, which informally maintains that the IDU must be paid in this case.

At the time of publication, there is no known official position or administrative or judicial precedent on whether or not IDU is payable in these cases.

Paraguayan law does not commonly provide for transparent or “pass-through” entities in the same way that some other jurisdictions do. While unregistered partnerships (sociedades de hecho) and civil partnerships (sociedades simples) exist, they do not generally benefit from limited liability or advantageous tax treatment as transparent vehicles. Consequently, they are rarely chosen for substantive commercial or investment activities.

Under Law No 6380/19, which came into effect on 1 January 2020, Paraguay introduced the concept of transparent legal entities (entidades jurídicas transparentes), which allows certain entities, such as trusts, private service-oriented joint ventures (consorcios) and investment funds, to have income and expenses “passed through” directly to their partners or beneficiaries.

While this structure theoretically provides a true “pass-through” tax regime, it remains uncommon in practice, as many local entrepreneurs and investors are more familiar with standard corporate forms like the SA or the EAS, both of which offer established governance frameworks, limited liability and relative ease of capital-raising.

For investment groups such as private equity and hedge funds, transparent entities are rarely adopted. These sophisticated investors generally prefer the tried and tested corporate vehicles (mainly SAs), citing benefits like robust regulation, potential stock market listing and investor familiarity. Although the transparent entity model could theoretically appeal to certain niche strategies, most market participants still gravitate towards the stability and clarity of traditional corporate forms in Paraguay.

In addition, investment funds have another advantage: practically all the profits obtained by their participants, whether resident or not, are exempt from tax, not because of the transparency regime, but because of a special exemption aimed at promoting the use of these investment instruments and the local stock market, since these funds can only place their shares on Paraguayan stock exchanges.

Under Law No 6380/19, Paraguay generally applies an incorporation test for tax residency, deeming entities incorporated under its laws as tax residents. However, in the context of double taxation treaties, the place of effective management may determine residency if a tie-breaker rule is applied.

Paraguayan tax law treats transparent entities as fiscally neutral, attributing income and deductions directly to their beneficiaries, who are taxed based on their own residency and applicable regulations. While these entities may be considered “resident” due to incorporation, taxation occurs at the beneficiary level.

Where a double taxation treaty applies, treaty provisions prevail and residency determinations focus on the beneficiaries rather than the entity. Treaties generally recognise that the income of a transparent entity is taxable in the jurisdiction of its beneficiaries and not the entity itself.

Incorporated Businesses

Paraguay applies a 10% IRE to the net profits of resident entities, including SAs, SRLs and EASs. When distributing profits, these corporations must also withhold the IDU at 8% for Paraguayan-resident shareholders and 15% for non-residents generally. Under double taxation treaty rules, it is generally 5% for Spanish residents, although there are cases in which it could be 0% and others in which it could be 10%. For Chilean residents, the dividend withholding tax is 10%.

While this additional levy technically applies to distributed profits, the practical effect is that the overall effective tax rate is 14.5% for Spanish residents, 19% for Chilean residents, 23.5% for other non-residents and 17.2% for residents.

Businesses Owned by Individuals Directly

Businesses owned by a resident individual (empresa unipersonal) can settle the IRE under the IRE Simple regime. Under this regime, if their annual gross income does not exceed approximately USD250,000, they pay a maximum of 3% on their gross income.

The maximum is 3% because the IRE Simple rule is 10% is paid on the actual profit, which is the income for the year minus the deductible expenses, or on a presumed profit of 30%, which the rate of 10% is applied to – whichever results in the lowest tax being paid. Likewise, the owners of these sole proprietorships who pay IRE through the Simple regime are not subject to IDU for their business’ dividends.

If the USD250,000 threshold is surpassed, or the IRE is assessed under the general regimen, businesses owned directly by a sole proprietor have the same regime as an incorporated business. This is a 10% IRE rate on the annual profits and IDU at 8% when distributing the profits.

Businesses Owned Through Transparent Entities

Under Law No 6380/19, an entity recognised as transparent shifts its income and expenses to the partners or shareholders, meaning the entity itself does not pay IRE. Instead, each owner pays tax according to their personal tax status.

In contrast, non-residents may be subject to 15% withholding tax on their portion. However, for tax-transparent entities (empresas de joint venture– EJT) with non-resident beneficiaries, such as a trust, a regulation forces the non-resident beneficiaries to have the EJT pay IRE as if they were residents, and then IDU, thereby eliminating tax transparency.

Investment funds’ earnings are generally tax-exempt, except when the fund is a company shareholder. In this case, the fund must pay IDU at 8% for the receipt of dividends from local companies.

General Approach

In Paraguay, IRE is generally assessed on net profits determined by the difference between taxable revenues and deductible costs/expenses. The starting point is typically the company’s accounting records, prepared in line with local generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS). Thereafter, specific tax rules require add-backs or exclusions to arrive at the taxable base. Notably, profits are taxed on an accrual basis. Income is recognised when earned, and expenses when incurred, regardless of when cash actually changes hands.

Main Adjustments

Certain items may not be fully deductible or may trigger partial limitations.

• Thin capitalisation rule: interest expenses (combined with royalties and technical assistance fees paid to related parties) are only deductible up to 30% of the company’s net taxable income before those expenses.
• Transfer pricing: transactions with related parties (especially non-resident affiliates) must be at market value (arm’s length). Any interest, service fees or cost allocations above or below that value are adjusted for IRE purposes.
• Managerial/director compensation: fees paid to directors or shareholders acting as management may be capped in deductibility (broadly up to 1% of gross revenue, along with certain other expenses).
• Depreciation and amortisation: must generally follow statutory useful lives and methods prescribed by the tax authority rather than purely accounting estimates, thereby generating a difference between IFRS rules and tax rules.
• Foreign exchange gains/losses: recognised on an accrual basis as taxable income or deductible expenses in the period they arise.

Paraguay imposes a minimum taxation rule on loss relief. While companies may carry forward operating losses for up to five fiscal years, the utilisation of these losses in any given year is capped at 20% of that year’s net taxable income (before the losses are offset). Consequently, at least 80% of the current year’s net income remains taxable, ensuring a minimum tax base even when significant losses have been incurred in prior periods.

Another relevant point relates to the revaluation of fixed assets. Under Paraguayan rules, revaluation gains are not taxed immediately. Instead, they only become taxable upon actual disposal of the asset. This means that any upward adjustment in book value does not trigger a current tax liability, as long as the asset remains on the company’s balance sheet.

However, once the asset is disposed of, the realised gain (calculated as the sale price minus the depreciated tax cost) is fully included in the tax base, ensuring that the increased asset value is eventually subject to IRE. This framework ensures that while the primary reference point is the financial statements, Paraguay’s IRE rules impose specific limitations and require detailed support for claimed deductions, particularly in related-party settings.

Paraguay does not offer a specific patent box regime or any specialised R&D tax incentives akin to those in other jurisdictions. Consequently, there is no direct preferential treatment for royalties stemming from patents or for in-country R&D expenditures.

However, as tax law is currently written, the assignment of the use of patents, trade marks and rights by a Paraguayan entity that takes place exclusively abroad is not subject to IRE, so it could be understood as a patent box. However, the law does not conceive it as such.

Therefore, the transfer of rights, trade marks and patents exploited exclusively abroad is not subject to IRE. Nonetheless, when the company pays its shareholders dividends, there will be IDU to pay, according to the applicable rate, depending on the residence of the partners.

However, general investment incentives (not uniquely tech-focused) can apply if a project meets the relevant criteria. For instance, under Law No 60/90, intangible assets such as technology or software may be recognised as eligible investments, potentially benefiting from import tax exemptions or other concessions if approved as part of an overall project.

Additionally, Law No 1064/97 (the maquila regime) can offer low effective tax rates for industrial processes or tech-enabled manufacturing geared towards export, although it is not limited to R&D activities. These broader mechanisms may help reduce the tax burden for tech-oriented companies, but Paraguay does not currently have a dedicated scheme specifically targeting R&D or patent income.

Investment Incentives (Law No 7548/25)

Paraguay recently enacted a new investment incentive regime designed to modernise and replace the traditional framework established under Law No 60/90. The new legislation aims to attract large-scale productive investment through a combination of tax exemptions and financing incentives.

Qualifying investment projects may obtain exemptions from customs duties and VAT on the importation of capital goods, machinery and equipment required for the productive process. In certain cases, raw materials and inputs used in the manufacturing of capital goods may also benefit from tax relief.

For large investment projects meeting specific thresholds (eg, investments of at least USD13 million), additional incentives may apply. These may include exemption from the IDU for a period of up to ten years, as well as exemption from withholding tax (impuesto a la renta de No residentes – INR) on interest and commissions arising from foreign financing used to fund the project.

Benefits are granted on a case-by-case basis through a bi-ministerial resolution approving the investment project. The regime also introduces enhanced monitoring mechanisms and certain holding requirements for capital goods benefiting from tax incentives.

Maquila Regime (Law No 7547/25)

Companies operating under Paraguay’s maquila regime are subject to a single tax of 1% calculated on the greater of the local value added or the value of monthly exports.

The updated regulatory framework explicitly recognises maquila of services, which may be particularly relevant for technology-driven activities and export-oriented service platforms. In addition to the 1% tax, maquila operations benefit from broad tax relief in relation to imports of inputs and capital goods used in export-oriented production processes. The regime continues to be one of Paraguay’s most widely used investment platforms for manufacturing and export services.

Electrical, Electronic and Digital Equipment Regime (Law No 7546/25)

Law No 7546/2025 establishes a special regime to promote the production and assembly of electrical, electronic, electromechanical and digital equipment in Paraguay. The regime grants tax incentives including exemptions from customs duties and VAT on imported capital goods and certain production inputs, as well as VAT relief on locally acquired capital goods used in the productive process. It also introduces a preferential VAT calculation mechanism for goods produced under the regime, under which VAT is assessed on 45% of the ordinary taxable base. Access to the incentives is subject to compliance with statutory conditions, including employment generation and a minimum level of domestic value added.

Free Trade Zones (Law No 523/95)

Firms established as “users” in a free trade zone pay a 0.5% single tax on export revenue and are generally exempt from other taxes (including IDU and income taxes) on those export operations. Goods or services entering local markets from a free trade zone become subject to Paraguay’s standard tax regime, and the user arrangement must be negotiated with the concessionaire who operates the zone.

Financing Structures

The Investments Incentives Law can exempt interest on foreign loans from withholding taxes (INR) and IVA when the lender is a recognised financial institution and the project surpasses specified investment thresholds (USD13 million). This relief can significantly reduce overall borrowing costs for large-scale investment or infrastructure projects.

Electric Transport Promotion (Law No 6925/22)

Although not exclusively a tax incentive scheme, Law No 6925/22 promotes the adoption of electric vehicles in both the public and private sectors by offering tax exemptions and streamlined import processes.

Specifically, the law contemplates reduced or zero import duties, preferential IVA treatment and other potential benefits for manufacturers and importers of electric or hybrid vehicles, their batteries and key components. These measures seek to encourage the development of local electromobility infrastructure, such as charging stations, and foster cleaner, more sustainable transportation.

Carry Forward and No Carry Back

Paraguayan corporate tax legislation allows businesses to carry forward losses for up to five fiscal years but does not permit any carry back of losses to prior periods. In principle, all income, ordinary or capital, falls under the same IRE calculation, so operating losses may offset capital gains (and vice versa) subject to general rules. When claiming losses, taxpayers must maintain thorough documentation to substantiate the amounts and ensure compliance with specific limitations imposed by the tax authority.

The 80% Minimum Tax Rule

A significant limitation is the so-called minimum taxation rule, which allows losses carried forward to offset only 20% of the net taxable income in each of the five subsequent years. Therefore, at least 80% of the current year’s income remains taxable, ensuring some baseline level of taxation even when historical losses are available. Unused losses beyond the five-year period or amounts disallowed by the annual 20% cap generally expire and cannot be claimed thereafter.

However, from a civil and commercial point of view, a company with accumulated losses cannot distribute profits or pay dividends until all the losses have been covered, by offsetting them against profits, contributions or capital reductions.

Local corporations in Paraguay are subject to a thin capitalisation rule, which limits the deduction of interest (together with royalties and technical assistance fees) paid to related parties to 30% of the entity’s net taxable income before those expenses. Any excess is non-deductible in that year.

Additionally, for the interest to be deductible, the lender must be a taxpayer – whether personal income tax, IRE or non-resident income tax.

Transfer pricing rules require interest to be paid to foreign-related parties under arm’s length conditions. For interest payments to non-resident lenders, a withholding tax (INR) applies at the following rates:

• if the lender is a related-party (ie, a controlling or majority-owned affiliate), the nominal rate is 15% of the gross payment (for an effective rate of 15%); and
• where the lender is unrelated, the nominal rate is 15%, but it is calculated on a presumptive base of 30% of the gross payment, resulting in an effective rate of 4.5%.

If a double taxation treaty is in place, a reduced withholding rate may apply, depending on the specific treaty provisions.

For third-party (eg, local commercial banks not related to the borrower), there is generally no numeric debt-to-equity limit beyond ensuring the expense is necessary, duly documented and incurred to generate taxable income.

No Consolidation Permitted

Paraguay does not permit consolidated tax grouping. Each legal entity, whether part of a broader group or not, must file its own separate tax return and compute its liability independently. Consequently, losses incurred by one company cannot be offset against the profits of another group entity.

Utilising Separate Company Losses

Because there is no group relief, businesses often rely on corporate reorganisations (eg, mergers, absorptions and spin-offs) to consolidate operations under a single entity, potentially transferring tax liabilities (including losses or credits). Although these reorganisations may proceed tax-free if certain requirements are met, each restructuring must be planned carefully to comply with applicable civil and tax rules. Otherwise, losses remain isolated at the individual company level.

Capital gains for corporations in Paraguay are taxed under the general IRE regime at a rate of 10% on net gains. There is no separate capital gains tax or special rate, so any profits realised on the sale of shares (or other capital assets) merge with ordinary income to form part of the taxable base:

• sale of shares – the net gain is calculated as the difference between the selling price and tax basis (eg, the acquisition cost) and taxed at 10%;
• no broad exemptions – unlike individuals, who may benefit from reduced effective rates under specific rules, corporate taxpayers do not enjoy any significant exemptions on the sale of shares;
• IVA – the sale of shares is exempt from IVA, while other assets are generally taxed at 10%, save for real estate, which has a 1.5% effective IVA rate; and
• double tax treaties – certain treaties may reduce or eliminate Paraguayan tax on capital gains, but the relief depends on the terms of each specific agreement.

Apart from IRE and IDU, Paraguayan-incorporated businesses may also encounter the following taxes or charges when executing specific transactions.

IVA

IVA applies at rates of 5% or 10% in most cases of sale of goods and provision of services. Imports of goods are also subject to IVA, usually at the standard 10% rate. Certain agricultural products, animals (including poultry) and their primary derivatives qualify for a reduced 5% rate.

Excise Tax (Impuesto Selectivo al Consumo – ISC)

ISC is levied on certain goods (eg, tobacco, alcoholic beverages, fuel and some machinery/equipment), either upon import or at the first local sale of locally produced items. Rates vary but can be as low as 0.5%–1% on some capital goods and as high as 50%.

Municipal Taxes

Municipal trade tax (impuesto a la patente comercial – IPC) is levied on the value of a company’s assets located in each municipality, calculated via a fixed amount plus a variable rate (ranging from roughly 0.85% to 0.05%).

If a business erects new facilities or expands existing ones, some municipalities impose a one-time levy based on the declared construction cost (construction tax).

An annual 1% tax on the fiscal value of real property is payable to the municipality in which the property is located (real estate tax; impuesto inmobiliario). When assigning land or real estate, a municipal tax on the value of the transaction must be paid (municipal real estate transfer tax). The rate is 0.3% of the assigning value if the land is in the capital (Asunción) and 0.2% if it is in any other part of the country. In addition, a judicial fee of 0.74% of the assignment value must be paid when registering the deed of assignment before the Public Records Office.

Customs Duties on Imports

Duties on imports are collected by the customs authority based on the declared (ad valorem) value of such goods, plus any relevant internal taxes (like IVA and, where applicable, ISC). An IRE advance of 0.4% on the customs value of imports typically applies as well, creditable against the year-end corporate tax liability.

While these taxes may not apply to every transaction, they can arise when a business imports capital goods, buys or sells real estate or builds new facilities. Companies should therefore review each contemplated transaction to determine whether additional taxes or municipal levies may apply.

Beyond the principal levies already mentioned (IRE, IDU, IVA, INR and ISC municipal taxes and import duties), there are no additional relevant taxes.

Paraguay does not impose a net worth tax or stamp duties, and there is no financial transaction tax. Additionally, no general export tax exists for goods shipped abroad, although exporters do face compliance measures such as monthly reporting and a mandatory withholding obligation of up to 70% of the supplier’s IVA included in certain transactions.

In Paraguay, most closely held local businesses opt for a corporate form, particularly limited liability vehicles like the SA, SRL and EAS. Even small-scale family enterprises frequently choose these vehicles due to their limited liability, relatively straightforward registration processes and the ability to accommodate multiple or even single shareholders (in the case of the EAS).

Non-corporate forms (eg, sole proprietors) are still used, but the trend is towards a corporate form, as the individual business generally lacks limited liability protections.

In Paraguay, professional services rendered by individuals typically fall under the personal income tax on personal services (impuesto a la renta personal-régimen simplificado para profesionales – IRP-RSP) system, which has a maximum rate of 10%. However, this system allows wide-ranging deductions, including personal and family expenses, not strictly tied to generating taxable income. Consequently, the actual effective rate for many professionals can be equal to or even lower than the effective 17.2% IRE plus dividends tax rates, removing the main incentive to shift income into a corporate form.

Because of this alignment in rates, Paraguay does not impose specific “personal service corporation” rules aimed at reclassifying individual income into corporate earnings. Professionals remain free to operate through a corporate form if they wish, but there is no inherent tax advantage in doing so. The law has therefore not found it necessary to implement special anti-avoidance measures in this area.

No Forced Distribution or Accumulated Earnings Tax

Paraguay does not impose specific rules preventing closely held corporations from accumulating earnings for reinvestment purposes. There is no accumulated earnings tax or similar mechanism penalising undistributed profits. Corporate owners can therefore choose to retain income within the company, deferring the IDU until such time as they decide to distribute dividends.

Standard Corporate Formalities

Under commercial law, most businesses must allocate a small portion of annual profits to a legal reserve (eg, at least 5% of the profits up to 20% of share capital), but that reserve remains within the company and does not equate to a forced dividend to shareholders. Beyond this mandatory reserve, there is no legal requirement for periodic or minimum distributions and no special anti-accumulation provisions apply.

Dividends

Resident individuals

Dividends from a Paraguayan corporation incur IDU at 8%, withheld at source by the distributing company.

Non-resident individuals

Non-resident individuals are also subject to IDU, but at 15% – and it is also withheld at source. A double taxation treaty, if applicable, may reduce or eliminate this tax.

Capital Gains (Sale of Shares)

Resident individuals

Gains on share sales fall under the personal income tax on capital gains (IRP-RGC (régimen de ganancias de capital)) category at a nominal rate of 8% on the net gain (sale price minus acquisition cost). However, if cost documentation is incomplete or results in a higher taxable gain, the law provides a simplified option that presumes the gain to be 30% of the selling price. This results in an effective maximum tax rate of 2.4% (8% × 30%).

Non-resident individuals

Gains are taxed under INR at a nominal rate of 15%. The basis is the lesser of:

• the difference between the sale price and the nominal value of the shares; or
• 30% of the sale price.

By multiplying that basis by the 15% nominal rate, the maximum effective rate typically does not exceed 4.5% (15% of 30%). A double taxation treaty, if applicable, may reduce or eliminate this tax.

Publicly listed companies in Paraguay are subject to the same IDU rates. Therefore, dividends paid to residents are generally subject to an 8% withholding tax, and those paid to non-residents are subject to a 15% withholding tax. The reduced rates may apply under an applicable double taxation treaty.

Regarding the sale of publicly traded shares, the tax legislation specifically exempts these transactions from capital gains tax if the securities are listed and traded through the local stock exchange. Therefore, resident individuals generally do not incur personal income tax on capital gains derived from selling publicly traded shares if those sales meet the conditions of the local securities market regulations. Non-resident individuals are similarly exempt, provided the transaction is fully executed via the local exchange, although they should confirm any additional reporting or documentation requirements.

In Paraguay, dividends paid by local corporations to non-resident shareholders are generally subject to a 15% IDU withholding tax, while resident shareholders are subject to an 8% rate. Interest paid to non-residents is also subject to a withholding tax (INR). When the lender is a related party, the nominal rate is 15% of 100% of the gross payment (an effective rate of 15%).

For unrelated lenders, an effective rate of 4.5% is payable. Royalties, licences and technical assistance fees paid to non-residents normally face a 15% nominal rate, with the base often presumed to be 15% for related parties, leading to a 15% effective rate.

Relief may arise from a double taxation treaty, which can reduce or eliminate these withholding taxes, but in the absence of a treaty, the statutory rates apply. The local tax authority tends to be particularly vigilant regarding cross-border payments for services and intangibles, ensuring that the payer withholds the correct INR and files the necessary documentation. Overlooked or incorrect withholding tax is likely to trigger audits, penalties and interest charges.

Paraguay maintains a relatively small network of double taxation treaties. Treaties with Chile, Taiwan, Qatar, the UAE and Uruguay are currently in force, along with a recently enacted and significant treaty with Spain, which took effect in January 2025.

The three major sources of foreign direct investment into Paraguay (namely, the USA, Brazil and the Netherlands) do not appear among these jurisdictions. With Spain already ranking among Paraguay’s top ten investors, the upcoming double taxation treaty is expected to stimulate further inflows, both from Spain itself and by positioning the country as a hub for capital originating from the EU and other global regions. Uruguay and Chile are large investors too, according to official data.

Local tax authorities in Paraguay are only just starting to scrutinise potential “treaty shopping” scenarios, and there are few documented precedents. However, with the recent adoption of an OECD Model Convention with Spain (in force from January 2025), new anti-abuse rules, such as beneficial ownership requirements, have been formally introduced. As a result, while enforcement has been light historically, it is expected that in the future, the tax authority will more closely examine whether treaty-based entities have real economic substance and genuine control of the income, particularly under treaties with explicit anti-abuse provisions.

The most frequent transfer pricing challenges in Paraguay centre on cross-border transactions involving loans, fees for technical assistance and intangible assets. Although the relevant rules adhere to the arm’s length principle, their practical application can be challenging for new inbound investors, especially those engaging in multiple related-party transactions. Additionally, once a local corporation exceeds annual gross revenues of approximately PYG10billion (about USD1.4 million), it must prepare and submit a transfer pricing study (estudio técnico de precios de transferencia – ETPT) detailing the methods used to confirm that intercompany pricing aligns with market conditions.

A common area of scrutiny involves services provided by non-resident related parties, particularly management, consultancy and intellectual property (IP) arrangements, where the tax authority may question the actual economic substance or the valuation of intangible benefits. Likewise, interest expenses on related-party financing can become contentious if interest rates deviate from prevailing market benchmarks.

While there is no formal advanced pricing agreement (APA) system, the tax authority has indicated increasing vigilance in auditing these areas, suggesting that robust documentation and careful benchmarking are key to minimising disputes, although the actual control of the operations is yet to be seen in the short-to-medium term.

Paraguayan transfer pricing rules do not specifically define limited risk distribution arrangements, but they do require that any related-party transactions reflect an arm’s length profit allocation.

In practice, where a local company acts as a “limited risk distributor”, the tax authority may challenge the arrangement if it suspects that the local margin is artificially low. This scrutiny typically involves ensuring that the local entity’s functional profile matches the reduced risks and functions described and that its compensation aligns with independent comparable rates in similar circumstances.

While aggressive challenges are not yet widespread, if the authority believes that local risks and functions are understated or that the local entity should retain more profit, it could adjust the transfer price upward. Proper documentation of functional responsibilities, assets employed and actual risks borne by the local distributor is therefore crucial to defend such a model.

Paraguay’s transfer pricing regime is broadly aligned with the OECD arm’s length principle but remains less comprehensive in terms of both substance and enforcement mechanisms.

The legislation references the standard OECD methods (comparable uncontrolled price, resale price, cost-plus, transactional net margin and profit split), yet it does not explicitly incorporate the full suite of OECD guidance.

Additionally, Paraguay does not offer an APA system, nor does it have a long-standing track record of audits or judicial precedents interpreting complex transactions.

Consequently, while the formal rules point to OECD benchmarks, actual enforcement is at an early stage and can sometimes yield inconsistent or highly manual review processes when local examiners encounter intricate multinational structures.

In addition, Paraguay applies a method like the “sixth method” for commodity transactions, which can extend beyond purely related-party dealings. If commodities such as soy or other grains are exported to purchasers situated in a low-tax or no-tax jurisdiction, the local tax authority may require that the prices be benchmarked against official commodity exchange listings or other internationally recognised indices at the date of shipment.

While this approach primarily addresses transfer pricing concerns among affiliated entities, it can also be triggered for sales to non-related parties if certain conditions are met, reflecting a broader policy to discourage under-invoicing and ensure export prices align with arm’s length values.

Bearing in mind that Paraguay effectively adopted transfer pricing rules in 2021, the local tax authorities are gradually setting their focus on cross-border transactions, although Paraguay’s transfer pricing regime remains comparatively new and lightly enforced compared to other jurisdictions.

If the authorities obtain fresh data or suspect underreporting, they may initiate or reopen enquiries for prior years, but formal reassessments remain limited, partly because there is still a relatively limited track record of in-depth transfer pricing audits.

Mutual agreement procedures (MAPs) have not been used in practice in Paraguay to date, largely due to the limited scope of its double taxation treaty network. There are no publicly known MAP cases or precedents involving the Paraguayan tax authorities, and tax disputes have traditionally been addressed through domestic administrative or judicial mechanisms. With new treaties – notably the treaty with Spain – entering into force and the gradual incorporation of OECD-aligned provisions, MAP procedures may become more relevant in the future, although their practical application in Paraguay remains untested.

There is no formal, automatic mechanism for compensating adjustments when a transfer pricing claim is settled in Paraguay (to the best of the firm’s knowledge, there have been none so far).

Once an adjustment is agreed upon or imposed, the revised taxable base for that period is generally accepted as final. If it later emerges that an overpayment has occurred as a result of the adjustment, any refund or credit should be determined on a case‐by‐case basis through a reassessment or mutual agreement with the tax authority.

In other words, while individual cases may result in some corrective measures, Paraguay does not provide a standardised compensation adjustment process for settling transfer pricing disputes.

In Paraguay, local branches of non-local corporations are taxed in the same way as local subsidiaries. Both are subject to IRE on Paraguay-sourced income at the same nominal rate, and the tax calculation, deductions and filing obligations are applied identically.

While a branch is legally an extension of its foreign parent and a subsidiary is a separate legal entity, there is no distinction between the two for tax purposes.

Non-resident capital gains from selling shares in local Paraguayan corporations are subject to INR. The taxable base is determined using a presumptive method, calculated as the lesser of either the actual gain (ie, the difference between the sale price and the nominal value of the shares) or 15% of 30% of the sale price, which results in an effective rate that typically does not exceed 4.5%.

When it comes to the sale of shares in a non-local holding company that directly owns stock in a local corporation, and when the ultimate beneficial owner of the holding company is a non-resident, the tax treatment becomes more nuanced. In these cases, if the holding company is incorporated abroad, the gain realised by a non-resident may not be considered sourced in Paraguay and therefore may not be subject to Paraguayan tax. However, the determination of the source of the gain is complex and can depend on the specifics of the transaction and the underlying asset structure, particularly when a double taxation treaty applies.

Double taxation treaties may further reduce or eliminate the capital gains tax, but these benefits generally apply to direct investments and may not extend to gains on indirect holdings through non-local entities. The actual tax outcome will depend on the precise treaty provisions and the circumstances surrounding the sale.

Paraguay does not include specific change of control provisions in its tax regime that trigger additional tax or duty charges solely based on a change in corporate control.

Disposals of shares by a non-resident of an indirect holding company is not subject to Paraguayan taxes. However, when an overseas holding company disposes of an indirect interest (ie, a holding much higher up the group structure) in a local corporation, the tax treatment may require a closer examination of the transaction’s substance. In these cases, while no additional tax or duty is imposed simply due to the change in control, the tax authority may scrutinise the arrangement to ensure that the disposal reflects a genuine economic transaction and that the tax bases have not been artificially reallocated.

In Paraguay, there is no standard formula mandated by law specifically for determining the income of foreign-owned local affiliates. Instead, taxable income is computed based on the affiliate’s actual financial records, adjusted in line with the general tax rules and the arm’s length principle.

In practice, the income from sales of goods or services is determined on a case-by-case basis, with necessary adjustments for transfer pricing, thin capitalisation and other relevant factors. Although the tax authority may in certain instances apply a simplified or safe harbour method, particularly where documentation is incomplete or for smaller taxpayers, these approaches are not broadly established or routinely used for foreign-owned affiliates.

In Paraguay, deductions for payments made by local affiliates for management and administrative expenses incurred by a non-local affiliate are allowed when those payments are determined to be at arm’s length.

In practice, this means that the expense must reflect the price that would have been charged by an independent service provider under comparable circumstances. The tax authority requires that these payments are supported by appropriate documentation and comply with the transfer pricing rules. If the amount paid is deemed excessive relative to market rates, the tax authority may adjust or disallow part of the deduction.

Foreign-owned local affiliates borrowing from non-local affiliates are subject to the same general constraints as other related-party loans.

In practice, the interest expense on these loans is limited by the thin capitalisation rules, which restrict the deduction to 30% of the affiliate’s net taxable income before these expenses.

Additionally, the interest rate on the borrowing must be at arm’s length, reflecting prevailing market conditions. If the interest rate deviates from market benchmarks, the tax authority may adjust or disallow the excess deduction.

There are no additional statutory ceilings specific to borrowing from non-local affiliates beyond these general requirements.

Contrary to popular belief, from 1 January 2020, foreign income of local corporations is not automatically exempt from corporate tax in Paraguay. In fact, local corporations are subject to tax on their worldwide income, including earnings from foreign sources, with some exceptions. However, in the past, it was the other way around.

Nevertheless, Paraguay’s system incorporates a credit mechanism to avoid double taxation. Essentially, if determined foreign income has already been taxed abroad at a rate equal to or higher than Paraguay’s 10% corporate tax rate, that income is effectively exempt from additional Paraguayan tax.

If the foreign tax rate is lower, the corporation must pay Paraguayan tax on the difference, with the foreign tax paid credited against its domestic liability.

This approach ensures that the effective tax rate on foreign income does not exceed the local rate, while also addressing any undertaxed foreign earnings.

If foreign income is exempt, expenses incurred solely to generate that income are generally not deductible for domestic tax purposes.

Only expenses that directly relate to the production of taxable local income can be deducted in full. For mixed expenses – ie, those that support both exempt foreign income and taxable domestic income – the taxpayer must apportion the costs on a reasonable basis, so that only the portion attributable to domestic income is deductible.

Dividends received by Paraguayan resident corporations from foreign subsidiaries are generally included in the corporate income tax (IRE) base of the Paraguayan company. Accordingly, such income is subject to taxation under the ordinary corporate income tax rules applicable to resident entities.

When the Paraguayan company subsequently distributes profits to its shareholders, the dividend distribution tax (IDU) applies at the relevant rate. This is generally 8% for resident shareholders and 15% for non-resident shareholders, unless a double taxation treaty provides for a reduced rate.

Intangibles developed by local corporations and subsequently used by non-local subsidiaries are not automatically exempt from local corporate tax. These transactions must instead comply with Paraguayan transfer pricing rules, meaning that any transfer or licensing of intangibles must be priced at arm’s length.

Payments made by the non-local subsidiary, such as royalties or licence fees, are recognised as ordinary income by the local corporation and are subject to IRE, provided that the rights are used at least partially in Paraguay. If the transaction is not properly priced, the tax authority may apply transfer pricing adjustments and assign a royalty payment to ensure that the economic benefit derived from the intangible is taxed accordingly.

Paraguay does not operate a controlled foreign corporation (CFC) regime. In practice, this means that local corporations are not required to include the income of their foreign subsidiaries in their domestic tax base until that income is repatriated as dividends.

The same principle applies to non-local branches of local corporations. Income earned by a foreign branch is generally not subject to Paraguayan tax until repatriation. In other words, if a local corporation operates its business abroad through a subsidiary or a branch, the foreign income remains untaxed in Paraguay until it is brought back, and there is no separate CFC-type rule that distinguishes between these two structures.

Paraguay does not have specific statutory provisions that impose explicit substance requirements on non-local affiliates. However, in practice, the tax authority may expect that all intercompany transactions, including those with non-local affiliates, reflect genuine economic activity.

This means that if a non-local affiliate lacks sufficient physical presence, personnel or real decision-making authority, the tax authority may scrutinise the related-party transactions and adjust the pricing to ensure that profits are not artificially shifted.

Essentially, while there is no formal “substance test” codified separately, the principle of economic substance is effectively enforced through transfer pricing rules and general anti-avoidance measures when an applicable double taxation treaty includes such provisions. There are no additional rules.

Local corporations that dispose of shares in non-local affiliates calculate the taxable gain as the difference between the sale price and the tax basis (typically the cost of acquisition). This gain is then included in the taxable income of the local corporation and taxed at the IRE tax rate of 10%.

There is no separate or preferential rate for these gains, and the treatment is analogous to that applied to other general taxable income. However, under a double taxation treaty, the applicable rules may vary depending on the specific transaction, such as when the subsidiary’s assets include real estate, among other factors.

Paraguay’s tax legislation does not consolidate all anti-avoidance measures into a single, standalone general anti-avoidance rule (GAAR). Instead, a series of specific provisions, such as transfer pricing rules and thin capitalisation limits, collectively function as de facto anti-avoidance measures.

The tax authority has the discretion to recharacterise or disregard transactions that appear to be artificial or lack genuine economic rationale, but there have been very few cases in which this provision has been successfully applied.

In Paraguay, routine corporate tax audits are conducted on a risk-based approach rather than on a fixed, statutory schedule applicable to all taxpayers.

The tax authority reviews a range of corporate taxpayers, more frequently focusing on larger entities, those with complex operations or companies with past compliance issues. The process generally begins with a desk audit of submitted returns and supporting documentation, and it can escalate to field audits if discrepancies or high-risk transactions are identified.

Paraguay has implemented several measures that reflect base erosion and profit shifting (BEPS) recommendations. For instance, the country has introduced detailed transfer pricing rules and documentation requirements, including the preparation of a transfer pricing study once certain revenue thresholds are exceeded, and has established thin capitalisation limits to restrict excessive interest deductions on related-party loans.

In addition, anti-abuse provisions and substance requirements have been incorporated into the framework to ensure that intercompany transactions reflect genuine economic activity.

These changes, incorporated through recent legislative reforms such as Law No 6380/19, represent significant steps towards aligning the tax system with international standards. However, while these measures address key areas of BEPS Action 4 and related recommendations, full alignment with the broader BEPS agenda, especially in terms of Pillars One and Two (BEPS 2.0), remains a work in progress.

The Paraguayan government has shown a balanced approach towards BEPS measures. On the one hand, it is committed to modernising its tax system by implementing stronger transfer pricing rules, thin capitalisation limits, and other measures in line with international standards. On the other hand, Paraguay seeks to maintain a competitive environment that continues to attract foreign investment.

Regarding Pillar One, which deals with reallocating taxing rights for large, often digital, multinational enterprises, it is unclear whether significant changes will directly affect Paraguay due to its smaller digital economy and traditional business structure. However, any global changes could still have an indirect impact if large multinational enterprises adjust their business models.

As for Pillar Two, which establishes a global minimum tax, Paraguay’s current corporate tax rate of 10% is rather low compared with other countries.

If a global minimum tax is enforced, an open question is whether Paraguay will adjust its tax framework, given that the government has stated it will not increase tax rates. At this initial stage, it is likely that firms subject to Pillar Two will consider Paraguay’s 10% rate while determining how to adjust their global tax base, particularly in scenarios where tax is paid without dividend distributions.

The most pronounced impact is likely to be on multinational groups operating in Paraguay, particularly in sectors such as digital services, multinational enterprises involved in exporting, and finance, where profit shifting has been more common.

International tax issues have not traditionally been at the forefront of public debate in Paraguay, especially compared to larger economies. However, interest in global tax matters is gradually increasing.

In recent years, legislative reforms and alignment with international standards have increased awareness among policymakers and in the business community. This growing profile is influencing the way Paraguay implements BEPS recommendations, particularly in areas like transfer pricing and thin capitalisation, and exchange of information.

Although public debate remains relatively muted, there is a clear governmental intention to modernise the tax system without undermining its competitive low-tax environment. Consequently, while BEPS measures will likely be adopted, their implementation is expected to be gradual and pragmatic, carefully balancing global compliance with the need to attract and retain foreign investment.

Paraguay’s government has long maintained a competitive tax policy, exemplified by its low statutory corporate tax rate and investor-friendly environment. At the same time, the global push for international standards compliance creates pressure to ensure that profits are reported accurately and that the tax base is not eroded by artificial arrangements.

To balance these priorities, the government is expected to implement said standards gradually, enhancing transfer pricing documentation, reinforcing thin capitalisation rules and tightening substance requirements, without significantly raising the effective tax rates that have historically attracted investment.

This careful calibration may involve the use of transitional measures or the implementation of safe harbours, which Paraguay currently lacks but should consider adopting. These mechanisms would help taxpayers adjust to the new compliance standards without facing abrupt tax increases. The government’s objective is to preserve the integrity of the tax system and prevent profit shifting, while still maintaining the competitive advantages of its regime.

Ultimately, by pragmatically integrating the measures and engaging in ongoing dialogue with international bodies and domestic stakeholders, Paraguay aims to ensure both a fair tax system and an attractive environment for foreign and domestic investment.

Paraguay’s competitive tax system is built on a low statutory rate (currently 10%), along with preferential regimes such as the IRE Simple regime for smaller companies, which can yield effective rates as low as 3% and various targeted investment incentives. These features are key to attracting foreign investment and stimulating economic growth. However, they could be more vulnerable than other areas of the tax regime if they are perceived as overly generous or if they lead to significant base erosion. Although Paraguay is not bound by EU state aid rules, its tax incentives are still subject to scrutiny by both domestic stakeholders and international investors to ensure fairness and transparency, as well as the controls and constraints that the Southern Common Market (Mercado Común del Sur – MERCOSUR) legislation established for its members.

To date, there has been little controversy or legal challenge regarding these competitive features, with the tax authorities emphasising compliance and proper documentation. Nonetheless, as global tax standards evolve, particularly under the BEPS agenda and increased international scrutiny, there may be future pressure to recalibrate these incentives to ensure a balanced approach between competitiveness and tax base protection.

At present, Paraguay does not have comprehensive, standalone legislation specifically targeting hybrid instruments. However, considering increasing global pressure, there is growing awareness of the potential for hybrid mismatch arrangements to facilitate tax avoidance. In Paraguay, interest payments are currently deductible, whereas dividends are not, which aligns with traditional tax principles. The country has already incorporated thin capitalisation rules into its legislation, signalling a step towards addressing BEPS concerns.

Looking ahead, Paraguay may adjust its tax framework in response to international recommendations, potentially limiting deductions for certain hybrid arrangements or requiring a stronger economic substance analysis. However, rather than implementing an entirely new regime, such changes would likely come through amendments to existing tax laws.

Given Paraguay’s competitive tax framework and its commitment to maintaining an attractive investment environment, any adjustments are expected to be gradual. The government is likely to focus on high-risk areas, particularly complex financing structures used by multinational groups. While hybrid mismatch rules are not a central feature of Paraguay’s tax system, they could gain relevance in the coming years.

Paraguay does not have a fully territorial tax regime for corporations. Resident companies are taxed on their worldwide income, with some exceptions, although foreign tax credits help mitigate double taxation. Consequently, there are no interest deductibility restrictions specifically tailored to a territorial system under the current framework. However, in light of global proposals, particularly those emerging from the BEPS process, there may be future changes that introduce tighter limits on interest deductions.

These measures would aim to curb excessive debt financing and prevent profit shifting by related parties, potentially raising the effective cost of borrowing. If these proposals are implemented, both domestic and foreign investors might need to reassess their financing structures, possibly shifting towards a greater reliance on equity to maintain competitiveness.

Paraguay does not currently apply CFC rules, and such a regime is not a priority given the country’s tax structure. Paraguay is not typically a holding jurisdiction for foreign subsidiaries, nor is it a country that faces significant profit shifting concerns given its competitive tax rates. As a result, policies targeting CFCs are unlikely to be a focus of the tax agenda in the near future.

Paraguay’s tax framework includes some anti-avoidance measures, and many of its modern double tax treaties contain limitation on benefit clauses designed to prevent “treaty shopping”. In practice, these provisions require that taxpayers demonstrate real economic substance and that transactions are carried out on an arm’s length basis.

For inbound investors, this means that if their corporate structures or financing arrangements appear to be primarily designed to exploit treaty benefits without genuine commercial activity, the tax authority may deny those benefits, particularly when applying the latest double taxation treaties with Spain, Uruguay, Qatar and the UAE.

Similarly, outbound investors may also face restrictions if their arrangements are seen as contrived for tax purposes. Overall, while these rules add an extra compliance layer, with proper planning and economic substance, their impact on legitimate investment activities can be minimised.

Paraguay’s transfer pricing rules came into effect in 2021 following the enactment of the 2019 legislation. While these regulations incorporate many BEPS recommendations, their implementation is still in an early phase, with both tax authorities and taxpayers undergoing a learning process. So far, no significant changes have been made to the framework, as the focus remains on adaptation and practical application rather than immediate revisions.

While increased transparency, including country-by-country reporting (CbCR), is a key tool in the global fight against profit shifting, Paraguay has not yet implemented a CbCR framework. Currently, the country only requires a local file, which must be submitted alongside a sworn statement. This documentation includes certain information about the multinational group’s parent entity, but does not yet extend to a full CbCR requirement.

At the same time, Paraguay is focused on enhancing its transparency standards and strengthening its capacity for information exchange. However, the adoption of CbCR remains a future consideration rather than an immediate priority.

Paraguay has implemented a structured system for taxing digital economy businesses, primarily through its IVA framework and INR provisions. This model follows approaches successfully implemented in countries like Uruguay and Chile, ensuring that digital transactions contribute appropriately to tax revenues.

Digital services consumed in Paraguay are subject to IVA at 10% rate if certain conditions are met, such as indicators like IP address, billing address, or bank account details confirming domestic consumption.

For income taxation, the treatment depends on the type of recipient.

• If the foreign service is provided to a local corporation, withholding tax (INR) of 4.5% applies on the payment.
• If the service is provided to individual residents, the foreign provider must register with the tax authority and comply with tax obligations. However, this does not require incorporation in Paraguay nor create a permanent establishment; it is simply a compliance mechanism that involves registering and appointing a local representative for tax purposes.

While Paraguay’s current framework is effective in taxing digital services, the potential impact of Pillar One remains uncertain, as there have been no discussions on its adoption within the country so far.

Instead of introducing a separate digital services tax, Paraguay has chosen to integrate the taxation of digital transactions into its existing tax framework. This approach ensures consistency with broader tax policies while maintaining an attractive investment environment.

Digital services consumed in Paraguay are subject to IVA, determined by factors such as IP address, billing address or bank account details. Additionally, non-resident digital service providers must comply with INR rules.

Paraguay’s strategy prioritises compliance through existing tax mechanisms rather than introducing a standalone digital tax, a model that has been tested in other Latin American jurisdictions. This approach reflects the country’s commitment to maintaining a competitive tax system while ensuring that digital transactions contribute appropriately to its tax base.

Paraguay does not have a specific regime governing the taxation of offshore IP. Instead, the tax treatment depends on whether the IP is economically used in Paraguay.

Under the Paraguayan source-based taxation principle, payments made to non-residents for the use or exploitation of IP are subject to non-resident income tax (INR) only to the extent that the IP is used or economically exploited in Paraguay, even partially. If the IP is not used in Paraguay, the related income is generally not subject to Paraguayan taxation.

Where the IP is used in Paraguay, payments to non-resident licensors are subject to withholding tax under the general INR rules applicable to royalties and similar payments. The nominal withholding rate is generally 15%, applied on a presumptive taxable base established by law.

If a double taxation treaty applies, the withholding tax may be reduced in accordance with the treaty provisions. For instance, under the Paraguay–Spain tax treaty, the withholding tax on royalties is capped at 5%.