In the past 12 months, the technology M&A market in Paraguay has shown moderate growth, aligned with post-pandemic economic recovery. While the global pace of growth has been faster, increased activity in fintech and digital services transactions has been seen in Paraguay, driven by accelerated digitalisation and growing interest from foreign investors in the region. Locally, tech companies are seeking consolidation and attracting foreign capital, highlighting the crucial role of foreign investment in the market’s growth.

Before this publication, Paraguay recently reached investment grade status, a significant milestone that is expected to have a positive impact on the technology M&A market. Therefore, in the short and midterm, the authors anticipate a considerable boost in foreign investment in general, and given the rapid advance of technology, this niche will increase in prominence in the country, providing promising prospects for investors and tech companies alike.

Over the past year, there has been a notable increase in investments in technology, particularly in fintech and telemedicine, which are critical sectors for developing the digital ecosystem in Paraguay. Government incentives for the technology sector and the growth of tech start-ups have contributed to this trend. Additionally, international investors are increasingly interested in acquiring stakes in local tech companies.

Start-ups in Paraguay are usually registered locally to benefit from the low corporate income tax (CIT), with a 10% annual rate, and the simplified tax regime. The process of registering a company in Paraguay is quite efficient, typically taking only two to eight weeks depending on the type of entity used (simplified stock corporation (empresa por acciones simplificada; EAS), stock corporation (sociedad anónima; SA) or limited liability company (sociedad de responsabilidad limitada; SRL)) and whether the investor is present in the country or represented by a proxy when signing the deed. It is common for companies to acquire shelf companies, especially SAs, which can be incorporated and ready to operate within one to two weeks. The entire acquisition process can be completed electronically.

Except for certain fintech companies (eg, electronic wallets), there is no initial or minimum capital requirement in Paraguay. This flexibility, based on local practices, allows start-ups to enter the market easily, with the only recommendation being to have sufficient capital to carry out their activities.

Entrepreneurs are generally advised to incorporate as an SA or an EAS, depending on the size of the project and the level of liability founders are willing to accept.

The EAS is a new type of vehicle available from 2020. It is easier and faster to incorporate if the pro forma by-laws are used, as it is incorporated via a government system and is ready within a week or two. However, everything must be done under such a system. Another advantage of this kind of vehicle is that it is the only one that allows one shareholder. All other vehicles require at least two, even if the second shareholder has a minimum stake.

An SA requires a notary public and registration before the Public Records Division. Since this type of company has existed for decades, it is the most widely recommended vehicle for investors with various shareholders, and for those who plan a local IPO locally (EAS shares or bonds cannot be traded in the local stock market).

Seed investment for start-ups in Paraguay typically comes from individuals or companies who are the founders. If a start-up is deemed to have potential, local or foreign investors often acquire a majority stake in it. Meanwhile, the previous owners may continue as managers or consultants for a few years.

The process usually involves private investment agreements that outline the terms and conditions of the investment.

Additionally, depending on the bank's risk appetite, some local bank funding can be obtained. Recently, some digital – ie, less traditional – banks have been established, and this type of loan is becoming more common.

Venture capital in Paraguay is still in the early stages of development, with limited local funding sources and minimal government-sponsored support. However, there is a growing trend of foreign investors providing funding for promising start-ups. International venture capital firms, particularly those from neighbouring countries, have begun to express interest in Paraguay’s expanding tech sector.

While venture capital regulation and documentation guidance or statutes in Paraguay are almost non-existent and less standardised than in other jurisdictions, international best practices are often followed, especially for deals involving foreign investors.

As start-ups grow, they may be advised to change their corporate structure, move to another location to access better financing options or enter new markets. However, many tech start-ups remain in Paraguay due to favourable tax laws and government incentives.

In this scenario, the parent company, particularly if it is a venture capital investor, plays a crucial role in seeking capital or a foreign IPO to fund the local entity.

Only a few Paraguayan companies issue bonds abroad, usually on the New York Stock Exchange, while maintaining their local legal structure.

In Paraguay, start-up investors are more inclined to pursue a sale process rather than an IPO due to the limited depth of the local stock exchange. Dual-track processes are uncommon in the local market, and an exit through a sale is generally the preferred option.

If a company decides to become publicly traded, it is more likely that it will pursue a listing on a foreign stock exchange. This is particularly true when the local stock market lacks the depth of other emerging or established regional and global markets. Foreign exchanges provide better access to capital and increased liquidity for shareholders.

The decision to list on a foreign exchange can significantly influence the feasibility of future M&A transactions. For instance, foreign exchanges often have stringent minority shareholder protection rules, including squeeze-out mechanisms that are not commonly available under Paraguayan law. This could pose a challenge in implementing a successful tender offer and squeezing out minority shareholders, especially if the company is not listed on the home country exchange.

Understanding the tax implications is crucial. For instance, if shares of a publicly listed company in the Paraguayan stock exchange are sold, the capital gain is entirely exempt. On the other hand, the sale of a non-listed share is subject to Paraguayan taxes.

In Paraguay, the sale of a company typically involves bilateral negotiations with a specific buyer rather than going through an auction process. The smaller market size often results in fewer competing buyers, making auctions less frequent, if not non-existent, in the past.

In Paraguay, the typical transaction structure for a privately held tech company involves selling a controlling interest. Current trends show that venture capital funds often choose to exit entirely, while founders may remain as shareholders. This structure allows investors to cash out while ensuring continuity in the management of the company.

In Paraguay, most transactions are conducted as cash sales for a liquidity event. However, stock-for-stock deals may occur when the buyer is a foreign company listed on an exchange. It is rare to have a combination of cash and stock, but this may happen, especially when valuation uncertainties need to be addressed.

In a liquidity event, founders and venture capital investors are usually required to support representations and warranties, such as tax liabilities, employee claims and environmental issues, after the deal is finalised. Escrow accounts or holdbacks are commonly used to cover these potential liabilities, but representations and warranties insurance is not yet widely used in this jurisdiction.

Spin-offs, while not particularly common in Paraguay due to its limited regulations, have been on the rise in recent years, particularly in the technology sector. This trend is driven by the need for efficient capital and the strategic separation of business units, which is attracting investment in specific technology segments.

In Paraguay, spin-offs can potentially be structured as tax-neutral transactions at the corporate level, subject to compliance with specific legal and tax requirements.

At the shareholder level, a spin-off presents an opportunity to significantly reduce the burden of a liquidity event. Selling shares of a new local entity could result in a maximum of 4.5% tax on the gross selling price, or even zero tax if the spin-off is strategically arranged with a foreign entity as the shareholder of the target company.

A spin-off may qualify as tax-neutral at the corporate level if executed at book value and in line with other relevant corporate restructuring provisions. If such conditions are met, the transfer of assets during the spin-off should not trigger immediate tax liabilities, such as the CIT or the withholding tax (WHT) on dividends (impuesto a los dividendos y utilidades; IDU).

It is important to note that as of the time of writing, there are no specific provisions in place regarding the continuity of ownership, business or purpose in relation to spin-offs in Paraguay.

Key requirements for achieving tax neutrality in a spin-off include:

• execution of the spin-off at book value, with no revaluation of assets; and
• adherence to corporate restructuring regulations.

Spin-offs followed immediately by a business combination are possible in Paraguay. The key requirements include ensuring compliance with tax regulations (keeping the assets at book value) and corporate law, as well as obtaining shareholder and board approvals. This is the most common way in which spin-offs are utilised.

The typical timeline for a spin-off in Paraguay depends on the transaction’s complexity, the shareholders’ agreement, the kind of assets involved and regulatory approval (for some industries), but it generally takes four to six months. A tax ruling from the Paraguayan tax authority is not required, but some opt for it. In such a case, obtaining it can take three to six months.

It is not customary in Paraguay to acquire a stake in a public company before making an offer. The reporting threshold for acquiring an interest in a public company is 10%.

Regarding the disclosure, unless it could be considered a “material event”, the company has three business days to inform the relevant authorities (the Securities Superintendency (Superintendencia de Valores; SIV), equivalent to the American SEC, and the Asunción stock exchange (Bolsa de Valores de Asunción; BVA)). Generally, the acquisition of shares by a third party should not be considered a material event. A merger, on the other hand, is considered a material event.

Further, the company must update its ultimate beneficial owner (UBO) and legal entities records. The UBO record contains information about the individuals who ultimately own or control the company, while the legal entities record includes details about the company’s structure and ownership.

On a regular basis – ie, every quarter – the company is mandated to file and publicly disclose its financial statements, including all holders with more than 10% of the shares or the votes. This regularity, a testament to the transparency of the Paraguayan market, ensures stakeholders are consistently informed.

The acquirer is not required to disclose its intentions regarding the company, and importantly, there is no “put up or shut up” rule, providing a level of flexibility in the Paraguayan market.

Paraguay does not have a mandatory offer threshold for acquiring a public company. The process for acquiring control is typically governed by the company’s by-laws and shareholder agreements, if any.

Public company acquisitions in Paraguay are typically structured as tender offers, and mergers are less commonly used for public companies due to the corporate process of local merger regulations. Tender offers allow for a cleaner and faster acquisition process and are often preferred.

Acquisitions of public companies in the technology industry typically involve cash transactions, although stock-for-stock deals may happen when a foreign buyer is involved.

There is no minimum price requirement for a takeover offer, but contingent value rights and other mechanisms are used to address valuation uncertainties.

Typical conditions for a takeover offer include the following:

• regulatory approval, if applicable;
• a minimum control stake threshold, usually 51% or more; and
• no material adverse changes in the target’s financial position.

Paraguayan regulators typically allow reasonable flexibility in applying conditions, and usually approve transactions if the origin of funds complies with all relevant mutual legal assistance (MLA) regulations and the conditions do not violate antitrust regulations.

All bonds or securities in the market must be cancelled before the company can withdraw from public offering.

In Paraguay, it is customary for parties to enter into a transaction agreement regarding a tender offer. The target company’s board is usually not involved, and negotiations take place at the shareholder level.

Additionally, sellers and the company typically provide detailed representations and warranties, especially when the acquisition involves all shares. The specific details of these representations are usually negotiated on a case-by-case basis.

A typical minimum acceptance condition for tender offers in Paraguay is 51%, reflecting the majority control threshold. However, higher thresholds may be negotiated in some cases, especially when control over strategic decisions is crucial to the acquirer.

Paraguayan law does not provide specific squeeze-out mechanisms, which are legal procedures that allow majority shareholders to force minority shareholders to sell their shares, following a successful tender offer.

However, in the following situations, shareholders can exercise their right to leave the company through withdrawal (derecho de receso). To exercise this right, the shareholder must notify the company within a specific period, generally through written communication, requesting reimbursement of the value of their shares. The company must buy back the shares at fair value, usually determined by the last balance sheet, ensuring a fair and just process for the shareholder.

The triggering situations to exercise such a right are:

• substantial changes to the corporate object or purpose – if the company changes its main business activity, a shareholder may opt to leave;
• transformation or merger of the company – shareholders can leave if they disagree with the company’s transformation or merger; and
• violation of their rights or interests – where a shareholder’s rights are unfairly affected.

Furthermore, it is important to note that corporate by-laws or shareholder agreements can include rules regarding squeeze-out mechanisms. This underlines the importance of being informed and prepared as a shareholder.

In Paraguay, it is not mandatory by law to have specific funds, such as fully executed financing documents, to initiate a takeover offer.

Nevertheless, it is standard procedure for the acquiring party to have financing arranged, and the offer may be contingent upon securing the necessary financing.

Deal protection measures like break-up fees, matching rights and non-solicitation provisions are permitted in Paraguay, although they are not as prevalent as in other jurisdictions. These provisions are typically open to negotiation between the parties since there is no specific regulation governing them. Therefore, the parties have the freedom to negotiate and establish these measures as they see fit.

If a bidder cannot acquire 100% ownership of a target, they may negotiate governance rights such as board representation, veto rights on strategic decisions and profit-sharing agreements to protect their interests.

Given the lack of regulation for these covenants, the parties have complete freedom for negotiation.

In Paraguay, it is common practice to secure irrevocable commitments from significant shareholders to tender their shares. These commitments, which usually include a guarantee or a high penalty clause, also typically allow shareholders to withdraw if a better offer arises, but only after paying a break-up fee or similar.

This provision for better offers can be seen as an opportunity for shareholders, adding a sense of optimism to the market.

If a competing offer is announced, whether the initial offer will be terminated or further evaluated depends solely on the conditions accepted by the shareholders. There are no specific regulations governing this situation, and it is based entirely on the agreement of the parties involved.

All bonds or securities in the market must be cancelled before the company can withdraw from public offering.

Takeover offers can be extended in Paraguay, provided the target company and the sellers agree. To avoid delays, it is recommended to seek regulatory approval before launching the offer, but in general, transactions tend to be communicated after the offer is made.

Establishing and running a new technology company in Paraguay is governed by general corporate regulations. However, there are no specific regulatory bodies exclusively dedicated to overseeing the tech sector.

Nonetheless, certain areas, such as telecommunications and fintech, relating to loan concessions and electronic wallets, are regulated by entities like the National Telecommunications Commission (CONATEL) and the Central Bank of Paraguay (Banco Central del Paraguay; BCP).

Obtaining permits from these entities may take two to four months. Further, they might be subject to assessment by the finance intelligence unit (Secretaría de Prevención de Lavado de Dinero o Bienes; SEPRELAD).

The primary securities market regulator in Paraguay is the SIV, which depends on the BCP, and the Antitrust Commission (Comisión Nacional de la Competencia; CONACOM), which oversees M&A transactions involving public and private companies.

There are no significant restrictions on foreign investments in Paraguay. Foreign direct investment filings are not mandatory, and no suspensory requirements exist.

Paraguay does not have a formal national security review process for acquisitions, and there are no specific restrictions on investments from certain regions. However, there is a ban on nationals of the countries bordering Paraguay (Bolivia, Brazil and Argentina) acquiring land within a 50 km radius of the Paraguayan border.

In Paraguay, antitrust regulations are governed by Law No 4956/13 on the Promotion of Competition, and CONACOM is the authority responsible for overseeing these matters.

Filing Requirements

A filing with CONACOM is required for takeover offers or business combinations that meet the following threshold: the combined turnover of the parties involved must currently exceed around USD35,000,000, updated annually according to Paraguay’s minimum wage.

When the Filing Must Be Made

The filing must be submitted within 10 days after the transaction is executed. Unlike other jurisdictions where filings are required before closing, Paraguayan law allows the transaction to be completed first, with the obligation to file for antitrust approval within this post-transaction window.

CONACOM’s Powers

CONACOM has extensive powers to review, approve, conditionally approve or block a transaction based on its potential impact on competition. During its review process, which typically lasts 60 to 120 days, CONACOM can:

• request additional information – the commission may require further documentation or analysis to evaluate the transaction’s competitive impact;
• impose conditions – if the transaction raises competition concerns, CONACOM can impose remedies, such as asset divestitures or other behavioural conditions, to mitigate anti-competitive effects; and
• block the transaction – in cases where no remedy sufficiently addresses the anti-competitive issues, CONACOM has the authority to block the deal outright.

It is crucial that parties comply fully with CONACOM’s requirements. Failure to file within the required period, or to comply with the imposed conditions, could result in penalties or even a reversal of the transaction.

In Paraguay, employers must comply with several fundamental labour law regulations:

• minimum wage – employers are required to follow the government’s legal minimum wage;
• severance pay – employees who are terminated without cause are entitled to receive half a month’s wage for every year of service;
• notice period – employers must give notice before terminating an employee, with the notice period ranging from 30 to 90 days, depending on the length of the employee’s service;
• social security contributions – employers must contribute 16.5% of the gross monthly salary towards pensions and healthcare; and
• vacation entitlement – employees are entitled to 12 to 30 days of paid annual leave, depending on their length of service.

There are no works councils, but labour unions are becoming increasingly rare.

There are no formal currency controls in Paraguay. M&A transactions involving a central bank-regulated entity may require central bank approval to ensure compliance with MLA regulations.

In the past three years, Paraguay has not experienced significant court rulings related to M&A in general, nor in the technology sector in particular.

Although there is no specific regulation addressing this topic, three laws could potentially strengthen or facilitate M&A in the technology sector.

• Law No 6822/2021: This law, which came into effect in 2022, regulates electronic signatures and documents, granting them the same legal validity and effectiveness as handwritten signatures. It establishes a legal framework for the use of electronic signatures in both the public and private sectors, simplifying regulations by removing the previous distinction between electronic and digital signatures.
• Law No 6925/2022: This law promotes the use of electric transport in the country by providing incentives. It encourages the adoption of electric vehicles in both the public and private sectors through tax exemptions, and facilitates their importation. Additionally, it supports the development of necessary infrastructure, such as charging stations, and strengthens public policies aimed at reducing dependence on fossil fuels and decreasing carbon emissions. Given the rise of electromobility, which is typically managed by technology companies, the authors anticipate a significant increase in operations under this law, potentially impacting M&A activities.
• Law No 6380/2019: Although it has been in effect since 2020, this law allows for certain corporate reorganisations to be conducted tax-free, which may also influence M&A activities.

Overall, while specific M&A regulations may be limited, these laws provide a supportive framework that could enhance activities in the technology sector.

In Paraguay, data privacy legislation is scarce and limited mostly to credit scoring data.

Further, public companies can provide necessary due diligence information to potential bidders. However, the board of directors must ensure that the information disclosed is not prejudicial to the company’s interests and does not provide undue advantage to any bidder.

The same level of information must be provided to all bidders, and financial statements, corporate governance details and operational information must be shared.

Due diligence often includes a review of technology infrastructure, intellectual property and data privacy policies, as well as compliance with local regulations.

Paraguay still lacks a comprehensive data privacy law; however, some general privacy principles are included in Law No 6534/20. Companies that handle sensitive or personal data must take appropriate measures to protect that information during the due diligence process. Disclosing personal data without the individuals’ consent can lead to legal challenges, particularly in sectors like fintech, where the handling of personal data is especially sensitive. Data privacy restrictions can limit the scope of due diligence for technology companies, particularly if the target holds a significant amount of personal data.

If the acquisition is considered a material event according to the regulations of the Paraguayan Stock Exchange, the company is required to disclose the bid to the SIV and the stock exchange within three business days.

A prospectus is typically required if shares are issued in a stock-for-stock takeover or business combination. The decision of where the buyer’s shares must be listed, either on the Paraguayan stock exchange or a recognised foreign exchange, is significant. However, it is important to note that Paraguayan regulation does not mandate listing.

Local regulation does not oblige bidders to disclose documents publicly.

Publicly traded companies must provide financial statements, following International Financial Reporting Standards (IFRS) standards in Paraguay.

In Paraguay, parties must file copies of the primary transaction documents, such as the acquisition agreement and any relevant shareholder agreements, with the securities regulator if the transaction involves a public company. Private transactions may not require such public filings.

In any case, should the transaction trigger any of the antitrust tests, it is imperative that they are filed with CONACOM. This is a key aspect of regulatory compliance that cannot be overlooked.

In Paraguay, the directors of a company involved in a business combination primarily owe their duties to the shareholders. However, they must also act in the best interests of the company as a whole, considering the potential effects on employees, creditors and other stakeholders. Directors are required to ensure that the transaction is fair and reasonable for all parties involved.

In Paraguay, it is uncommon for companies to form special or ad hoc committees during business combinations. However, when conflicts of interest arise, especially among directors, companies may establish committees to oversee negotiations and protect shareholder interests.

Typically, during the initial stage, the partners engage in negotiations. If shareholders approve, the board of directors may then become involved.

In this scenario, the board may actively participate in negotiations throughout an M&A transaction. It is responsible for recommending or rejecting offers and may also defend the company against hostile bids if necessary. While shareholder litigation challenging the board’s decisions is uncommon in Paraguay, it can occur, especially if the board is perceived to be acting against the best interests of the shareholders.

It is standard practice for shareholders to seek independent financial and legal advice during a business combination. The board’s involvement is crucial, and they may also seek outside advice.

While not mandatory, a fair opinion from a financial adviser is often obtained in significant transactions. Its purpose is to ensure the offer is fair to shareholders from a financial perspective.