To comply with the international tax transparency standards and to evade critics, Paraguay reformed its tax system; the amended rules will enter in force from January 2020.
The Paraguay Tax Reform Law
The related law is the “Convenio Convencional No 6380/19 Sobre Modernización y Simplificación del Sistema Tributario”, also known as the “Tax Reform Law”. With the help of the new legislation, the Paraguayan tax system is in line with the guidelines issued by international organizations (as the Organization for Economic Cooperation and Development – OECD).
This law unifies criteria and establishes an adequate structure for the direct taxes, simplifying the process of determining the burdens and incorporating benefits for companies of loss carryover. A crucial point is the incorporation of valuation standards or the transfer pricing to adapt Paraguayan legislation to the international organizations’ requirements to ensure transparency in global operations, according to Deloitte’s analysis.
Paraguay Business Income Tax IRE
The reform enhances the payment of direct taxes, like in the case of Business income tax (Impuesto a la Renta Empresarial-IRE) which joins three different tax types from 1 January 2020:
- Commercial, Industrial or Services Income Tax (IRACIS), Tax on the Income of the Agricultural Activities (IRAGRO)
- and the Income Tax of the Small Taxpayer (IRPC)
Within this same category (IRE) is the Simplified Regime for Medium Enterprises (Simple) and the Simplified Regime of Small Companies (Resimple*) that will be applied according to the level of turnover of the companies, to facilitate the operations of MSMEs and encourage formalization, according to the Info Negocios.
The general tax rate of the IRE is ten per cent (10%) which is applied over the net income of the fiscal year. Moreover, the “new IRE partially replaces the source system currently in force by the worldwide system of taxation”.
Paraguay Income Tax
The Paraguayan Personal Income Tax (IRP) will have progressive rates of 8, 9 and 10% when the gross income of the taxpayer exceeds 80 million guaraníes in the year.
Paraguay Tax on Dividends and Utilities (IDU)
The reform created the Tax on Dividends and Utilities (IDU), the tax rate is 8% on the distribution of profits for Paraguayan residents, but if the firms do not distribute profits, they will not pay this tax. Moreover, non-Paraguayan residents will pay a 15% rate. The effective tax rate for the distribution and remittance of dividends for non-Paraguayan residents is decreased, from 27.32 per cent to 23.50 per cent. Important to notice that companies with a turnover that exceeds G. 2 billion in billing will have to contribute to the IDU.
Paraguay VAT 2020
The Paraguayan Value Added Tax (VAT, Impuesto de Valor Agregado – IVA) will not change significantly. The payment of IVA to public transport companies is still tax-exempt, to maintain the ticket price and the tax rate of office rent increases from 5% to 10%. (The general IVA rate in Paraguay is 10%, but there is a decreased 5% rate on essential food products, medicines and the rent of the family home. A deduction of up to 30% of the tax credit is allowed for personal service providers to buy vehicles.). The new legislation eliminates the VAT refund for agro-exporters.
The government will also implement the Non-Resident Income Tax (INR) – for companies like Uber, Netflix, Spotify, etc. – the foreign digital product providers will pay a 15% fee. The Personal Income Tax (IRP) will have an 8% rate of income and capital gains, and between 8% to 10% on income on providing services.
The Selective Consumption Tax (ISC) is increased for tobacco, and its scope reached the import of the aircraft and vessels with a value over USD 30,000 and several packaged foods products with additional high calories.
The objective of the Paraguay Tax Reform 2020
The economically active population is 3,500,000 people in Paraguay. However, there are only about 871,000 registered taxpayers. When the new system is fully implemented, the State will receive about 300 million USD more, according to the estimates of the Cabinet.
*Resimple: For sole proprietorships (unipersonal companies) that reached a gross income below G. 80,000,000 in the previous fiscal year.
You can read here all the essential information on the Paraguayan Taxes!
Could you please answer my questions?
1) If I operate a business from Paraguay and take out dividends my total tax burden will be
Corporate tax of 10% on profits and another 8% dividend tax on the distributed profits. Am I correct ?
2) From 1-Jan-2020, Tax will be levied on worldwide income. Which means income from foreign countries (like dividends, bank interest) will also be taxed. Is this applicable to personal foreign income as well?
3) What are the annual compliance costs of running a Paraguay company ( very low activity – a company incorporated just to get the PR)?
4) Investment program – Is it mandatory to expend 70000 USD in 10 years? Can It be like open a company, invest 70000 USD in something like stocks, bonds, gold etc and keep it as is.
Dear Vino, these are interesting questions. Here you are the answers:
1) If I operate a business from Paraguay and take out dividends my total tax burden will be
Corporate tax of 10% on profits and another 8% dividend tax on the distributed profits. Am I correct?
That’s right, corporate or business tax in Paraguay is 10%, and when a company makes a decision to pay dividends another 8% must be paid, it must be withheld and paid to the government by the company.
2) From 1-Jan-2020, Tax will be levied on worldwide income. Which means income from foreign countries (like dividends, bank interest) will also be taxed. Is this applicable to personal foreign income as well?
The corporate income tax here in Paraguay is still under income from Paraguayan sources. This means that the tax paid is paid by the Paraguayan company. You can perform work done in Paraguay or work done in Paraguay and sold to foreigners. If the Paraguayan company is the owner of a foreign company, and the foreign company does not pay to the Paraguayan parent company, Paraguay does not levy tax (artigo 6, inc 4 da ley 6380/19) Individuals’ foreign-sourced and not remitted incomes are tax-exempt.
3) What are the annual compliance costs of running a Paraguay company ( very low activity – a company incorporated just to get the PR)?
App 1,100 USD, depends on various factors.
4) Investment program – Is it mandatory to expend 70000 USD in 10 years? Can It be like open a company, invest 70000 USD in something like stocks, bonds, gold etc and keep it as is.
As an investment it is considered only an activity that generates income or a source of work in Paraguay, it is not considered an investment to bring, buy, invest in or deposit in stocks or gold. The applicant must certify the investment in development and present project in Paraguay, the project is controlled by the SUACE.
I have read “artigo 6, inc 4 da ley 6380/19” on https://www.set.gov.py/portal/PARAGUAY-SET/detail?folder-id=repository:collaboration:/sites/PARAGUAY-SET/categories/SET/Normativas/leyes&content-id=/repository/collaboration/sites/PARAGUAY-SET/documents/leyes/B%20-%20Ley%20N%C2%BA%206380-19
No where it is mentioned that foreign sourced income is tax exempt if the same is not remitted to Paraguay. If the foreign sourced income suffers a tax at the country of origin then a DTAA can be used to avoid double taxation.
Do you have any source which confirms the exemption?
Thank you for the question, we love details.
In Paraguay, the tax must be paid once it is communicated to the Government. Currently, we have only a few double taxation agreements with countries like Brazil, Chile, Uruguay, Argentina. However, there are agreements with other jurisdictions as well but only for a couple of activities.
How does it work if a person in Paraguay does some work for a foreign company/business, and then is paid into a foreign bank account? Would it only be reported as income if the money is transfered to a bank in Paraguay?
Your foreign-sourced and not remitted income is tax-exempt. It is so simple. If you would like to consult and go through the possible solutions in detail, then let’s set up a consultation. thank you