Taxation and Incentives in Paraguay
Paraguay, with its capital in Asunción and Spanish as its official language, has been drawing attention for its unique taxation system. If you're considering relocating or doing business in this South American nation, understanding its fiscal landscape is crucial.
1. Taxation Principles in Paraguay
Paraguay's taxation system primarily operates on the principle of territoriality. This means residents are taxed only on income generated within the country. So, if you're a resident selling products or services abroad, you're exempt from local taxation. However, any business conducted within Paraguay's borders is taxable.
In 2019, significant changes were introduced to the country's tax system through Law n. 6380/19. This law aligned Paraguay with OECD standards, especially concerning transfer pricing. It also simplified tax procedures for small and medium-sized businesses.
2. Personal Income Tax
The 2019 tax reform reshaped the personal income tax system. Only incomes generated within Paraguay are taxable. This includes incomes from assets located in Paraguay or rights economically used within the country. The tax rates are as follows:
- Up to 50 million PYG: 8%
- 50 million to 150 million PYG: 9%
- Above 150 million PYG: 10%
3. Exemptions and Deductions
Several exemptions are available for residents:
- Interest from local banks or financial institutions.
- Profits from foreign currency exchanges.
- Death, illness, disability, and maternity allowances.
- Donations, inheritances, and pensions (provided mandatory social contributions have been made).
Moreover, residents can deduct various expenses, including healthcare, housing, education, clothing, and recreational activities. However, fines, penalties, and other income taxes are not deductible.
4. Corporate Taxation
Companies, regardless of their legal status, are subject to a 10% tax rate. This includes individual enterprises, associations, public entities, foreign company branches operating in Paraguay, and cooperatives. The tax is applicable to incomes generated within the country.
5. Dividend Tax
Dividends and profit distributions are taxed at:
- 8% for resident recipients.
- 15% for non-resident recipients.
6. Non-resident Taxation
Non-residents are taxed only on Paraguayan-sourced income. The tax rate is 15% on a varying taxable base, depending on the income category.
7. Transfer Pricing
Paraguay's alignment with OECD standards in 2019 meant the introduction of transfer pricing regulations. Entities with a turnover exceeding 10 million PYG or those transacting with low-tax jurisdictions must maintain transfer pricing documentation.
8. Incentives for Foreign Investors
Foreign companies investing in Paraguay can avail of tax benefits if their activities contribute to the country's development. These benefits include exemptions from various taxes and duties.
9. Simplified Tax Regime for SMEs
Small and medium-sized enterprises with an annual turnover below 80 million PYG can opt for a simplified tax regime. This regime requires a fixed monthly tax payment based on the previous year's turnover.
10. Value Added Tax (VAT)
Introduced in 1991, the VAT in Paraguay is known as "impuesto al valor agregado." It applies to goods, services, and imports. The VAT system underwent a significant change in 2017 with the introduction of the "National Electronic Invoicing System" (SIFEN).
In conclusion, Paraguay offers a unique taxation landscape with numerous incentives, especially for foreign investors and SMEs. Whether you're considering relocation or business expansion, understanding the country's fiscal policies can provide a competitive edge.
Disclaimer: Always speak directly to an attorney; blog posts are not a sufficient source of information to make decisions, may not be appropriate for your situation, may not be well researched, and may not be current at the time you read them, always speak directly with an attorney.
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