A diversified economy has allowed economic expansion in recent years, driven by record agricultural production. Agriculture is so vital to Paraguay that the ruling party declared during the 2018 election that they would not raise taxes, as the farm sector is so crucial.
It is also one of the largest net exporters of clean energy in the world, the largest exporter of organic sugar, and the sixth-largest producer of soybeans. This is an economy ready for the next generation of sustainable business.
But Paraguay is not just an agricultural nation; it's become a favoured destination for maquila services, a place for manufacturing plants that import and assemble duty-free components for export. These services allow plant owners to take advantage of low-cost labour and only pay duty on the value-added parts, causing the Paraguay tax environment to become of interest to global businesses looking to take advantage of these opportunities.
Paraguay tax system
The Paraguayan tax system is governed by Law 125/91, amended by Law 2421/04 and by Law 5061/2013. Taxes on company incomes include:
- Tax on income from commercial and industrial activities (IRACIS)
- Tax on agricultural income (IRAGRO)
- Small business tax (IRPC)
- Personal income tax (IRP)
There are also two indirect taxes: VAT, and selective consumption tax (ISC). It's ranked 127th in the world for ease of paying taxes.
Any income from property or rights within the national territory is subject to tax. It's worth noting any yields from capital abroad and exchange differences are considered sourced in Paraguay when the investing or beneficiary institution is based in Paraguay. The fiscal year follows the calendar year in Paraguay. Foreign tax credits are not applied to local tax payments in Paraguay.
Paraguay has several treaties to avoid double taxation with Argentina, Uruguay, Chile, Germany and Belgium regarding transportation and with Chile and Taiwan on income taxes.
Corporations and commercial enterprises are taxed on their Paraguay-sourced income at 10%, the lowest corporate income tax of the region. Any income earned from farming activities in Paraguay is subject to IRAGRO, which is calculated at a rate of 10% of the tax base.
Entities set up as a branch are subject to dividend withholding tax of 5%, and to a 15% withholding tax on remittances to the head office.
There is a special tax regime for small businesses and the self-employed, applying to commercial, manufacturing and service businesses with a total income not exceeding Gs 100 million (approx US$20,000) in the previous year. Their tax base is considered the smaller amount between 30% of annual gross income and gross income minus documented expenses, and the rate is 10% on the applicable tax base.
VAT & Excise
The sales tax rate also stands at 10% in Paraguay, and its revenue is a vital source of income to the Paraguay government. There is a reduced VAT rate of 5% for pharmaceuticals, the "basic family basket" and agricultural, horticultural and fruit products, as well as property rentals. Exports are not subject to VAT.
There is an excise tax - or "selective consumption tax" - payable at the time of import or first sale of products such as soft drinks, alcohol, cigarettes and toiletries. That tax must be settled monthly and must be settled before the goods are released from customs. There is also an excise on fuel imports which should be settled weekly. General excise rates include:
- Up to 50% on petroleum fuels
- From 18% up to 22% on cigarettes
- 13% on champagne
- 11% on other alcoholic beverages
- 10% on denatured alcohol
- 5% on soda, juice, perfume, natural pearls, precious stones and metal, watches and bracelets, weapons, ammunition, and accessories
- 1% on toys and accessories, machinery for air conditioning, laundry machines, musical instruments and accessories
Wage taxes and social security
Social security is taxed at 25.5% in Paraguay, of which 16.5% is liable to companies and 9% to employees. It's levied based on total remuneration, which includes royalties, commissions, perks, severance pay, awards, fees, and interests - though excludes bonuses.
Unlike many South American countries which can require an increasing amount of tax paid at multiple levels of government, Paraguay's tax system is relatively straightforward. Municipal taxes and fees are paid to each city for a wide range of services and activities, mainly concerning commercial licenses and patents, and taxes on real estate, construction, and property.
BEPS and transfer pricing
Paraguay is a signatory to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, joining more than 100 other jurisdictions to boost transparency and combat cross-border tax evasion. This means that details of financial accounts held in Paraguay will be automatically exchanged with fellow signatories to the Convention.
TMF Group in Paraguay
Knowledge of the law, regulations, local requirements and processes is vital for companies looking to operate in Paraguay. TMF Group in Paraguay's local expertise complements a global TMF Group network of 125 offices in over 83 jurisdictions, employing more than 7,000 qualified accountants, lawyers, corporate secretaries, HR, and other professionals. Whether you want to establish a business in Paraguay or just want to streamline your local operations, talk to us.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.