Paraguay: A strategic destination for international investment

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Paraguay stands out as a competitive and stable tax platform in Latin America. Its low-tax regime, combined with incentives for foreign companies, creates an attractive environment for investment. The country’s young, skilled workforce and sustained economic growth solidify Paraguay as an ideal destination for wealth planning and project structuring. With modern legislation and a proactive approach to international treaties, Paraguay is a strategic choice for expanding regional operations.

Although Paraguay boasts many positive aspects that make it an attractive investment hub –including macroeconomic stability, low inflation, a strong local currency, a recent investment-grade rating, and an expanding double tax treaty (DTT) net – this article focuses on the main tax incentive regimes. These regimes highlight the advantages for foreign investors, such as favourable tax rates, simplified regulations and other incentives under programmes such as capital investment, maquila , and free trade zone (FTZ) regimes. Concentrating on these fiscal incentives underscores Paraguay's strategic benefits for international businesses looking to expand.

Analysing fiscal regimes for foreign investments in Paraguay must start with understanding the business itself, as not all regimes offer the same benefits or promote the same activities. Determining whether the focus is on export, domestic trade, or both is crucial.

Paraguay's tax framework, as outlined in Law No. 6380/2019, the Law for the Modernisation and Simplification of the National Tax System (the General Tax Regime), is designed to be modern and simple. This straightforward approach provides a clear understanding for potential investors, instilling a sense of reassurance and confidence in the system.

In general terms, this regime provides for the following:

Direct taxes:

10% corporate income tax (IRE, by its Spanish initialism);

An additional 8% or 15%, depending on the residency of the shareholder, as a withholding tax (WHT) on dividends and profits (IDU, by its Spanish initialism), unless a DTT applies; and

Effective withholding rates between 4.5% and 15% on payments to foreign suppliers from Paraguayan-source income under the non-residents income tax (INR, by its Spanish initialism).

Indirect taxes:

10% VAT in general, with a reduced rate of 5% for specific cases; and

Excise tax rates between 0% and 50% on imported goods or their first sale in the case of domestic production.

This article explores some of Paraguay's most relevant special tax regimes available to potential investors.

The Paraguayan ‘ maquila regime’, defined in Law No. 1064/1997, is a promising avenue for industrial production and service provision, focusing on export. The regime offers significant potential for investors, encouraging a positive outlook and instilling a sense of optimism and hope for future growth and success.

Among its main objectives, it establishes that maquiladora companies must incorporate national labour and other local resources into their business. This is “Paraguayan added value”, which refers to the value added to a product or service in Paraguay. This added value is a critical factor in determining the tax incentives under the regime. The company must conduct its activity under a contract signed with a foreign company (the Parent Company, which does not have to be a related entity under company law). For the company to be subject to the regime and thus benefit from tax incentives, the maquila programme must be approved by a joint resolution issued by the Ministry of Finance and the Ministry of Industry and Commerce.

Under the maquila regime, maquiladora companies may import raw materials and inputs needed for the industrial process, to which the Paraguayan added value is applied for subsequent export.

Maquiladora companies enjoy the following tax incentives regarding their exports:

The payment of a single tax at the rate of 1%, applied to the Paraguayan added value or on the gross value of exports to the Parent Company. The tax is filed and settled monthly.

Dividends remitted to foreign shareholders are not subject to IDU.

Activities performed under the maquila contract are exempt from all other national, departmental, or municipal taxes.

A VAT exemption on the export of goods and services. Input VAT related to exported goods can be refunded.

A suspension of customs duties and input VAT on the importation of goods and raw materials.

Maquiladora operations with foreign related parties are not subject to local transfer pricing rules.

Regarding maquiladora obligations, they must guarantee customs the amount of duties that may eventually apply to imported goods, ensuring compliance with the obligations imposed by this regime.

Another relevant point is that when the maquiladora pays for services abroad or financing obtained, it must withhold INR and pay VAT (10%) under the reverse charge mechanism. This mechanism shifts the responsibility for reporting and paying VAT from the supplier to the recipient of the goods or services. This is based on a recent stance taken by the tax authority, confirmed by the Administrative Court (the final ruling of the Supreme Court of Justice on the matter is still pending). It is recommended that these withholdings be reviewed on a case-by-case basis.

Regarding maquiladora operations in or to the domestic market (sales, services, etc.), including the sale of imported goods, such activities are subject to the General Tax Regime.

This applies to maquiladoras with idle capacity; i.e., those that, in addition to their operations for their Parent Company abroad, also carry out activities for the Paraguayan market.

Law No. 523/1995 (the FTZ Law) establishes the regime for FTZs (the FTZ Regime), aiming to promote investments, jobs, exports, and international trade from within FTZs.

FTZs are areas within the national territory where the entry and exit of goods are not subject to economic prohibitions, nor are they taxed, except for what is expressly established by the FTZ Regime.

Under the FTZ Law, the following roles are distinguished:

Concessionaire – a legal entity authorised by the Paraguayan state to operate the FTZ during the concession period; and

User – any person who sets up in an FTZ to carry out commercial, industrial, or service activities, leasing space in the FTZ operated by the concessionaire.

Taxation of FTZ concessionaires

Based on an analysis of the FTZ Law and its regulations, it is understood that the concessionaires were designed to focus on leasing space in the FTZ, allowing users to conduct their export activities. The tax benefits for concessionaires are oriented and limited to constructing the FTZ's basic infrastructure.

The FTZ Regime is increasingly becoming the preferred choice for investors for large-scale projects. It offers significant tax benefits on commercial, industrial, or service operations, which can be a source of excitement and motivation for potential investors.

It is also worth noting that the FTZ Regime can be appealing for industrial construction. In this context, the authors recommend it, provided that the FTZ concession is efficiently negotiated, clarified with regard to its tax benefits, and agreed upon between the investor and the Paraguayan state.

Unlike concessionaires, the following applies to FTZ users:

FTZ users must pay a single tax, the FTZ unified tax, at a rate of 0.5% on gross export income. This tax must be settled and paid to the tax authorities on each export shipment. The FTZ unified tax is a unique tax system designed to simplify the tax process for FTZ users and ensure a consistent and manageable tax burden.

Income subject to this tax is not liable for IRE or IDU.

Within the FTZ, goods’ entry and exit are not subject to national, departmental, or municipal taxes.

Transactions between domestic suppliers and FTZ users are exempt from VAT.

Transactions between FTZ users are exempt from VAT.

Dividend remittances to shareholders are not subject to IDU.

Payments for royalties, commissions, fees, interest, services, technical assistance, technology transfers, loans and financing, equipment rentals, and other services provided from abroad are not subject to INR withholding.

Operations between FTZ users and their related foreign entities are not subject to local transfer pricing rules.

The General Tax Regime applies if the user of the FTZ conducts operations in the Paraguayan domestic market; that is, within or to the local territory.

Law No. 60/90 establishes incentives for capital investment of national and foreign origin (the Capital Investment Law). Its objective is to increase investments, with an emphasis on:

The growth of goods and services production;

The creation of permanent employment opportunities;

The promotion of exports and import substitution;

The incorporation of technologies that increase production efficiency and facilitate more significant and better use of national raw materials, labour, and energy resources; and

The investment and reinvestment of profits into capital assets.

Beneficiaries of this law can invest in the following ways:

In cash or financial instruments;

In capital goods, raw materials, and inputs intended for local industry for the manufacturing of capital goods;

In trademarks, designs, models, industrial processes, and other forms of technology transfer that can be licensed;

In specialised technical assistance services; and

In the leasing of capital goods.

As for tax benefits, the Capital Investment Law provides the beneficiary with:

An exemption from withholding IDU for up to 10 years, provided that the investment amounts to at least $13 million and does not originate from a jurisdiction considered by Paraguay to have low or zero taxation and that the shareholders cannot offset the WHT on the dividends as a credit in their residence jurisdiction;

An exemption from customs duties and VAT on the importation of capital goods, raw materials, and inputs intended for local industry, as specified in the approved investment project; and

An exemption from the obligation to withhold INR from foreign financiers, provided the investment-related activity amounts to at least $13 million and the financier is a bank, a financial entity, a multilateral credit organisation, or a credit entity of recognised standing in the financial market.

Under this regime, except for the listed exemptions, the General Tax Regime applies to the beneficiary entity.

Some other regimes have been established, but their application is limited. In some cases, applying for them is more expensive than performing the activities under the General Tax Regime.

Final comments on the Paraguayan tax framework’s appeal to international investors

In summary, Paraguay offers an attractive tax framework for foreign investors, with special tax regimes that could suit the various needs of projects.

Among these special regimes are:

The maquila regime, which promotes industrial production and services for export by adding national value;

The FTZ regime, which focuses on industrial and commercial export activities from a physical space granted by the state to a private entity; and

The capital investment regime, which incentivises the incorporation of capital assets, mainly aimed at attracting new technologies to boost productivity.

Although the General Tax Regime is relatively simple and less burdensome compared with most of the country's competitors (corporate and shareholder taxation ranging between 17.2% and 23.5%), Paraguay offers exciting benefits to attract foreign direct investment, with an emphasis on local employment generation and the protection of national industry.

In this context of simplicity and a favourable fiscal environment, it is essential that each investor carefully analyses which of these regimes best aligns with their business strategy, evaluating the fiscal benefits and the associated obligations, as well as their target market.

The suggested analysis becomes even more relevant when considering that these tax regimes were enacted several decades ago, highlighting the need to update them to align with current business dynamics and versatility, ensuring their effectiveness and appeal to modern investors.

Finally, several legitimate questions regarding the future of these tax incentives must be recognised, especially in light of the implementation of the OECD's pillar two, which introduces a global minimum tax. Will these benefits remain? Will Paraguay continue to attract investment without them? What concrete advantages would adopting this new global scheme bring to the country? These are open questions that a subsequent article may address. However, Paraguay should seek a balance that maintains its tax attractiveness while adapting to international commitments, without giving up the fiscal benefits that drive its economic development.

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Paraguay: A strategic destination for international investment

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