PARAGUAY Law and Practice Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
private service-oriented joint ventures ( consorcios ) and investment funds, to have income and expenses “passed through” directly to their partners or benefi - ciaries. While this structure theoretically provides a true “pass-through” tax regime, it remains uncommon in practice, as many local entrepreneurs and investors are more familiar with standard corporate forms like the SA or the EAS, both of which offer established governance frameworks, limited liability and relative ease of capital-raising. For investment groups such as private equity and hedge funds, transparent entities are rarely adopted. These sophisticated investors generally prefer the tried and tested corporate vehicles (mainly SAs), cit - ing benefits like robust regulation, potential stock market listing and investor familiarity. Although the transparent entity model could theoretically appeal to certain niche strategies, most market participants still gravitate towards the stability and clarity of traditional corporate forms in Paraguay. In addition, investment funds have another advantage: practically all the profits obtained by their partici - pants, whether resident or not, are exempt from tax, not because of the transparency regime, but because of a special exemption aimed at promoting the use of these investment instruments and the local stock market, since these funds can only place their shares on Paraguayan stock exchanges. 1.3 Tests for Determining Tax Residence Under Law No 6380/19, Paraguay generally applies an incorporation test for tax residency, deeming entities incorporated under its laws as tax residents. However, in the context of double taxation treaties, the place of effective management may determine residency if a tie-breaker rule is applied. Paraguayan tax law treats transparent entities as fiscally neutral, attributing income and deductions directly to their beneficiaries, who are taxed based on their own residency and applicable regulations. While these entities may be considered “resident” due to incorporation, taxation occurs at the beneficiary level.
Where a double taxation treaty applies, treaty provi - sions prevail and residency determinations focus on the beneficiaries rather than the entity. Treaties gener - ally recognise that the income of a transparent entity is taxable in the jurisdiction of its beneficiaries and not the entity itself. 1.4 Applicable Corporate and Individual Tax Rates Incorporated Businesses Paraguay applies a 10% IRE to the net profits of resi - dent entities, including SAs, SRLs and EASs. When distributing profits, these corporations must also with - hold the IDU at 8% for Paraguayan-resident share - holders and 15% for non-residents generally. Under double taxation treaty rules, it is generally 5% for Spanish residents, although there are cases in which it could be 0% and others in which it could be 10%. For Chilean residents, the dividend withholding tax is 10%. While this additional levy technically applies to dis - tributed profits, the practical effect is that the overall effective tax rate is 14.5% for Spanish residents, 19% for Chilean residents, 23.5% for other non-residents and 17.2% for residents. Businesses Owned by Individuals Directly Businesses owned by a resident individual ( empresa unipersonal ) can settle the IRE under the IRE Simple regime. Under this regime, if their annual gross income does not exceed approximately USD250,000, they pay a maximum of 3% on their gross income. The maximum is 3% because the IRE Simple rule is 10% is paid on the actual profit, which is the income for the year minus the deductible expenses, or on a presumed profit of 30%, which the rate of 10% is applied to – whichever results in the lowest tax being paid. Likewise, the owners of these sole proprietor - ships who pay IRE through the Simple regime are not subject to IDU for their business’ dividends. If the USD250,000 threshold is surpassed, or the IRE is assessed under the general regimen, businesses owned directly by a sole proprietor have the same regime as an incorporated business. This is a 10%
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