PARAGUAY Law and Practice Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
IRE rate on the annual profits and IDU at 8% when distributing the profits. Businesses Owned Through Transparent Entities Under Law No 6380/19, an entity recognised as trans - parent shifts its income and expenses to the partners or shareholders, meaning the entity itself does not pay IRE. Instead, each owner pays tax according to their personal tax status. In contrast, non-residents may be subject to 15% withholding tax on their portion. However, for tax- transparent entities ( empresas de joint venture – EJT) with non-resident beneficiaries, such as a trust, a reg - ulation forces the non-resident beneficiaries to have the EJT pay IRE as if they were residents, and then IDU, thereby eliminating tax transparency. Investment funds’ earnings are generally tax-exempt, except when the fund is a company shareholder. In this case, the fund must pay IDU at 8% for the receipt of dividends from local companies. In Paraguay, IRE is generally assessed on net prof - its determined by the difference between taxable revenues and deductible costs/expenses. The start - ing point is typically the company’s accounting records, prepared in line with local generally accepted accounting principles (GAAP) or international finan - cial reporting standards (IFRS). Thereafter, specific tax rules require add-backs or exclusions to arrive at the taxable base. Notably, profits are taxed on an accrual basis. Income is recognised when earned, and expenses when incurred, regardless of when cash actually changes hands. Main Adjustments Certain items may not be fully deductible or may trig - ger partial limitations. • Thin capitalisation rule: interest expenses (com - bined with royalties and technical assistance fees paid to related parties) are only deductible up to 2. Corporate Tax Regime 2.1 Taxable Profits General Approach
30% of the company’s net taxable income before those expenses. • Transfer pricing: transactions with related parties (especially non-resident affiliates) must be at mar - ket value (arm’s length). Any interest, service fees or cost allocations above or below that value are adjusted for IRE purposes. • Managerial/director compensation: fees paid to directors or shareholders acting as management may be capped in deductibility (broadly up to 1% of gross revenue, along with certain other expens - es). • Depreciation and amortisation: must generally fol - low statutory useful lives and methods prescribed by the tax authority rather than purely accounting estimates, thereby generating a difference between IFRS rules and tax rules. • Foreign exchange gains/losses: recognised on an accrual basis as taxable income or deductible expenses in the period they arise. Paraguay imposes a minimum taxation rule on loss relief. While companies may carry forward operating losses for up to five fiscal years, the utilisation of these losses in any given year is capped at 20% of that year’s net taxable income (before the losses are off - set). Consequently, at least 80% of the current year’s net income remains taxable, ensuring a minimum tax base even when significant losses have been incurred in prior periods. Another relevant point relates to the revaluation of fixed assets. Under Paraguayan rules, revaluation gains are not taxed immediately. Instead, they only become taxable upon actual disposal of the asset. This means that any upward adjustment in book value does not trigger a current tax liability, as long as the asset remains on the company’s balance sheet. However, once the asset is disposed of, the realised gain (calculated as the sale price minus the depreci - ated tax cost) is fully included in the tax base, ensuring that the increased asset value is eventually subject to IRE. This framework ensures that while the primary reference point is the financial statements, Paraguay’s IRE rules impose specific limitations and require detailed support for claimed deductions, particularly in related-party settings.
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