PARAGUAY Law and Practice Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
productive process. It also introduces a preferential VAT calculation mechanism for goods produced under the regime, under which VAT is assessed on 45% of the ordinary taxable base. Access to the incentives is subject to compliance with statutory conditions, including employment generation and a minimum level of domestic value added. Free Trade Zones (Law No 523/95) Firms established as “users” in a free trade zone pay a 0.5% single tax on export revenue and are generally exempt from other taxes (including IDU and income taxes) on those export operations. Goods or services entering local markets from a free trade zone become subject to Paraguay’s standard tax regime, and the user arrangement must be negotiated with the con - cessionaire who operates the zone. Financing Structures The Investments Incentives Law can exempt inter - est on foreign loans from withholding taxes (INR) and IVA when the lender is a recognised financial institu - tion and the project surpasses specified investment thresholds (USD13 million). This relief can significantly reduce overall borrowing costs for large-scale invest - ment or infrastructure projects. Electric Transport Promotion (Law No 6925/22) Although not exclusively a tax incentive scheme, Law No 6925/22 promotes the adoption of electric vehicles in both the public and private sectors by offering tax exemptions and streamlined import processes. Specifically, the law contemplates reduced or zero import duties, preferential IVA treatment and other potential benefits for manufacturers and importers of electric or hybrid vehicles, their batteries and key components. These measures seek to encourage the development of local electromobility infrastructure, such as charging stations, and foster cleaner, more sustainable transportation. 2.4 Loss Relief Carry Forward and No Carry Back Paraguayan corporate tax legislation allows business - es to carry forward losses for up to five fiscal years but does not permit any carry back of losses to prior peri - ods. In principle, all income, ordinary or capital, falls
under the same IRE calculation, so operating losses may offset capital gains (and vice versa) subject to general rules. When claiming losses, taxpayers must maintain thorough documentation to substantiate the amounts and ensure compliance with specific limita - tions imposed by the tax authority. The 80% Minimum Tax Rule A significant limitation is the so-called minimum taxa - tion rule, which allows losses carried forward to off - set only 20% of the net taxable income in each of the five subsequent years. Therefore, at least 80% of the current year’s income remains taxable, ensuring some baseline level of taxation even when historical losses are available. Unused losses beyond the five- year period or amounts disallowed by the annual 20% cap generally expire and cannot be claimed thereafter. However, from a civil and commercial point of view, a company with accumulated losses cannot distribute profits or pay dividends until all the losses have been covered, by offsetting them against profits, contribu - Local corporations in Paraguay are subject to a thin capitalisation rule, which limits the deduction of inter - est (together with royalties and technical assistance fees) paid to related parties to 30% of the entity’s net taxable income before those expenses. Any excess is non-deductible in that year. tions or capital reductions. 2.5 Deduction of Interest Additionally, for the interest to be deductible, the lend - er must be a taxpayer – whether personal income tax, IRE or non-resident income tax. Transfer pricing rules require interest to be paid to foreign-related parties under arm’s length conditions. For interest payments to non-resident lenders, a with - holding tax (INR) applies at the following rates: • if the lender is a related-party (ie, a controlling or majority-owned affiliate), the nominal rate is 15% of the gross payment (for an effective rate of 15%); and • where the lender is unrelated, the nominal rate is 15%, but it is calculated on a presumptive base of
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