PARAGUAY Law and Practice Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
the UAE and Uruguay are currently in force, along with a recently enacted and significant treaty with Spain, which took effect in January 2025. The three major sources of foreign direct investment into Paraguay (namely, the USA, Brazil and the Neth - erlands) do not appear among these jurisdictions. With Spain already ranking among Paraguay’s top ten investors, the upcoming double taxation treaty is expected to stimulate further inflows, both from Spain itself and by positioning the country as a hub for capi - tal originating from the EU and other global regions. Uruguay and Chile are large investors too, according to official data. 4.3 Tax Authority Scrutiny of “Treaty Shopping” Practices Local tax authorities in Paraguay are only just start - ing to scrutinise potential “treaty shopping” sce - narios, and there are few documented precedents. However, with the recent adoption of an OECD Model Convention with Spain (in force from January 2025), new anti-abuse rules, such as beneficial ownership requirements, have been formally introduced. As a result, while enforcement has been light historically, it is expected that in the future, the tax authority will more closely examine whether treaty-based entities have real economic substance and genuine control of the income, particularly under treaties with explicit anti-abuse provisions. 4.4 Transfer Pricing Issues for Inbound Investors The most frequent transfer pricing challenges in Par - aguay centre on cross-border transactions involving loans, fees for technical assistance and intangible assets. Although the relevant rules adhere to the arm’s length principle, their practical application can be challenging for new inbound investors, especially those engaging in multiple related-party transactions. Additionally, once a local corporation exceeds annual gross revenues of approximately PYG10billion (about USD1.4 million), it must prepare and submit a transfer pricing study ( estudio técnico de precios de transfer- encia – ETPT) detailing the methods used to confirm that intercompany pricing aligns with market condi - tions.
A common area of scrutiny involves services pro - vided by non-resident related parties, particularly management, consultancy and intellectual property (IP) arrangements, where the tax authority may ques - tion the actual economic substance or the valuation of intangible benefits. Likewise, interest expenses on related-party financing can become contentious if interest rates deviate from prevailing market bench - marks. While there is no formal advanced pricing agreement (APA) system, the tax authority has indicated increas - ing vigilance in auditing these areas, suggesting that robust documentation and careful benchmarking are key to minimising disputes, although the actual con - trol of the operations is yet to be seen in the short-to- medium term. 4.5 Challenges to Related-Party Limited Risk Distribution Arrangements Paraguayan transfer pricing rules do not specifically define limited risk distribution arrangements, but they do require that any related-party transactions reflect an arm’s length profit allocation. In practice, where a local company acts as a “limited risk distributor”, the tax authority may challenge the arrangement if it suspects that the local margin is arti - ficially low. This scrutiny typically involves ensuring that the local entity’s functional profile matches the reduced risks and functions described and that its compensation aligns with independent comparable rates in similar circumstances. While aggressive challenges are not yet widespread, if the authority believes that local risks and functions are understated or that the local entity should retain more profit, it could adjust the transfer price upward. Proper documentation of functional responsibilities, assets employed and actual risks borne by the local distributor is therefore crucial to defend such a model. 4.6 Local Transfer Pricing Rules and OECD Standards Paraguay’s transfer pricing regime is broadly aligned with the OECD arm’s length principle but remains less comprehensive in terms of both substance and enforcement mechanisms.
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