PARAGUAY Law and Practice Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
5.3 Capital Gains of Non-Residents Non-resident capital gains from selling shares in local Paraguayan corporations are subject to INR. The tax - able base is determined using a presumptive method, calculated as the lesser of either the actual gain (ie, the difference between the sale price and the nominal value of the shares) or 15% of 30% of the sale price, which results in an effective rate that typically does not exceed 4.5%. When it comes to the sale of shares in a non-local holding company that directly owns stock in a local corporation, and when the ultimate beneficial owner of the holding company is a non-resident, the tax treatment becomes more nuanced. In these cases, if the holding company is incorporated abroad, the gain realised by a non-resident may not be considered sourced in Paraguay and therefore may not be subject to Paraguayan tax. However, the determination of the source of the gain is complex and can depend on the specifics of the transaction and the underlying asset structure, particularly when a double taxation treaty applies. Double taxation treaties may further reduce or elimi - nate the capital gains tax, but these benefits generally apply to direct investments and may not extend to gains on indirect holdings through non-local entities. The actual tax outcome will depend on the precise treaty provisions and the circumstances surrounding the sale. 5.4 Tax Implications of Change of Control Paraguay does not include specific change of control provisions in its tax regime that trigger additional tax or duty charges solely based on a change in corporate control. Disposals of shares by a non-resident of an indi - rect holding company is not subject to Paraguayan taxes. However, when an overseas holding company disposes of an indirect interest (ie, a holding much higher up the group structure) in a local corporation, the tax treatment may require a closer examination of the transaction’s substance. In these cases, while no additional tax or duty is imposed simply due to the change in control, the tax authority may scrutinise the arrangement to ensure that the disposal reflects a
genuine economic transaction and that the tax bases have not been artificially reallocated. 5.5 Formula-Based Income Attribution In Paraguay, there is no standard formula mandated by law specifically for determining the income of for - eign-owned local affiliates. Instead, taxable income is computed based on the affiliate’s actual financial records, adjusted in line with the general tax rules and the arm’s length principle. In practice, the income from sales of goods or ser - vices is determined on a case-by-case basis, with necessary adjustments for transfer pricing, thin capi - talisation and other relevant factors. Although the tax authority may in certain instances apply a simplified or safe harbour method, particularly where documen - tation is incomplete or for smaller taxpayers, these approaches are not broadly established or routinely used for foreign-owned affiliates. 5.6 Deductibility of Intra-Group Management and Administrative Charges In Paraguay, deductions for payments made by local affiliates for management and administrative expens - es incurred by a non-local affiliate are allowed when those payments are determined to be at arm’s length. In practice, this means that the expense must reflect the price that would have been charged by an inde - pendent service provider under comparable circum - stances. The tax authority requires that these pay - ments are supported by appropriate documentation and comply with the transfer pricing rules. If the amount paid is deemed excessive relative to market rates, the tax authority may adjust or disallow part of the deduction. 5.7 Restraints on Related-Party Borrowing Foreign-owned local affiliates borrowing from non- local affiliates are subject to the same general con - straints as other related-party loans. In practice, the interest expense on these loans is lim - ited by the thin capitalisation rules, which restrict the deduction to 30% of the affiliate’s net taxable income before these expenses.
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