PARAGUAY Law and Practice Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
Additionally, the interest rate on the borrowing must be at arm’s length, reflecting prevailing market condi - tions. If the interest rate deviates from market bench - marks, the tax authority may adjust or disallow the excess deduction. There are no additional statutory ceilings specific to borrowing from non-local affiliates beyond these gen - eral requirements. 6. Taxation of Foreign Income of Local Corporations 6.1 Foreign Income Exemptions Contrary to popular belief, from 1 January 2020, for - eign income of local corporations is not automatically exempt from corporate tax in Paraguay. In fact, local corporations are subject to tax on their worldwide income, including earnings from foreign sources, with some exceptions. However, in the past, it was the other way around. Nevertheless, Paraguay’s system incorporates a cred - it mechanism to avoid double taxation. Essentially, if determined foreign income has already been taxed abroad at a rate equal to or higher than Paraguay’s 10% corporate tax rate, that income is effectively exempt from additional Paraguayan tax. If the foreign tax rate is lower, the corporation must pay Paraguayan tax on the difference, with the foreign tax paid credited against its domestic liability. This approach ensures that the effective tax rate on foreign income does not exceed the local rate, while also addressing any undertaxed foreign earnings. 6.2 Non-Deductible Local Expenses If foreign income is exempt, expenses incurred solely to generate that income are generally not deductible for domestic tax purposes. Only expenses that directly relate to the production of taxable local income can be deducted in full. For mixed expenses – ie, those that support both exempt foreign income and taxable domestic income – the taxpayer must apportion the costs on a reasonable
basis, so that only the portion attributable to domestic income is deductible. 6.3 Dividends From Foreign Subsidiaries Dividends received by Paraguayan resident corpora - tions from foreign subsidiaries are generally included in the corporate income tax (IRE) base of the Para - guayan company. Accordingly, such income is subject to taxation under the ordinary corporate income tax rules applicable to resident entities. When the Paraguayan company subsequently distrib - utes profits to its shareholders, the dividend distri - bution tax (IDU) applies at the relevant rate. This is generally 8% for resident shareholders and 15% for non-resident shareholders, unless a double taxation treaty provides for a reduced rate. 6.4 Taxation of Intangibles Developed by Local Corporations Intangibles developed by local corporations and subsequently used by non-local subsidiaries are not automatically exempt from local corporate tax. These transactions must instead comply with Paraguayan transfer pricing rules, meaning that any transfer or licensing of intangibles must be priced at arm’s length. Payments made by the non-local subsidiary, such as royalties or licence fees, are recognised as ordinary income by the local corporation and are subject to IRE, provided that the rights are used at least partially in Paraguay. If the transaction is not properly priced, the tax authority may apply transfer pricing adjust - ments and assign a royalty payment to ensure that the economic benefit derived from the intangible is taxed accordingly. 6.5 Controlled Foreign Corporation-Type Rules Paraguay does not operate a controlled foreign corpo - ration (CFC) regime. In practice, this means that local corporations are not required to include the income of their foreign subsidiaries in their domestic tax base until that income is repatriated as dividends. The same principle applies to non-local branches of local corporations. Income earned by a foreign branch is generally not subject to Paraguayan tax until repa -
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