PARAGUAY Law and Practice Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
7. Anti-Avoidance Provisions 7.1 Overarching Provisions
triation. In other words, if a local corporation operates its business abroad through a subsidiary or a branch, the foreign income remains untaxed in Paraguay until it is brought back, and there is no separate CFC-type rule that distinguishes between these two structures. 6.6 The Substance of Non-Local Affiliates Paraguay does not have specific statutory provisions that impose explicit substance requirements on non- local affiliates. However, in practice, the tax authority may expect that all intercompany transactions, includ - ing those with non-local affiliates, reflect genuine eco - nomic activity. This means that if a non-local affiliate lacks sufficient physical presence, personnel or real decision-making authority, the tax authority may scrutinise the related- party transactions and adjust the pricing to ensure that profits are not artificially shifted. Essentially, while there is no formal “substance test” codified separately, the principle of economic sub - stance is effectively enforced through transfer pricing rules and general anti-avoidance measures when an applicable double taxation treaty includes such provi - sions. There are no additional rules. 6.7 The Sale of Shares in Non-Local Affiliates Local corporations that dispose of shares in non-local affiliates calculate the taxable gain as the difference between the sale price and the tax basis (typically the cost of acquisition). This gain is then included in the taxable income of the local corporation and taxed at the IRE tax rate of 10%. There is no separate or preferential rate for these gains, and the treatment is analogous to that applied to other general taxable income. However, under a double taxation treaty, the applicable rules may vary depending on the specific transaction, such as when the subsidiary’s assets include real estate, among other factors.
Paraguay’s tax legislation does not consolidate all anti-avoidance measures into a single, standalone general anti-avoidance rule (GAAR). Instead, a series of specific provisions, such as transfer pricing rules and thin capitalisation limits, collectively function as de facto anti-avoidance measures. The tax authority has the discretion to recharacterise or disregard transactions that appear to be artificial or lack genuine economic rationale, but there have been very few cases in which this provision has been successfully applied. In Paraguay, routine corporate tax audits are conduct - ed on a risk-based approach rather than on a fixed, statutory schedule applicable to all taxpayers. The tax authority reviews a range of corporate tax - payers, more frequently focusing on larger entities, those with complex operations or companies with past compliance issues. The process generally begins with a desk audit of submitted returns and supporting documentation, and it can escalate to field audits if discrepancies or high-risk transactions are identified. 8. Audit Cycles 8.1 Regular Routine Audit Cycle 9. BEPS 9.1 Adoption of BEPS Recommendations Paraguay has implemented several measures that reflect base erosion and profit shifting (BEPS) recom - mendations. For instance, the country has introduced detailed transfer pricing rules and documentation requirements, including the preparation of a trans - fer pricing study once certain revenue thresholds are exceeded, and has established thin capitalisation lim - its to restrict excessive interest deductions on related- party loans. In addition, anti-abuse provisions and substance requirements have been incorporated into the frame -
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