PARAGUAY Law and Practice Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
objective is to preserve the integrity of the tax system and prevent profit shifting, while still maintaining the competitive advantages of its regime. Ultimately, by pragmatically integrating the measures and engaging in ongoing dialogue with international bodies and domestic stakeholders, Paraguay aims to ensure both a fair tax system and an attractive envi - ronment for foreign and domestic investment. 9.5 The Competitive Tax System Paraguay’s competitive tax system is built on a low statutory rate (currently 10%), along with preferential regimes such as the IRE Simple regime for smaller companies, which can yield effective rates as low as 3% and various targeted investment incentives. These features are key to attracting foreign investment and stimulating economic growth. However, they could be more vulnerable than other areas of the tax regime if they are perceived as overly generous or if they lead to significant base erosion. Although Paraguay is not bound by EU state aid rules, its tax incentives are still subject to scrutiny by both domestic stakehold - ers and international investors to ensure fairness and transparency, as well as the controls and constraints that the Southern Common Market ( Mercado Común del Sur – MERCOSUR) legislation established for its members. To date, there has been little controversy or legal chal - lenge regarding these competitive features, with the tax authorities emphasising compliance and proper documentation. Nonetheless, as global tax stand - ards evolve, particularly under the BEPS agenda and increased international scrutiny, there may be future pressure to recalibrate these incentives to ensure a balanced approach between competitiveness and tax base protection. 9.6 Hybrid Instruments and BEPS Implementation At present, Paraguay does not have comprehensive, standalone legislation specifically targeting hybrid instruments. However, considering increasing global pressure, there is growing awareness of the poten - tial for hybrid mismatch arrangements to facilitate tax avoidance. In Paraguay, interest payments are cur - rently deductible, whereas dividends are not, which
aligns with traditional tax principles. The country has already incorporated thin capitalisation rules into its legislation, signalling a step towards addressing BEPS concerns. Looking ahead, Paraguay may adjust its tax frame - work in response to international recommendations, potentially limiting deductions for certain hybrid arrangements or requiring a stronger economic sub - stance analysis. However, rather than implementing an entirely new regime, such changes would likely come through amendments to existing tax laws. Given Paraguay’s competitive tax framework and its commitment to maintaining an attractive investment environment, any adjustments are expected to be gradual. The government is likely to focus on high-risk areas, particularly complex financing structures used by multinational groups. While hybrid mismatch rules are not a central feature of Paraguay’s tax system, they could gain relevance in the coming years. 9.7 Interest Deductibility and Territorial Tax Regime Paraguay does not have a fully territorial tax regime for corporations. Resident companies are taxed on their worldwide income, with some exceptions, although foreign tax credits help mitigate double taxation. Con - sequently, there are no interest deductibility restric - tions specifically tailored to a territorial system under the current framework. However, in light of global proposals, particularly those emerging from the BEPS process, there may be future changes that introduce tighter limits on interest deductions. These measures would aim to curb excessive debt financing and prevent profit shifting by related parties, potentially raising the effective cost of borrowing. If these proposals are implemented, both domestic and foreign investors might need to reassess their financ - ing structures, possibly shifting towards a greater reli - ance on equity to maintain competitiveness. 9.8 Controlled Foreign Corporation Reform Paraguay does not currently apply CFC rules, and such a regime is not a priority given the country’s tax structure. Paraguay is not typically a holding jurisdic - tion for foreign subsidiaries, nor is it a country that
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