PARAGUAY Trends and Developments Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
income is subject to progressive tax rates of 8%, 9% or 10% depending on the income bracket. From an indirect tax perspective, services rendered within Paraguay are generally subject to value added tax (VAT) at a rate of 10%, whereas services per - formed abroad generally fall outside the Paraguayan VAT regime unless they are economically used or exploited within Paraguayan territory, as may occur in certain digital service transactions taxed under a market-jurisdiction approach. At the same time, Paraguay’s source-based tax sys - tem may produce different outcomes depending on the nature of the income and the location where the underlying activities are performed. For example, resi - dent individuals who generate foreign-source passive income, such as dividends, interest or capital gains derived from investments abroad, may not necessarily be subject to taxation in Paraguay under the personal income tax regime. Corporate service providers Where services are provided through corporate enti - ties, the income generally falls within the scope of the corporate income tax regime ( Impuesto a la Renta Empresarial – IRE). Companies established in Para - guay that provide services from within the country – including outsourcing services, shared service centre activities, technical support, software development, data processing and other technology-enabled ser - vices – are typically subject to corporate income taxa - tion on their net taxable profits derived from those activities. In practice, modern service-based business models frequently involve organisational structures in which different functions of the service chain are performed in separate jurisdictions. Management, operational teams, technological infrastructure and client rela - tionships may be located in different countries, while support functions such as programming, data pro - cessing, customer support or administrative services are centralised in specific locations. Paraguay has increasingly attracted interest as a potential location for certain components of these service structures.
Where services are effectively performed from Para - guayan territory, the resulting income is generally treated as Paraguayan-source income and therefore falls within the scope of the corporate income tax regime. Under the general regime, corporate income tax is levied at a rate of 10% on net taxable profits. In certain international operations where services are performed partially within and partially outside Paraguay, the legislation establishes a presumptive method for determining Paraguayan-source income. Under this rule, 30% of the gross revenue is deemed to constitute taxable income, which may result in an effective tax burden of approximately 3% of gross rev - enue derived from the international operation. Further considerations regarding the taxation of dis - tributed profits at the shareholder level are discussed below. Services performed outside Paraguay A separate set of considerations arises where services are performed entirely outside Paraguayan territory, regardless of whether they are provided by individuals or corporate entities resident in Paraguay. Under Paraguay’s source-based approach to the tax - ation of service income, income derived from services that are effectively performed outside the country may fall outside the scope of Paraguayan income taxation. This may occur, for example, where the personnel, operational infrastructure or technological platforms used to perform the services are located abroad, even though the service provider is a Paraguayan-incorpo - rated company or branch. In practice, this feature of the system may become relevant in a variety of cross-border service arrange - ments. For instance, a Paraguayan company may co- ordinate regional consulting or advisory services while the professionals carrying out the work are located in other jurisdictions. Similarly, a technology company incorporated in Paraguay may engage software devel - opers, data-processing teams or technical specialists based abroad to perform operational functions for for - eign clients. In such scenarios, the location where the
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