PARAGUAY Trends and Developments Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
services are effectively performed may play a decisive role in determining whether the resulting income falls within the Paraguayan tax base. Comparable considerations may arise in structures involving distributed service platforms or regional operational models, where different components of the service chain, such as management, client acqui - sition, billing, collection, technical development or operational delivery, are performed in separate juris - dictions. In these situations, determining the jurisdic - tion in which the services are effectively carried out may require a careful assessment of the specific facts and operational arrangements of the business. Similar considerations may also arise at the indi - vidual level. For example, a foreign professional who has obtained Paraguayan tax residence may perform consulting, programming or other professional ser - vices while temporarily located outside Paraguayan territory and providing those services to foreign cli - ents. In such cases, the determination of where the services are effectively performed may be relevant in assessing whether the resulting income falls within the Paraguayan tax base. These considerations may also extend to certain digital or technology-enabled services provided by Paraguayan companies to foreign markets. Although Paraguay currently remains primarily an importer of many digital services, the legal framework does not preclude the development of export-oriented digital service models. Where such services are effectively performed outside Paraguayan territory and no por - tion of the underlying activities takes place within the country, the resulting income may fall outside the scope of Paraguayan taxation under the source- based rules applicable to service income. Similar considerations may arise in cross-border structures where the relevant activities are carried out abroad and do not create a permanent establishment or comparable taxable presence in Paraguay, even where certain technological or hosting infrastructure is physically located in Paraguay. As cross-border service models continue to evolve, the determination of where services are effectively
performed, and therefore where income is considered to arise, may become an increasingly relevant factor for companies and professionals evaluating Paraguay as a jurisdiction for structuring regional service opera - tions. Profit distribution and shareholder-level taxation While the preceding sections highlight several fea - tures of Paraguay’s tax framework that may be rel - evant in the context of cross-border service activities, corporate profits are ultimately subject to a two-tier system of taxation. Business income accrued by com - panies incorporated in Paraguay is first taxed at the corporate level under the corporate income tax regime ( Impuesto a la Renta Empresaria l – IRE). A second level of taxation arises only when profits are distrib - uted to shareholders through the tax on distributed profits ( Impuesto a los Dividendos y Utilidades – IDU). The applicable withholding rate depends on the tax residence of the shareholder. Distributions to resident shareholders are generally subject to an 8% rate, while distributions to non-resident shareholders are taxed at a rate of 15%. Although these rates represent an additional level of taxation, their overall impact may vary depending on the nature of the underlying activi - ties and the circumstances in which the income is generated. For example, in situations where services are performed entirely outside Paraguayan territory and therefore do not fall within the corporate income tax base, the taxation associated with profit distribu - tions may represent the principal tax charge arising in Paraguay. This structure also has practical implications for com - panies engaged in service-based activities. Because shareholder-level taxation arises only upon distribu - tion, profits that are retained within the company for reinvestment in operations are not subject to addi - tional taxation until a distribution occurs. For busi - nesses operating in sectors characterised by ongo - ing investment in technology, infrastructure or human capital, this feature may provide a degree of flexibility regarding the timing of profit distributions.
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