PARAGUAY Trends and Developments Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
Absence of controlled foreign corporation rules Another characteristic of Paraguay’s tax framework that is frequently noted by international investors is the absence of CFC rules. In many jurisdictions, CFC regimes are designed to prevent the deferral of taxation by requiring resident companies to include certain categories of income earned by foreign subsidiaries in their taxable base, even if the profits have not been distributed. These rules typically target passive income such as interest, royalties or investment returns generated in low-tax jurisdictions. Paraguay’s tax system does not currently contain such mechanisms. As a result, income earned by for - eign subsidiaries of Paraguayan companies is gener - ally not attributed to the Paraguayan parent company for tax purposes until profits are effectively distributed. This characteristic reflects the broader structure of the Paraguayan tax framework, which continues to rely primarily on source-based taxation rather than global income consolidation. Implications for cross-border service structures Taken together, the relatively moderate personal and corporate tax rate, the taxation of profits primarily upon distribution and the absence of CFC rules cre - ate a framework that may be particularly relevant for certain cross-border service structures. Service-based business models frequently involve the centralisation of management, intellectual property, technical support or back-office operations within a single jurisdiction, while commercial activities are car - ried out across multiple markets. In such cases, the interaction between corporate taxation, profit distribu - tion rules and international tax principles becomes a key factor in determining the overall efficiency of the structure. In certain situations, Paraguayan companies may also participate in service activities that are effective - ly performed outside Paraguayan territory. Where the underlying services are carried out abroad, questions may arise as to whether the resulting income falls within the scope of corporate income taxation under the source-based framework. In such cases, the pri -
mary taxation event may occur at the moment profits are distributed to shareholders through the dividend taxation regime. Although Paraguay has traditionally been associated with goods-based economic activities, these struc - tural characteristics are increasingly attracting atten - tion in the context of service exports, digital activities and regional shared service centres. The maquila regime and the expansion of service exports In addition to the general tax framework applicable to cross-border services, Paraguay provides a spe - cialised regime designed to promote export-oriented activities: the maquila regime. Originally introduced to encourage export manufac - turing, the maquila framework has evolved into one of the country’s most significant investment promotion tools, including by the current administration. Under this regime, companies established in Paraguay may perform industrial or service processes for a foreign contracting entity, incorporating local labour and resources while exporting the resulting goods or ser - vices abroad. A central feature of the maquila regime is its simplified tax structure. Instead of being subject to the ordinary corporate tax system, export maquiladora companies are subject to a single tax equivalent to 1% applied to the higher of the value added in Paraguay or the invoiced export value. This tax replaces the ordinary corporate income tax (IRE and IDU) and certain other domestic taxes that would otherwise apply to the operation under the general regime. In practical terms, maquila operations benefit from a highly simplified tax framework. Activities carried out under an approved maquil a programme are generally not subject to the standard corporate income tax or VAT applicable to domestic transactions, and the tax - ation of profits is concentrated in the single maquila tax rather than complemented by additional layers of taxation upon distribution. Another distinctive feature of the regime is that maqui- la operations are governed primarily by the terms of
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