PARAGUAY LAW AND PRACTICE Contributed by: Manuel Arias, Carla Sosa, Martin Carlevaro, Milena Sljivich, Alexander Berkemeyer and Antonio Villa Berkemeyer, BKM - Berkemeyer
on the accrual criterion for the fiscal year) at a rate of 10% on the fiscal net income, with specific excep - tions. IRE applies the “source principle” for income attri - bution and, in certain cases, taxes income earned abroad (mixed-source income). There are specific rules regarding deductible expens - es, including thin capitalisation rules, transfer pricing regulations, etc, and the compensation of tax losses is allowed for up to five fiscal years at a rate of 20% per year. Finally, the law requires advance payments or instal - ments on account of the tax for the fiscal year. These are paid in four instalments per year and are calculat - ed based on the average IRE paid over the last three fiscal years. Furthermore, a withholding rate of 0.4% IRE is imposed at customs upon importation. 9.2 Withholding Taxes on Dividends, Interest, Etc Tax on the Distribution of Dividends and Profits (IDU) IDU applies to profits distributed by Paraguayan companies to their partners or shareholders, taxed at the level of the latter. The rate is 8% for residents in Paraguay and 15% for non-residents, and is pay - able at source at the time of the corporate decision, the availability of funds or the payment of dividends, whichever occurs first. Among Paraguayan shareholder companies, a fiscal compensation mechanism is applied to avoid double taxation. Non-Resident Income Tax (INR) INR applies to Paraguayan-source income earned by non-residents, through withholdings made by the pay - ing Paraguayan entity. The INR rate is 15%, with effective rates ranging between 4.5% and 15% of gross income. In the specific case of interest payments to foreign investors, the local company must withhold from the lender:
• 15% if it is a related company (grossing up to an effective rate of 17.65%); or • 4.5% if it is not a related company (grossing up to an effective rate of 4.71%). Value Added Tax (VAT) Financing will be considered to occur in the national territory when the borrower is a resident of Paraguay. The rate of VAT is 10%. Reduction or Elimination of Withholding Rates Through International Treaties Paraguay has signed double taxation avoidance trea - ties with Chile, Taiwan, Qatar, the UAE, Uruguay and Spain, which allow for the reduction or elimination of withholding rates on dividends and interest. 9.3 Tax Mitigation Strategies In Paraguay, corporate tax planning is based on Law 6380/19 and other regulations that facilitate tax opti - misation, supported by a growing network of double taxation treaties. Common strategies include the fol - lowing. Increase in the Depreciable Asset Base In acquisitions, the tax base of the assets can be adjusted to market value, allowing greater tax depre - ciation. The sale of real estate is subject to IRE at an effective rate of 3%. Elimination of Profits Through Intercompany Debt Interest paid between related parties is deductible as long as it complies with transfer pricing regulations and thin capitalisation rules. Cross-Licences and Similar Agreements Royalties and payments for the use of intangible assets are deductible if they meet the requirements of economic substance and transfer pricing rules. Tax Benefits in Business Reorganisation Although direct fiscal consolidation does not exist, processes like mergers or spin-offs can offer tax advantages, depending on the specific context.
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