PARAGUAY Law and Practice Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
5. Spin-Offs 5.1 Trends: Spin-Offs
ly if the company is not listed on the home country exchange. Understanding the tax implications is crucial. For instance, if shares of a publicly listed company in the Paraguayan stock exchange are sold, the capital gain is entirely exempt. On the other hand, the sale of a non-listed share is subject to Paraguayan taxes. 4. Sale as a Liquidity Event (Sale of a Privately Held Venture Capital- Financed Company) 4.1 Liquidity Event: Sale Process In Paraguay, the sale of a company typically involves bilateral negotiations with a specific buyer rather than going through an auction process. The smaller market size often results in fewer competing buyers, making auctions less frequent, if not non-existent, in the past. 4.2 Liquidity Event: Transaction Structure In Paraguay, the typical transaction structure for a pri- vately held tech company involves selling a control- ling interest. Current trends show that venture capital funds often choose to exit entirely, while founders may remain as shareholders. This structure allows inves- tors to cash out while ensuring continuity in the man- agement of the company. 4.3 Liquidity Event: Form of Consideration In Paraguay, most transactions are conducted as cash sales for a liquidity event. However, stock-for-stock deals may occur when the buyer is a foreign company listed on an exchange. It is rare to have a combination of cash and stock, but this may happen, especially when valuation uncertainties need to be addressed. 4.4 Liquidity Event: Certain Transaction Terms In a liquidity event, founders and venture capital inves- tors are usually required to support representations and warranties, such as tax liabilities, employee claims and environmental issues, after the deal is finalised. Escrow accounts or hold-backs are commonly used to cover these potential liabilities, but representations and warranties insurance is not yet widely used in this jurisdiction.
Spin-offs, while not particularly common in Paraguay due to its limited regulations, have been on the rise in recent years, particularly in the technology sector. This trend is driven by the need for efficient capital and the strategic separation of business units, which is attracting investment in specific technology seg- ments. 5.2 Tax Consequences In Paraguay, spin-offs can potentially be structured as tax-neutral transactions at the corporate level, sub- ject to compliance with specific legal and tax require- ments. At the shareholder level, a spin-off presents an oppor- tunity to significantly reduce the burden of a liquidity event. Selling shares of a new local entity could result in a maximum of 4.5% tax on the gross selling price, or even zero tax if the spin-off is strategically arranged with a foreign entity as the shareholder of the target company. A spin-off may qualify as tax-neutral at the corporate level if executed at book value and in line with other relevant corporate restructuring provisions. If such conditions are met, the transfer of assets during the spin-off should not trigger immediate tax liabilities, such as the CIT or the withholding tax (WHT) on divi- dends ( impuesto a los dividendos y utilidades IDU). It is important to note that as of the time of writing, there are no specific provisions in place regarding the continuity of ownership, business or purpose in rela- tion to spin-offs in Paraguay. Key requirements for achieving tax neutrality in a spin- off include: • execution of the spin-off at book value, with no revaluation of assets; and • adherence to corporate restructuring regulations.
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