PARAGUAY Trends and Developments Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
representations and warranties. Payment deferrals typically range from 90 days to one year after clos- ing, depending on the deal complexity and the nature of contractual guarantees. Tax indemnity clauses in favour of buyers are com- mon, particularly when targets have undergone recent reorganisations or hold tax credits that are subject to audit or review. Escrow or holdback mechanisms, often implemented through notarial deposits or trusts, are increasingly used to secure these obliga- tions. Although unregulated, these tools have become standard in local practice. Corporate mergers and spin-offs are gaining ground. Mergers, governed by the Civil Code and comple- mented by tax provisions, are typically used in group integrations or restructuring processes, where consid- eration is granted in the form of shares or participa- tions in the resulting entity. Spin-offs, though not expressly regulated under civil and commercial law, are recognised for tax purposes, ensuring continuity of fiscal values and neutrality. In practice, they are used to separate business lines, reorganise asset holdings, or prepare spin-offs before new investor entry or the sale of a business unit. Conversely, direct acquisitions of assets or shares are subject to taxation. The sale of assets is subject to corporate income tax ( impuesto a la renta empresarial IRE) and VAT, while share sales, though VAT-exempt, may still generate income taxable under the IRE and, subsequently, dividend tax withholding ( impuesto a los dividendos y a las utilidades IDU) upon profit dis- tribution. If the seller party is a non-resident, the realised gain on the share assignment is taxable at a maximum effec- tive rate of 4.5% non-resident income tax ( impuesto a la renta de no residentes INR), which must be paid by the local company whose shares were sold. The local company is jointly and severally liable with the non-resident seller for the payment of this tax. The indirect sale of Paraguayan companies’ shares remains untaxed, as no anti-abuse rules have been enacted so date.
This distinction shapes transaction strategy: reorgani- sations prioritise neutrality and deferral, while direct sales favour liquidity and simplicity. In both cases, early co-ordination between legal, tax and financial teams is crucial to ensure that the transaction struc- ture aligns with the economic intent of the parties and optimises regulatory and fiscal outcomes. The fiscal framework for corporate reorganisations The Tax Law reorganised Paraguay’s tax structure and introduced the IRE as the core levy applicable to busi- ness entities. For legal, financial and M&A advisers, its scope extends beyond taxation, as it shapes how transac- tions are structured, timed and executed. Its guiding principle – that of “effective realisation” – determines when income is deemed to have been generated, ensuring that only transactions involving a genuine transfer of economic risks and benefits are subject to tax. This principle creates a bridge between corporate reorganisation and fiscal neutrality. It enables com- panies involved in technological carve-outs, hold- ing realignments or regional consolidations (such as cross-border mergers within the Southern Cone), to restructure without triggering taxation, provided that asset and fiscal continuity are maintained. The tax authority – now the National Directorate of Tax Revenue ( Direccion Nacional de Ingresos Tributarios DNIT), formerly the Subsecretariat of State for Taxa- tion – has reinforced this interpretation through bind- ing rulings, such as the one issued in April 2023 on the tax treatment of corporate spin-offs. In that case, the DNIT concluded that reorganisations preserving patri- monial continuity do not entail the effective realisation of income, and therefore do not constitute a taxable event under the IRE, and that this neutrality extends to related taxes, such as VAT and IDU. Elective neutrality and strategic planning In Paraguay, tax neutrality is not automatic but elec- tive, and therefore strategic.
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