PARAGUAY Trends and Developments Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
Further tax implications of mergers Since a merger involves a business reorganisa- tion that unites the assets of separate entities into a single entity, asset transfers are subject to special rules. Paraguayan tax law states that transfers result- ing from business reorganisations, including mergers, are exempt from VAT. Tax credits, such as VAT or other taxes payable by the company, are not lost due to this business reorganisation process but, as established by law, must be transferred to the successor or absorbing com- pany. The tax administration has not regulated the procedure for transferring tax credits due to a business reorganisation; however, this does not constitute an impediment to such an operation. In the absence of specific regulation, and con- sidering that tax credits should be transferred through the system managed by the tax admin- istration, the transfer should be requested via a note, followed by the necessary follow-up until the absorbed company’s tax credit is transferred to the absorbing company. Concerning CIT, given that the merger entails an increase in the acquiring company’s assets as a result of the contributions made by the acquired company’s shareholders, it should be noted that the increase in the assets received does not gen- erate CIT. As the transfer of the assets is not taxed in the absorbing entity, it should be clarified that the assets must retain their tax base from the absorbed to the absorbing entity so as not to generate CIT in the absorbed company.
or highly negotiated transactions. This timeline can be crucial when considering alternatives that might generate similar effects, such as direct acquisitions or share contributions. A merger generally (but not necessarily) implies the following: • the capital of the absorbing company will be increased, resulting in modifications to the articles of incorporation and the issuance of shares, following the terms of the definitive merger agreement; • the employees of the absorbed company will join the payroll of the absorbing company, retaining the same rights and seniority; • while the transfer of rights between the com- panies takes effect from the definitive merger agreement, it – and thus the effective merger – only becomes opposable to third parties upon registration with the General Directorate of Public Registries; • there will be significant tax exemptions; and • the absorbed company’s tax credits and asset tax base must be transferred to the absorbing company. Tax implications of a merger A merger involves the universal succession of rights and obligations, which effectively entails the transfer of assets and rights and the assump- tion of obligations. It is essential to review, in particular, the following taxes: • value added tax (VAT), which, among other things, taxes the transfer of goods and the assignment of rights; and • corporate income tax (CIT), where the absorption of a company would increase the assets.
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