PARAGUAY Trends and Developments Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
The ability to execute mergers without tax impli- cations significantly encourages their adoption as a strategic tool, such that there is a grow- ing trend towards their use in the Paraguayan market. Spin-offs The spin-off of companies is a corporate act that can be understood as the inverse of a merger since, through this route, a block of assets is separated from a company (ie, the one that is spun off), creating a new company having these assets or integrating them into an already exist- ing company. Generally, the spin-off serves as a tool to redistribute the activities of one or more companies according to the lines of business, among other factors. This type of transaction, given its lack of regulation, is uncommon; how- ever, its use is growing. Unlike mergers, spin-offs in Paraguay are only regulated from a fiscal perspective, with no spe- cific provisions outlined in civil or commercial legislation. To protect the rights of creditors and shareholders, it is common practice to adhere to requirements similar to those applicable to mergers. This includes holding shareholders’ meetings, preparing special balance sheets and making these documents available to creditors for 30 days to safeguard their rights of withdraw- al or opposition. These practices are primarily aimed at protecting the interests of partners and creditors. A spin-off typically takes approximately four to six months, not including special regulatory approvals or cases involving controversial or highly negotiated transactions. Although the legislation does not contain provi- sions that define or determine the types of spin- offs, they can be classified as follows.
• Pure spin-off: This occurs when the assets of the spun-off company are entirely trans- ferred to two or more new companies that are established as a result of the spin-off pro- cess. In this case, the receiving companies did not exist before the spin-off, which neces- sitates a somewhat extended process. • Spin-off merger: In this type of spin-off, the assets of the spun-off company are trans- ferred to one or more pre-existing companies, generating a combination – ie, the spin-off and the merger. No new companies are cre- ated; rather, the assets are transferred to entities that were already established by the group. Generally, a spin-off involves the following. • There is a reduction of the capital of the split- ting company and an increase in the capital of the receiving company, if it is pre-existing or incorporated – the annulment and issuance of shares are common, but are not seen in all cases. • The effective date of the spin-off is the date on which it is registered with the Directorate General of Public Registers. • There are significant tax exemptions. • The company’s tax credits may be transferred to the beneficiary company. Tax implications of the spin-off Similar to a merger, a spin-off involves the trans- fer of assets and rights and has the same effect on VAT and CIT. Concerning tax, spin-offs are treated in the same way as mergers. The following points are of par- ticular relevance: • transfers resulting from a spin-off are exempt from VAT;
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