PARAGUAY Trends and Developments Contributed by: Mauro Mascareño, Carlos Vargas and Rodrigo Gómez Sánchez, Mascareño Vargas – Asesores
• regarding CIT, as long as the operation is conducted at accounting values, the opera- tion has no tax incidence; and • tax credits are also transferable. It should also be mentioned that tax law in Para- guay regulates the tax on dividends and profits ( impuesto a los dividendos y utilidades IDU) lev- ied on the distribution of profits to the partners, shareholders or owners of local companies, where the obligation arises when the dividends are made available to the partners or at the time of the actual distribution, whichever occurs first. In the context of this tax, it is also presumed that, in a capital reduction, the first amounts withdrawn are capitalised or accumulated earn- ings, which implies that there is an obligation to pay IDU; the rate is 8% for residents and 15% for non-residents. However, in the case of a company spin-off, while there could be a reduction of capital in the spinning company, the dividends are not distributed to the partners or shareholders but instead become part of the beneficiary company of the spin-off. Thus, it is clear that the partner or shareholder does not access the dividend, as the receiving company must subsequently decide on its distribution. Given that one of the most analysed issues in relation to Paraguayan company spin-offs tends to be whether the IDU applies – and where this may depend on the decision to proceed with the transaction – it is essential to emphasise that spin-offs should not be understood as generat- ing IDU for the reasons stated above. Transformation of companies Companies transform by changing from one corporate type to another, with joint-stock com-
panies ( sociedad anónima SA) and limited lia- bility companies ( sociedad en responsabilidad limitada SRL) being the most commonly used in Paraguay. This form of reorganisation is espe- cially relevant in the context of M&A trends, as it allows companies to adapt more effectively to a constantly evolving environment. It is essential to highlight this option, especially for the transformation of SRLs, which are often family-owned, to SAs. Joint-stock companies are better positioned to attract capital and promote innovation in their governance. This change is fundamental for capturing significant investments and operating dynamically in an increasingly competitive market. Moreover, given that the transfer of shares in SRLs can be a more cumbersome process com- pared to that in SAs, many companies choose to transform their SRLs into SAs to inject greater dynamism and mobility into their structures. This transformation facilitates more agile operations and allows for family planning, such as the early partition of assets by ancestors and the trans- fer of shares (with or without the reservation of economic and political rights), which helps avoid the costs and time associated with succession processes. Tax implications of legal entity transformation It is important to note that transformation has no tax implications with respect to VAT or CIT. As it is merely a change of corporate type, there is no increase in assets that can be considered sub- ject to business income tax ( impuesto a la renta empresarial IRE). The transfers are also exempt from VAT, thanks to specific legal provisions. Asset sale vs shares sale Asset trading has emerged as a key M&A strat- egy, allowing companies to acquire or dispose of
270 CHAMBERS.COM
Powered by FlippingBook