About to reach the year and a half after the beginning of the mandate of Mario Abdo Benítez, Paraguay faces significant challenges, especially in fiscal matters. From 1st January 2020, important changes in the taxation of foreign companies and investors will come into effect, following the recent approval of Law 6380/19 on Modernization and Simplification of the National Tax System.
For this reason, we analyze the main aspects of this reform and the implications for all those who already operate or are considering doing so in the country.
New Corporate Income Tax
In order to simplify the taxation of all sectors of the Paraguayan economy, the current land taxes on Commercial, Industrial or Services Income (IRACIS, by its Spanish acronym) and Agricultural Income (IRAGRO, by its Spanish acronym) are replaced by a new, integrated, tax figure: Businesses Income Tax (IRE, by its Spanish acronym).
It is important to highlight that the concept of taxable income from a Paraguayan source will include, among others, the income obtained by IRE taxpayers from carrying out activities abroad. However, those incomes for which the taxpayer has paid an income tax abroad at a tax rate equal to or higher than the IRE rate will be exempt.
Deductible expenses, regarding interest, fees and technical assistance charged from related entities are considered tax deductible only if (i) they do not exceed the market price (ii) withholding taxes have been applied properly and (iii) and the amount of the expenses does not represent 30% of the net income for the year.
Tax losses carryforward will be allowed within the following five years, with the limit of 20% of the net income of each tax period. Currently, it is not generally allowed.
The tax rate will be 10%, equivalent to the previous taxation structure.
Taxation of Foreign Investment and Non-Residents
Regarding the taxation of foreign investment and non-residents, the tax applicable to dividend distributions will be significantly modified. Thus, a 15% withholding rate applicable to distributions to non-resident investors is established. However, there will be a reduced transitory regime, between 5 and 10%, applicable to benefits yielded before the entry into force of this Law that have not been distributed or capitalized, applicable only in the first year of entry into force of the law. Another significant issue that may affect the structure of the investment is that the granting of loans to shareholders will be considered distribution of dividends as long as the corporate purpose of the Paraguayan entity is financial intermediation. Furthermore, a separate tax (INR) is created, which taxes Paraguayan source income obtained by non-resident entities in Paraguay. The applicable tax rate is 15%.More specifically, regarding digital services, they are subject to INR as long as they are used or harnessed in Paraguay.
Generally speaking, the VAT tax rates in force until now, whose general rate is 10% (5% for basic food basket) are maintained. On the other side, the Selective Consumption Tax (ISC, by its Spanish acronym) has mainly increased the rates applicable to certain goods such as tobacco (which may not be less than 18% or greater than 27%) and alcoholic beverages (whose rate would range between 5% and 13% according to the type of alcoholic graduation). All these developments pose important challenges for companies that are already in the country or are considering starting an internationalization process in Paraguay.
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