Tax in Paraguay and its benefits for dual residents

Taxation in Paraguay

“Tax haven” has become a distinctly pejorative term in recent years, synonymous with money laundering and corruption. But Paraguay was technically a tax haven almost by accident for years, without running afoul of international laws and norms, because the government simply chose not to introduce any kind of personal income tax. This unusual delay can be attributed to an extremely lax national culture surrounding taxpaying in general. In 2012, the government finally introduced a personal income tax of 10%, although this is mainly aimed at the country’s upper classes, who are likely to have structured their finances to avoid paying in any case! However, dual residents with no in-country income can still benefit from a 0% local tax.

Paraguay is a territorial taxation country, meaning that residents, dual residents and non-residents alike are only subject to taxation on income sourced from within the country – i.e. from rent on a Paraguayan property, or a salary earned at a local company, among other examples. However, if you receive income sourced from outside the country – from a previously-established business in another country, for example – then these earnings are exempt from income tax, and you will not be expected to file a tax return. Compare that to nearby Mexico, where non-resident personal income tax ranges from 15 to 30%. It’s clear why Paraguay has become an attractive base for digital nomads who can earn in a foreign currency while working from any location, and for retirees looking to take advantage of the country’s low cost of living while living off a foreign-sourced pension or savings.

US citizens are arguably the exception to this rule, since the United States notoriously requires its citizens to pay taxes on their worldwide income no matter where they live, unless they choose to renounce their American citizenship. But for European, Canadians or any other Western citizen, taking up dual residency in Paraguay is extremely attractive from a taxation perspective, not to mention other factors. And US citizens can still take advantage of the many other benefits which dual residency in Paraguay has to offer, all without necessarily residing in the country itself.

As far as other taxes are concerned, the rates in Paraguay are relatively low for the region as well. VAT is applied at a rate of 10%, property tax ranges from 0.5% to 1% of value annually, capital gains are taxed at 10% (or 20% on 50% gross) for non-residents, while wealth and inheritance taxes are not applied at all. In addition, all bond yields in Paraguay pay no income tax whatsoever, although dividends are taxed at 5%.

Corporate and personal income tax

Paraguay has the lowest corporate income tax rate (10%) in Latin America – compared to booming economies such as Brazil and Chile which apply a rate of around 30% – and can therefore be significantly more competitive than its neighbours when it comes to attracting foreign business. Corporate income tax is applicable to all companies no matter what services or products they supply. Value-added tax (VAT) is one of the lowest in the region too, all of which creates an attractive, welcoming environment for setting up a business.

There are three tax systems in Paraguay, depending on the type of taxpayer, as follows:

• Commercial income tax (CIT), applicable on income from commercial, industrial, and service activities. The general income tax rate of 10% applies here, but dividend distributions require an additional 5% tax which must be paid on the amount of dividend approved for distribution at the shareholder meeting.
• Agriculture income tax (AIT), applicable on income from agricultural activities. This tax is generally applied at a rate of 10% as well, although the specific rate depends on yearly income.
• Little taxpayer income tax (LTIT), applicable for taxpayers with an annual income of less than 100 million Paraguayan guaranís (PYG). A single tax rate of 10% applies here too.

Meanwhile, Paraguay-based businesses with employees or real estate are taxed in the following ways:

• Employee-related tax, whereby employers must contribute a total of 16.5% of an employee’s income to the employee’s social security, and are are obliged to withhold 9% of an employee’s income.
• Real estate tax, whereby corporate real estate is subject to a 1% annual tax. Surtaxes apply for specific types of property at an annual rate of 0.3% on the transfer of property.

The standardized rates on both personal and corporate income makes Paraguay’s tax system relatively simple to navigate. The fiscal year in Paraguay maps onto the calendar year – i.e. beginning on January 1st and ending on December 31st. Residents and companies are then invited to submit their taxes within four months of the end of the previous fiscal year – although once again, earnings on foreign income should not be considered during this process, and are not taxed at all.

Individual tax in Paraguay

Paraguay’s personal income tax (PIT) system is divided into two groups:

a) individuals resident in Paraguay, and
b) individuals living abroad

Only residents who live and work in Paraguay, with an annual income equal to or higher than 120 monthly minimum salaries (where the salary amount in question is that which is in force on January 1st of every year) are eligible for the first group, whose general PIT rate is 10%. A PIT rate of 8% is applied to individuals whose annual income is lower than 120 monthly minimum salaries. The amount to be taxed in this instance is the income equal to or higher than 48 minimum salaries.

The second group is made up of individuals who live abroad and earn profits from activities taking place inside the country. PIT for these individuals equates to an effective tax rate of 10%. Paraguay’s standardized taxes and limited requirements regarding physical presence in the country make it an ideal base for people who travel and small businesses that operate in multiple territories. Meanwhile, expanding to Paraguay can lead to beneficial tax treatment for foreign investors as well.

How to make the most of Paraguay’s tax regime

A Paraguayan tax resident is defined as:

a) anyone who has spent over 120 days in the country during a given tax year, OR
b) anyone who has established permanent residency, including dual residency with another country.

Both tax residents and non-residents are required to file an annual tax return if their local income – excluding foreign earnings – exceeds the minimum threshold. This income tax applies to both income from employment, income from conducting business and income from investments.

For foreigners, obtaining dual residency is the key to establishing oneself as a Paraguayan tax resident. Fortunately, in line with its competitive individual and corporate tax regime, Paraguay’s government greatly simplified the application process for establishing permanent residency, and therefore tax residency, in 2010. As it stands, anyone with a clean criminal history is eligible to apply, and the entire process costs around $USD 2,500. The application process takes approximately three months to complete, during which time your physical presence in the country is not required beyond the initial application stage. Once you are granted dual residency you will be able to take advantage of Paraguay’s attractive tax regime immediately, whether or not you decide to physically reside in the country.

As we have seen in this article, Paraguay is an extremely attractive tax base for foreign entrepreneurs and individuals, thanks in part to its relaxed dual residency laws. Applying for dual residency in the country is straightforward and relatively inexpensive, but hiring experts to advise you throughout the process is strongly advised, since doing so will prevent you from making mistakes and save you plenty of time. Why not get in touch with our dedicated team today to find out more about dual residency and the taxation system in Paraguay?