Paraguay’s tax system in plain English

Paraguay's low taxes are one of the main reasons people look at it as a second residency. The system is simple once the acronyms are decoded, and almost all of it comes from one law: Law 6380 of 2019, on the modernisation and simplification of the national tax system. It was signed on September 25, 2019 and took effect in January 2020, replacing a patchwork of older income taxes. This explainer sets out how the system works today for individuals and their companies.

The territorial principle

For individuals, Paraguay taxes income from Paraguayan sources only. That means income from work done in Paraguay, from assets located or rights used in Paraguay, from deposits and loans placed in the country, and salaries paid by the Paraguayan state. Income earned abroad, such as a foreign salary, dividends from a foreign company, interest on a foreign bank account or gains on foreign assets, generally falls outside the personal income tax altogether.

There is one important nuance. Work you do from abroad for a Paraguayan company or another Paraguayan taxpayer counts as Paraguayan income. And companies are treated differently from people: a Paraguayan company is taxed on income from its activities abroad too, unless that income has already been taxed abroad at a rate at least equal to Paraguay's 10%. Holding foreign investments inside a Paraguayan company therefore does not keep them out of tax.

IRP: the personal income tax

IRP stands for Impuesto a la Renta Personal, the personal income tax. It has two categories, each calculated separately.

• Personal services. Salaries, professional fees and similar earnings from work. The tax only applies once gross income from this category exceeds 80 million guaraníes in a year. Above that, net income is taxed in slices: 8% on the first 50 million guaraníes, 9% from 50 million to 150 million, and 10% above 150 million.
• Capital income and gains. Rent, interest and gains from Paraguayan assets, taxed at a flat 8%. Dividends are left out of this category because they have their own tax, the IDU, explained below.

Deductible expenses reduce the taxable amount, but spending abroad is only deductible for health and education. Since the reform, each spouse is taxed on their own income. Returns are filed once a year, in March, through the tax authority's online system, Marangatú. The tax authority is now called DNIT, the National Directorate of Tax Revenue.

IRE and IDU: companies and dividends

IRE stands for Impuesto a la Renta Empresarial, the business income tax. It replaced two older taxes, IRACIS (on commercial, industrial and service companies) and IRAGRO (on agricultural activity), and is charged at 10% on net profit. Losses can be carried forward for five years, offsetting up to 20% of each year's profit. Small businesses and sole traders can use simplified regimes known as SIMPLE and RESIMPLE.

IDU stands for Impuesto a los Dividendos y Utilidades, the tax on dividends and profits. It is withheld by the company when it pays out profits: 8% when the shareholder is a Paraguayan resident and 15% when the shareholder is not. Combined with the 10% IRE, the reform's own figures put the total burden on distributed profit at about 17.2% for resident shareholders and about 23.5% for foreign ones. A separate tax, INR (Impuesto a la Renta de No Residentes), charges 15% on Paraguayan income earned by non residents, usually on a presumed portion of the gross amount.

VAT and property

VAT, called IVA (Impuesto al Valor Agregado) locally, is 10% as standard. A reduced 5% rate applies to residential rent and property sales, staple foods such as rice, flour, milk and eggs, listed farm and livestock products, and registered medicines. Real estate tax is charged each year at 1% of the official fiscal value of a property, which is generally well below market value.

Becoming a tax resident

Residency for immigration purposes and tax residency are separate questions. Paraguay sets no minimum number of days to become a tax resident. A figure of 120 days is often quoted, but it comes from the Tax Code's rules on tax domicile (where the tax authority can assign your address), not from any test of tax residency. In practice, the key step is holding a Paraguayan identity card and registering for a tax number. Just as important is what your home country says: many countries keep taxing people until they can show they have genuinely left, regardless of a new residency elsewhere.

What it means if you are considering Paraguay

For someone whose income comes from outside Paraguay, the personal tax picture is unusually light: foreign income is generally not taxed, and Paraguayan income is taxed at no more than 10%. The main points to watch are where your work is actually billed, whether income runs through a Paraguayan company, which brings it into the 10% IRE, and whether your home country accepts that you have moved. We help clients obtain residency and work with our local team of accountants and tax advisers on the questions that depend on personal circumstances.

Our company structuring service can set up a Paraguayan EAS, or a company elsewhere if your income comes from abroad, so the structure matches how you are taxed. You can also compare Paraguay with other countries in our tax calculator.

This article is general information, not legal, tax or investment advice.