Depreciation and depletion
For tax purposes, the determination of the residual value of the fixed assets, as well as their depreciation, is mandatory. The residual value of a fixed asset will be the estimated amount that the taxpayer could obtain from the disposal of an asset to the end of its useful life, after deducting the costs expected at that time.
The regulations will establish the estimates of useful life for each type or class of depreciable asset for the purpose of determining the depreciation admitted for the settlement of the tax, as well as the residual value for each type or class of depreciable fixed asset, which may not exceed 20% of its cost value.
The Executive Power may establish the mandatory revaluation of fixed assets when the variation of the Consumer Price Index (CPI) determined by the Central Bank of Paraguay reaches at least 20%, accumulated since the fiscal year in which it is has arranged the last revaluation adjustment. The recognition of the mandatory revaluation established by the Executive Power will form part of a patrimonial reserve whose only destination may be capitalisation.
Amortisation of goodwill is not deductible.
The Tax Reform establishes that incorporation and organisation expenses, including so-called pre-operational expenses and those of reorganisation due to acquisition, merger, spin-off, business model changes, or brand changes, may be amortised over a period of up to five years at the option of the taxpayer.
The interest expenses on loans taken for Paraguayan residents or Paraguayan taxpayers may be considered as deductible expenses.
Additionally, it is important to mention that certain investment projects may be subject to a special exemption of the taxes on the interest, commission, and other expenses for loans taken for banking entities abroad (see Investment incentives in the Tax credits and incentives section).
However, the Tax Reform has introduced a limit if the loan is provided by a shareholder or related entities.
Extraordinary losses/bad debts
The deduction of extraordinary losses (theft and damage) and bad debts require the meeting of certain conditions (e.g. communication to the tax authority, evaluation of the actual loss in monetary terms, audit review). Regarding bad debts, they can be deductible three years from the date from which they arise.
The deduction of a donation is subject to formal registration of the beneficiary entity as a public benefactor before the Treasury Ministry.
Donations to the state, municipalities, the Catholic Church, and other religious entities recognised by the competent authorities, as well as entities with legal status for health, social, education, culture, and charity, that were previously recognised as a public benefit entity by the administration could be deductible if the amount of the contributions are not higher than 1% of the annual gross income.
The deduction of executive remuneration is limited to a percentage defined according to the enterprise's profits (1% of the annual gross income). However, in the event that the executive employees are subject to personal income tax (PIT), the deduction of their salaries is not limited for CIT purpose.
Fines and penalties
Fines and penalties are considered as non-deductible expenses for income tax purposes.
In general, all taxes mentioned in the Other taxes section are deductible. Income tax and any fiscal surcharges or fines are not deductible.
Other significant items
General provisions for expenses or other potential losses are not deductible.
Other specific non-deductible items include:
- The present income tax.
- The sanctions for infractions applied by any competent public body.
- Profits for the year that are used to increase capital or reserve.
- The amortisation of the self-generated goodwill (i.e. when said value is assigned unilaterally by the taxpayer, without any consideration).
- The personal expenses of the owner, partner, shareholder, or of family members, as well as amounts withdrawn on account of utilities.
- The VAT included in the acquisitions of goods, services, or imports related directly or indistinctly to operations taxed by the aforementioned tax, as well as the VAT credit subject to refund.
- The costs and expenses related to obtaining untaxed, exempt, or exonerated income, including those related to obtaining income from foreign sources.
Net operating losses
Once the admitted deductions have been made, if the net income is negative, this tax loss may be offset with the net income of the next few years up to a maximum of five, counted consecutively and uninterruptedly from the following fiscal year in which it occurred. Losses from previous years may be offset annually up to the amount that represents 20% of the net income of future fiscal years.
Payments to foreign affiliates
There are limits and specific conditions on the deduction of payments to foreign affiliates, shareholders, or related parties.