Foreign tax credit
Foreign tax credits are not applied to local tax payments in Paraguay.
The framework of economic investment was established in the Law No. 60/90, which offers some special tax exemption benefits to foreign and local investors.
The benefits of the Law No. 60/90 may be available for the following investments:
- Cash, financing, provision of credit, or other financial instruments, under the conditions established by the administration of the President of Paraguay and the corresponding ministries.
- Capital goods, raw materials, and inputs for local industry for the fabrication of capital goods.
- Transfers of licensing rights with respect to trademarks, industrial processes and models, and other technologies.
- Technically specialised services.
- Capital leases.
- Other forms that the administration of the President of Paraguay and the corresponding ministries determined by law.
The investment incentives included in Law No. 60/90 that remain enacted after tax law modification (Law No. 2421/04) are the exemptions from certain fiscal, municipal, and customs duties taxes.
When the amount of financing for an investment is equal to or greater than USD 5 million, it will be exempt from WHTs on interest, commissions, and capital that have to be paid to financial or banking entities abroad. This benefit is for five years.
If the investment is at least USD 5 million and the project is approved by the tax authorities, the dividends and profits derived from the project are tax exempt. The mentioned exemption is granted for five years and may be extended to ten years.
Maquila tax exemptions (Law No. 1064/97)
Under the ‘Maquila’ Regime, investors may import goods or products to be assembled, repaired, improved, worked on, or processed with the purpose of exporting such goods or products, prior to the addition of value or the ‘Paraguayan component’. This regime is subject to a special tax treatment: a 1% tax rate applies to the value added within Paraguayan territory.
Innovative regulations allow for virtual commerce between maquila factories, which improve the utilisation of goods imported under the temporary regime (called ‘virtual maquila’).
This regime also establishes the service maquila, which enjoys the same tax benefits, and its main purpose is to provide support to entities abroad (currently, there are call centres that benefit from this regime).
Paraguayan legislation does not impose restrictions in terms of the types of products and services that the maquila industry may comprise. The maquila activity’s national policy is regulated and supervised by the National Council of the Maquila Industry for Export (CNIME). Both individuals and legal entities domiciled in Paraguay, whether national or foreign, may take advantage of these regulatory benefits.
This industry has been receiving broad government support, given that it is considered an element of social interest in the strive to combat unemployment. There are currently over 130 maquila companies in the country.
Free trade zones (called 'zona franca' Law No. 523/95)
Free trade zones, where all types of commercial, industrial, and service activities may be carried out, constitute a relevant incentive for business.
The legal framework governing such zones offer several advantages in terms of tax exemptions, as well as a special tax regime with an income tax rate of 0.5%.
The main purpose of free trade zones is the development of activities in connection with foreign markets; however, operations within the country are also allowed.
Law No. 523/95, ‘which authorises and establishes the Free Trade Zone Regime’, and its regulatory Decree No. 15,554/96, ‘which regulates the Free Trade Zone Law’, among others, establish the guidelines related to activities within free trade zones.
The aforementioned regulation establishes two main entities, the ‘concessionaire’, responsible for providing the necessary infrastructure for freight operational management, and the user, responsible for carrying out the commercial, industrial, or service activity. The regulation therefore establishes the administrative measures that enable operations in free trade zones and its supervision, control, and development.
There are currently two free trade zones located in the Alto Paraná region (northeastern region, in close proximity to the border with Brazil and Argentina), in which national and international companies actively operate.
- Exports are exempt from certain customs duties and from VAT.
- A Capital Market Law (No. 1,284/98) established incentives for issuance of bonds abroad.
- Under the Export Incentives Regime, exports are VAT exempt. The legislation recognises a tax credit for pre-production stages. A Temporary or Provisional Admission Regime is also in place, which exempts imports from import tariffs and VAT.