Due to the increasing foreign investment in the country – as a result of the numerous opportunities offered by Paraguay –, it has become necessary to reinforce the tax stability and enhance the confidence over the flow of tax income channelized internationally. Therefore, the Paraguayan Executive Power submitted to Congress for its approval a bill of the “Convention between the Republic of Paraguay and the Oriental Republic of Uruguay (each a “State”) to Avoid Double Taxation and Prevent Tax Evasion and Income Tax and Capital Tax Evasion” (the “Convention”).
The conventions to avoid double taxation, besides avoiding tax evasion, are aimed to promote the exchange of goods and services and increase the movement of capital and people. Additionally, it intends to provide a reasonable level of legal protection and fiscal foreseeability to the foreign investor.
The Convention was signed in September 2017 by both executive powers. The base of the Agreement has been the Model Tax Convention on Income and on Capital prepared by the Organization for Economic Co-operation and Development (OECD). The Agreement provides a limit of 15%, to the States’ ability to collect taxes to residents of the other State in matters related to dividend, interest and royalties gains. This, without prejudice of the specific rules related to other types of gains and conditions set forth to obtain the benefits granted in the Convention. The method adopted to eliminate double taxation is by compensating de taxes payed in one State against the taxes generated or owned in the other State.
The Paraguayan taxes covered by the Convention are the Personal Income Tax (Impuesto a la Renta de Carácter Personal), Tax on Commercial, Industrial and Service Activities (Impuesto a las Actividades Comerciales, Industriales o de Servicios), Tax on Agricultural Activities (Impuesto a las Actividades Agropecuarias) and Small Taxpayers Tax (Impuesto del Pequeño Contribuyente); while the Uruguayan taxes covered by the Convention are the Economic Activities Income Tax (Impuesto a las Rentas de las Actividades Económicas), Personal Income Tax (Impuesto a las Rentas de Personas Físicas) and Non-Residents Income Tax (Impuesto a las Rentas de los No Residentes); as well as the Tax on Social Security Assistance (Impuesto de Asistencia a la Seguridad Social) and the Wealth Tax (Impuesto al Patrimonio).
The Convention bill has been preliminary approved by the Paraguayan Senate. If ultimately approved, it will come into effect 30 days after the notice given by each State to the other –through diplomatic channels– that they have complied with their respective constitutional requirements for it to be enforceable. Once in force, it will apply to the tax withholdings made since January 1, subsequent to the 30 days period stated above, and to the following fiscal years.