Israel – Paraguay Tax Treaty

Business Activity in Paraguay

Paraguay’s main sectors of the economy include agriculture, energy, retail, and construction, which altogether contributed to the country’s 2.8% GDP growth/per year, for the last decade. Particularly, agriculture is the primary driver of the Paraguayan economy, offering opportunities in animal genetics, biotechnology, fertilizers, pest control, farm equipment, and processing machinery.

Currently, Paraguay’s government is focused on attracting foreign direct investments (FDI), and for that reason, the country is committed to implementing policies that provide benefits and incentives. For instance, foreign legal entities can be established and operate without the participation of a Paraguayan. In addition, the country implements favorable tax regimes, temporary entry systems, industrial park laws, and incentives for certain high-technology goods. Paraguay’s government is endeavoring to see growth in the maquila sector as each sovereign government seeks to offer incentives to companies engaging in maquila operations within their country. Paraguay has signed bilateral investment agreements with 24 countries, the majority of which are from Latin America and Europe.

Paraguay’s four largest exported products (electricity, soybeans, corn, bovine meat, and frozen bovine meat) account for 29.6% of Paraguay’s total exports. Paraguay’s most important trade partners are Brazil, Argentina, and Chile, or a wider partner such as Russia. The most important imports are in the areas of refined petroleum, broadcasting equipment, cars, pesticides, and computers mainly from China, Brazil, the United States, Argentina, and Chile.

Paraguay’s tourism features a mix of history, culture, biodiversity, crafts, and adventure. The country has beautiful landscapes, and local businesses offer unique experiences. To attract more international visitors, Paraguay needs to increase the number of tourists, their stay duration, and their spending. Potential tourism areas include cultural and historical sites, wellness, bird watching, and light adventure activities​.

Bilateral Agreements Between Paraguay and Israel

1. Free Trade Agreement

Free Trade Agreement

The agreement between the Governments of Israel and Mercosur Block regarding free trade was signed on December 18, 2007. Paraguay is a full member of the Mercosur, a South American trade bloc established by the Treaty of Asunción in 1991 and the Protocol of Ouro Preto in 1994 comprised of Brazil, Argentina, Uruguay, and Paraguay. The agreement entered into force on June 1, 2010.

To read the agreement in English click here.

Applicability of the MLI

Israel has signed the “Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting” (MLI). Israel signed the agreement on June 7, 2017, and ratified it on September 13, 2018. Paraguay has not yet signed the agreement.

Residency for Tax Purposes in Paraguay

Residence of an Individual

According to the Paraguayan law, an individual is considered a tax resident if they stay in the country for more than 120 days in a year.

To read about how an individual is considered a resident of Israel, click here.

Residency of a Company

In Paraguay’s law, a legal entity will be considered a resident for tax purposes if meets one of the following criteria:

• The legal entity is constituted per Paraguayan law; or
• A foreign entity has established its domicile in Paraguay through registration with a relevant public registry. “Domicile” for entities incorporated in Paraguay is based on the location of the entity’s address of administration, or where its main center of activity is located.

To learn about how a company is considered a resident of Israel, click here.

The Tax System in Paraguay

Paraguay’s Tax Authority is called The National Directorate of Tax Revenue (DNIT).

Income Taxation:8%, 9%, 10%

Taxation of Companies and Branches:10%

VAT: 10%

Capital Gains Tax: 10%

Withholding Tax

Inheritance Tax and Estate Tax in Paraguay

Paraguay does not impose inheritance or gift taxes.

Relocation to Paraguay

Paraguay offers various tax incentives to attract foreign investment, such as exemptions on cash, financing, capital goods, and technology investments. Maquila tax benefits allow investors to import and process goods for export with added local value. Free trade zones offer further advantages, including a 0.5% income tax rate. Additional perks include VAT and customs duty exemptions for exports, capital market incentives, and temporary admission regimes for certain goods.

One of the peculiarities of Paraguay is its state-funded healthcare system, allowing residents to receive services. As well, its education system is based both on public and private international schools, giving the residents the possibility to enjoy a quality education.

The Jewish community of Paraguay, established in the 19th century, is mainly located in Asuncion, the capital city. The community is represented by the Consejo Representativo Israelita de Paraguay, the affiliate of the World Jewish Congress.

Real Estate Taxation in Paraguay

Real estate tax in Paraguay is 1% of the fiscal value of the property, which is typically lower than the market value. If rural property is less than five hectares and used for agriculture or ranching, the rate is reduced to 0.5%. Additional taxes apply to vacant or semi-vacant land based on how much of the property is developed. Large rural properties (10,000 to 60,000 hectares or more) are subject to extra taxes, ranging from 0.5% to 1%, depending on the size of the land.

Transfer of Funds from Israel to Paraguay

According to section 170(a) of the Israeli Income Tax Ordinance, all payments transferred to non-Israeli residents are subject to a 25% withholding tax. However, this tax can be reduced or even waived if certain conditions are met. Our firm handles withholding tax matters with the Israeli Tax Authority.

In addition to assisting with withholding tax matters, our firm also helps with other issues related to transferring funds abroad. This includes providing an accountant’s approval regarding the payment of taxes, reviewing additional actions required under the CRS standard, and more.

Moreover, banks often raise many difficulties and charge high fees for converting shekels into other currencies. Therefore, consulting with a specialist before transferring the funds is highly recommended, click here to contact us.

For more information on money transfers abroad, click here.

Types of Business Entities in Paraguay

Main business entities in Paraguay include:

Sole Proprietorship

A sole proprietorship is a business run by one person, combining capital and labor to generate profits. It can operate in areas like commerce, industry, services, or agriculture. This is the simplest and cheapest legal form of business. However, if the business fails, the owner is personally responsible for its debts, using their assets to cover liabilities.

Limited Liability Company (S.R.L.)

A Limited Liability Company (S.R.L.) limits partners’ liability to the amount they contribute, represented by equal quotas. It requires at least two members and can have up to 25. Directors and board members must have permanent residency. At creation, 50% of the capital must be paid, with the rest completed within two years. This company type cannot engage in banking, insurance, or capitalization activities. Meetings, management, and control systems are not mandatory unless specified in the Bylaws.

Limited company (S.A.)

A limited company (S.A.) is a legal entity requiring at least two shareholders, with no restrictions on nationality. The capital must be fully subscribed, and shares are nominative, meaning the shareholder’s details (name, nationality, profession, and address) are recorded in the company statutes. Share transfers can be made via private contract, public deed, or notarized endorsement. Shareholders make decisions during meetings, which are a formal part of the company’s governance.

Branch Office

When a foreign company opens a branch or agency in Paraguay, the branch is considered a resident for activities performed within the country. It must follow the same rules and legal obligations as a Paraguayan company of the same type. However, the foreign company’s head office remains responsible for any liabilities or obligations incurred by the branch in Paraguay. This ensures that the local branch complies with Paraguayan regulations while holding the parent company accountable for its operations.

Simplified Joint Stock Companies

The Simplified Joint Stock Company (EAS), established by Law 6.480/2020 in Paraguay, allows individuals or legal entities to form a company quickly. It can be set up by contract or unilateral decision, and the registration must be done through the SUACE system. EAS becomes a legal entity once registered with the Ministry of Finance, ensuring a fast start-up process. Members’ liability is limited to their contributions, and capital is divided into registered shares. The company is governed by tax laws and requires two main governing bodies: the members’ meeting and a legal representative, with meetings allowed remotely.

Incentive Laws in Paraguay

As mentioned earlier, the Paraguayan government is actively working to attract foreign investments by offering a range of incentive programs. These initiatives aim to create an investment-friendly environment, fostering economic growth and making the country a more appealing destination for investors.

Some of the main incentive policies include:

Maquila Regime

The maquila regime in Paraguay allows companies to process, repair, or assemble foreign goods for re-export, offering benefits like a 1% Maquila Single Tax, along with exemptions from various taxes and VAT refunds. To register, businesses must use the VUE platform and submit the required documents, including the company’s founding deed and information about labor and materials. This program is designed to enhance the attractiveness of Paraguay for industrial operations.

Legal Framework

The goal of Paraguay’s investment program is to boost capital investment, increase production, create stable jobs, and enhance exports while reducing imports. Benefits include a 0% tariff and VAT on capital goods, exemptions from remittance tax, and tax breaks on dividends and profits for investments over USD 5 million for ten years. To apply, businesses must submit various documents, including investment reports, company formation records, title deeds, and operating licenses.

Free Zone Regime

Paraguay’s Free Zones promote productive investment, export diversification, job creation, and technology transfer. These zones operate under specific fiscal, customs, and administrative regulations that support commercial, industrial, and service activities. To obtain a license, applicants must submit an investment project demonstrating economic feasibility. This includes details on legal structure, location, services, infrastructure, funding sources, estimated timelines, market studies, labor, environmental protection, and property use agreements. The property must either be owned by the licensee or have a contractual agreement for its use.

Automotive Policy Regime

The goal is to attract the industrial sector in Paraguay, generating jobs, increasing national industry competitiveness, training workers, boosting exports, and promoting technology transfers. For investors to do so, they have to present a project that includes a production program, the inclusion of national added value, layout of the production unit, authorization, employment declaration, industrial registration, and environmental license.

Investment Guarantee Scheme

The Paraguayan program offers protection and incentives for capital investments aimed at creating jobs in manufacturing and productive industries, focusing on transforming raw materials. It welcomes both national and foreign investors, providing benefits such as tax stability for up to twenty years, free capital transfer, and tariff-free importation of machinery. Investors can also enjoy income tax exemptions on profit distributions of up to 5% and reductions in profit remittance taxes of up to 50% based on job creation. Participants must fulfill certain obligations, including capital incorporation and compliance with legal and financial transparency requirements.

Paraguay Double Tax Treaties: