Paraguay has developed a tax system characterised by simplicity, with reduced rates and special regimes that have attracted foreign investment in strategic sectors. However, changes in international taxation, driven by the OECD and the G20 through the BEPS 2.0 project, are profoundly reshaping the rules of the game.
The limited network of double taxation treaties (DTTs), the taxation of digital services, and the potential implementation of the recommended global minimum tax under pillar two create a scenario in which Paraguay will need to adopt strategic policy decisions in the coming years.
Paraguay’s tax treaties: a selective but expanding network
Paraguay has six comprehensive DTTs in force:
Chile;
The Republic of China (Taiwan);
Uruguay;
Qatar;
The United Arab Emirates; and
Spain (effective from 2025).
Paraguay is a member of the OECD/G20 Inclusive Framework on BEPS (the Inclusive Framework), which involves working towards the implementation of international tax standards to address base erosion and profit shifting. It is also a party to The Multilateral Convention on Mutual Administrative Assistance in Tax Matters. In addition, Paraguay is a member of the OECD Development Centre, a policy dialogue platform that brings together OECD and non-OECD countries to exchange experiences on economic and social development, without imposing binding tax obligations.
Taken together, these engagements reflect Paraguay’s growing alignment with international standards of tax cooperation and transparency.
Spain: the most relevant treaty
The treaty with Spain is particularly significant as it closely follows the OECD model and grants clear predominance to the country of residence. By channelling investments through Spain, investors may benefit from the following:
The withholding tax on dividends is reduced to 5% or 10%, with the possibility of 0% in certain cases;
Reduced rates on interest payments; and
Business services are generally taxed only in the country of residence, without withholding at source.
Treaty renegotiation with Chile
The ongoing renegotiation of the DTT with Chile aims to update it to post-BEPS standards, including stronger anti-abuse clauses and enhanced information-exchange provisions, consistent with global demands for transparency and economic substance.
Withholding taxes: a regional comparison
Paraguay’s withholding framework remains competitive when compared with neighbouring jurisdictions:
Dividends – 15% as the general rule, and 5% or 10% under certain DTTs;
Interest – 15% between related entities and an effective 4.5% between unrelated entities; and
Royalties – 15%.
This structure has positioned Paraguay as a relatively attractive location for cross-border investment, particularly when contrasted with:
Argentina, where withholding can reach 35%; and
Brazil, which is debating a 15% dividend tax.
Digital services taxation: innovation and flexibility
Paraguay has had taxation on digital services since 2021, applying:
A 4.5% effective withholding on payments for the service; and
VAT at 10%.
The mechanism applies exclusively to non-resident providers of digital services, such as ride-hailing apps, streaming platforms, and digital advertising companies. VAT is collected through local financial intermediaries.
For income tax, the approach differs: in business-to-consumer transactions, the non-resident provider is directly responsible for compliance, while in business-to-business cases, the withholding obligation falls on the local company. This framework places Paraguay in line with international best practices, adopting a system that has already proven effective in countries such as Chile and Uruguay for non-digital providers. In the broader debate around the implementation of pillar one, Paraguay’s approach illustrates a pragmatic path that ensures large multinational players in the digital economy can operate under clear and workable rules.
Potential extension to permanent establishments
This simplified fiscal registration system for non-residents is a significant innovation. In the future, it could be extended to other contexts, such as permanent establishments (PEs).
Currently, if a PE is deemed to exist in Paraguay, it must be formally incorporated as a branch or subsidiary. In practice, this requirement is often addressed through the withholding of the non-resident income tax on gross income, rather than the corporate income tax on net income.
While the tax administration has validated this mechanism in binding rulings, it is not an ideal solution. The lack of a dedicated framework may expose taxpayers to potential challenges. A simplified PE registration regime, without requiring legal incorporation, would create significant efficiencies and bring Paraguay closer to international best practice.
BEPS measures: transfer pricing alignment and reporting obligations
The adoption of BEPS-related measures has already affected Paraguay in the following ways:
Transfer pricing – rules progressively aligned with OECD guidelines since 2020; and
Country-by-country reporting – not yet implemented, but Paraguay is moving towards the introduction of minimum information exchange standards as part of its commitments within the Inclusive Framework.
These measures illustrate Paraguay’s growing convergence with global tax governance guidelines. While policy and enforcement remain primarily centred on Paraguayan-source income, the country’s participation in the Inclusive Framework and in the Global Forum on Transparency and Exchange of Information for Tax Purposes demonstrates a clear orientation towards international standards that are increasingly shaping its tax system.
BEPS 2.0: pillar two is a direct challenge to Paraguay’s incentives
Pillar two, which establishes a 15% global minimum tax, is of direct relevance to Paraguay’s flagship incentive regimes.
The maquila system and free zones legislation – recently updated after almost three decades – have been instrumental in attracting more than 240 companies, with exports exceeding $1.2 billion in 2024. These regimes result in effective tax burdens of 7–10%, well below the global minimum threshold.
The implications are as follows:
Multinational groups may face a top-up tax in their home jurisdictions, neutralising Paraguay’s tax advantage; and
Paraguay risks losing revenue to foreign administrations unless it adopts a qualified domestic minimum top-up tax (QDMTT).
Similar jurisdictions, such as Uruguay, are moving towards compliance: a draft bill aligned with pillar two was under parliamentary review at the time of writing.
Possible scenarios for Paraguay
Three potential scenarios can be envisaged:
Non-adoption – Paraguay maintains its current incentives and competitiveness, but revenue leaks abroad.
Partial adoption – a QDMTT limited to large multinational groups, protecting SMEs and domestic investors.
Full adoption – a 15% domestic minimum tax aligned with OECD standards but eroding the attractiveness of special regimes. This is highly unlikely before 2028, given the president’s political commitment not to increase taxes during his current mandate.
Uncertainty over the two-pillar approach
A key question is whether pillar two will consolidate into a uniform global standard. Some major jurisdictions have delayed their implementation, while preferential regimes continue to adapt to retain competitiveness.
Paraguay must carefully weigh whether early alignment is advantageous or whether it is preferable to await the evolution of international consensus, avoiding premature reforms that could undermine competitiveness without reciprocal benefits.
Although BEPS 2.0 also includes pillar one – the proposal to reallocate taxing rights in the digital economy – its prospects remain highly uncertain, and for the time being, it carries no concrete implications for Paraguay.
Key takeaways on Paraguay’s tax landscape
Paraguay’s international tax policy stands at a turning point. The expansion of its DTT network, particularly with Spain and the renegotiation with Chile, demonstrates a clear will to modernise. The introduction of digital services taxation reflects an adaptation to new economic realities.
Yet pillar two presents a structural dilemma: how to preserve competitiveness without falling behind in a still-developing international consensus, and within the political commitment not to raise taxes until at least 2028.
The challenge will be to balance the maintenance of an attractive investment framework with securing adequate domestic revenue, while strengthening Paraguay’s international reputation. The decisions taken in the coming years will determine whether Paraguay positions itself as a reliable and competitive hub in the regional tax landscape or whether it risks marginalisation in an increasingly interconnected global environment.
