Paraguay is often described as a country with a territorial tax system, where income generated abroad is not taxed.
While this statement is largely correct, it is also frequently misunderstood if taken at face value.
This article aims to clarify what territorial taxation actually means in Paraguay today, how the system operates in practice, and—most importantly—how corporate income tax (IRE) is applied under the current framework.
The Role of Corporate Income Tax (IRE)
Territorial taxation in Paraguay applies to the Impuesto a la Renta Empresarial (IRE), the corporate income tax that covers business profits, service income, commissions, capital gains, and other entrepreneurial activities.
Paraguay does not tax companies based on their residence alone. Instead, it applies the source principle.
In simple terms, the key question is not where the company is incorporated, but rather:
Where is the income economically generated?
If the income is considered to be of Paraguayan source, it is taxable in Paraguay.
If it is foreign-source, it generally falls outside the scope of IRE.
What Paraguay Does Not Do
To understand the system correctly, it is useful to clarify what Paraguay does not do.
- Paraguay does not operate a worldwide taxation system for businesses.
- It does not automatically tax foreign income simply because a company is resident.
- There is no general controlled foreign company (CFC) regime and no global minimum tax.
If Paraguay applied residence-based taxation, all foreign income would be taxable by default.
That is clearly not the case.
Paraguayan-Source Income
Income is generally treated as Paraguayan-source when the core economic activity that produces it takes place in Paraguay.
This typically occurs when:
- services are performed from Paraguay,
- personnel and operational substance are located in Paraguay,
- key management and decision-making functions are carried out in Paraguay,
- assets or rights generating income are used within the country.
In such cases, the income is subject to IRE at the standard 10% rate.
Foreign-Source Income
When business activities are genuinely carried out abroad, with real operational substance outside Paraguay, the resulting income is considered foreign-source.
This includes, for example:
- services and consulting performed abroad,
- brokerage, intermediation, or agency activities carried out overseas,
- foreign commercial operations,
- capital gains from the sale of foreign shares or assets,
- professional or digital activities exercised entirely outside Paraguayan territory.
In these cases, IRE does not apply.
This is the foundation of Paraguay’s reputation as a territorial tax jurisdiction—and that foundation remains intact under the current system.
Current Practical Framework
Under the current framework, the tax treatment of foreign income earned by Paraguayan companies depends on substance rather than form.
Genuinely foreign-source income remains outside the IRE tax base, even if it is not subject to income tax abroad.
However, the tax authorities may challenge cross-border structures that lack real economic substance. Where income is formally booked abroad but effectively generated, managed, or controlled from Paraguay, it may be reclassified as Paraguayan-source and taxed accordingly.
In practice, taxation arises not because income is “untaxed abroad”, but because it is considered to be economically connected to Paraguay.
Practical Examples
The same territorial logic applies across different types of income. Below are two common scenarios that often raise questions in practice.
Example 1 – Royalties
A Paraguayan company owns intellectual property (software, trademarks, or know-how) and licenses it to foreign users.
Scenario A – Foreign use of IP
- The intellectual property is used exclusively outside Paraguay.
- The licensees are foreign entities.
- The exploitation of the IP takes place entirely abroad.
Result: the royalty income is considered foreign-source and is not subject to IRE in Paraguay.
Scenario B – IP effectively used in Paraguay
- The same intellectual property is used, wholly or partly, within Paraguay.
- The economic exploitation of the IP takes place in the local market.
Result: the royalty income is treated as Paraguayan-source and taxed under IRE at 10%.
The decisive factor is not where the IP is registered, but where it is economically exploited.
Example 2 – International Mediation Commissions
A Paraguayan company earns commissions for acting as an intermediary between foreign buyers and sellers.
Scenario A – Mediation activity carried out abroad
- Negotiations, contacts, and deal execution take place abroad.
- No personnel or operational structure is involved in Paraguay.
Result: the commission income is foreign-source and not subject to IRE in Paraguay.
Scenario B – Mediation activity effectively managed from Paraguay
- Key negotiation, coordination, or decision-making functions are carried out from Paraguay.
Result: the commission income may be reclassified as Paraguayan-source and taxed under IRE at 10%.
As with other types of income, the determining factor is where the value-creating activity actually takes place, not the nationality of the clients or the location of payment.
Conclusion
Paraguay continues to operate a territorial tax system for corporate income. For businesses, genuinely foreign-source income remains outside the scope of IRE.
Local businesses seeking structurally lower effective taxation may also consider alternative regimes, such as the Maquila regime, which operates outside the standard IRE logic and applies a reduced effective tax burden to qualifying export activities.
Disclaimer: This article is provided for general informational purposes only and does not constitute tax, legal, or professional advice. Paraguayan tax law and its practical application may vary depending on the specific facts and circumstances. Readers should consult a qualified local tax advisor before making any decisions or implementing any structure based on the information discussed herein.