Following several years of controversy and lack of implementation, Paraguay’s personal income tax (PIT) finally took effect starting in August 2012 after Congress enacted, on July 23, 2012, Law 4673/2012 and a related executive decree and Finance ministry general resolution were issued. The imposition of the personal income tax will have important implications for assignees to/from Paraguay who are subject to tax in Paraguay and for the costs related to international assignment programs with assignees in Paraguay.
Law 4673/2012 has been in force as of August 2, 2012.
Law 4673/2012 and its Regulations
Income That Is Subject to the Tax
The scope of the PIT applies in respect of Paraguayan source income as follows:
- 100 percent of remuneration derived from professional services and other personal services rendered under a labor relationship or by independent contractors;
- 50 percent of income derived from dividends, profits, and share price surplus, as specified, that are distributed (or credited) to shareholders or partners of organizations that are CIT taxpayers (CIT refers to Impuesto a la Renta de las Actividades Comerciales, Industriales y de Servicios and Impuesto a las Rentas Agropecuarias);
- 100 percent of income derived from certain capital gains arising on the “occasional” disposal of real estate in Paraguay and shares of Paraguayan companies (the income from such “occasional” disposals (considered “non-regular”) is subject to tax by the PIT – this will apply, for example, up to two sales effected within one fiscal year, while “regular” disposals are more than two sales within one fiscal year and they will be subject to tax under CIT rules);
- 100 percent of interest, commissions, or yields of capital not taxed under the CIT or by the Small Taxpayer’s Income Tax (CIT for taxpayers earning under the amount of PYG 100,000,000.00 (or approx. USD 22,470.00));
- Other Paraguayan source income where such income exceeds 30 times the minimum monthly wages within one fiscal year.
Taxpayers are exempt on the following:
- Sums received from indemnifications tied to death, incapacity, disease, maternity, accident, or dismissal.
- Sums from retirement and pension fund annuities in Paraguay.
- Interest, commissions, and yields from investments and deposits of capital in banks, financial entities, and cooperative organizations constituted under the laws of Paraguay.
- Foreign exchange gains/losses related to holdings in domestic or foreign entities (e.g., tied to fluctuations in USD/PYG or EUR/PYG exchange rates).
- Income arising from the valuation of assets, provided that the income is not from capital gains as a consequence of the asset’s disposal;
- Remuneration paid to Paraguayan diplomatic and consular personnel abroad (provided that in the countries where they perform their services, there is reciprocal treatment);
- State pensions that are granted to veterans from the Chaco War and their heirs.
Who Is Subject to the Tax?
- Service Industry Partnerships (Sociedades Simples): refers to a partnership or professionals who render personal services (e.g., law and audit firms).
- A tax rate of 10 percent applies when taxable income exceeds 10 times the minimum monthly wage.
- A differential tax rate of 8 percent when taxable income is under 10 times the minimum monthly wage. (This rate will be in force from January 1, 2013.)
Sociedades Simples are allowed to deduct:
- expenses connected to activities that generate taxable income;
- expenses incurred outside of Paraguay provided they are connected to activities that generate income taxable by the PIT;
- contributions to the social security system.
Individuals are allowed, under certain conditions, to deduct 100 percent of their:
- personal expenses;
- family (spouse, minor children) expenses (education, food, health care, housing, entertainment);
- expenses and investments of relatives who are under the care of the taxpayer (grandfather/grandmother, father/mother, parents-in law, brothers, etc.) – this refers to dependents of the taxpayer and all their personal and related expenses and investments, as specified;
- personal and family investments;
- the higher-educational expenses (e.g., university / tertiary) of ‘adult children’;
- up to 15 percent of gross income where the individual is not a contributing member of a social security system mandated by law and he or she is saving/investing a portion of that income for a minimum period of three years in:
- savings deposits in banks or financial organizations in Paraguay, as specified;
- deposits in saving cooperatives and credit institutions in Paraguay, as specified;
- investments in registered stocks in “stock-issuing” companies in Paraguay, as specified;
- privately-run retirement funds in Paraguay.
Tax Settlement and Assessment
- PIT is an annual tax – January 1 to December 31 – except for the first year of enforcement, as we noted earlier, when, due to the in-force date of the law, the fiscal year is from August 2 to December 31.
- The PIT will be declared and paid by means of tax returns during the month of March (further information is available at: www.set.gov.py).
- Deadlines for filing are established by the Paraguayan Tax Office – the filing/reporting calendar and assorted deadlines for all taxes are established by law and apply depending on the taxpayer’s identification number.
Withholdings for Nonresidents
Individuals who are nonresident and provide personal services within the Paraguayan territory will be subject to the PIT. The tax owed is to be withheld by the payer domiciled in Paraguay.
Under the PIT rules, a 20-percent tax rate will be applied to the 50-percent presumptive tax base (ER = 10 percent).
Paraguay Congress Suspends Personal Income Tax Rules, December 11, 2010