Paraguay has established Double Taxation Agreements (DTAs) with just a few countries: Germany, Qatar, the United Arab Emirates, Chile, Spain, Uruguay and Taiwan. This may leave you wondering how the presence or absence of a DTA between your home country and Paraguay could impact you in case you relocate your tax residency to Paraguay. Contrary to popular belief, in general it is easier to relocate your tax residency when a Double Taxation Agreement is not present. With few exceptions, it is easier to deal with your home country when this is the case.
But what exactly is a Double Taxation Agreement? A DTA is a treaty between two countries that aims to prevent the same income from being taxed by both countries. This is particularly relevant for individuals and companies that operate across borders. A DTA would consider cases like the ones of companies operating in both countries, or individuals that have business or presence in both countries. If you need help to navigate this subject, feel free to contact us and we will be happy to help.
Double Taxation Agreement: Good or Bad for You?
While DTAs are bilateral and vary by country, they typically share common features. Even if two countries can agree on any sort of agreement, most DTAs present the same criteria:
- If a person spends at least 183 days in one of the two countries, including short absences, they will be a tax resident of that country.
- If they haven’t spent 183 days in either country, they will be a resident in the country where they have a permanent home, meaning a place where they can habitually reside.
- If they have a permanent home in both countries or neither, they will be a resident in the country where they have closer economic and family ties.
- If ties can’t be determined, they are considered a resident in the country where they habitually live.
- In absence of a place where a person lives habitually, they are a resident in the country of their citizenship.
- If they are not a citizen of either country, the two countries will negotiate to decide tax residency.
When two countries have a Double Taxation Agreement, this overrides the national laws. When two countries don’t have a Double Taxation Agreement, you simply have to follow the regular laws of both countries. This is exactly why it is easier to handle your fiscal profile in absence of a DTA.
Practical Example
You may have probably heard that in Paraguay the 183-day rule does not apply. Here a person can be legally and transparently a tax resident without spending even a single day in the national territory. With this said, if your home country had a double taxation agreement with Paraguay, you may need to spend more time in Paraguay than in your home country to maintain your tax residency here.
This is the case of Spanish citizens, for instance, after the double taxation agreement came into play. If there was no double taxation agreement, a person could be free to spend less than 183 days in Spain and that would be enough to keep their tax residency in Paraguay, regardless of how many days they spend in Paraguay. Fortunately, most countries do not have a double taxation agreement with Paraguay and simply follow the 183-day rule to determine if a person shall be deemed a tax resident of theirs or not.
How DTAs Could Complicate Your Tax Status in Paraguay
If your country of origin doesn’t have a DTA with Paraguay, only the tax rules from your country of origin apply. This is generally simpler than navigating the complexities of a DTA. For instance, if you’re moving tax residency from a country without a DTA with Paraguay, you often just need to follow a few straightforward rules from your original country—like proving you live outside its borders for more than 183 days a year.
Some countries, like Ireland, also have rules concerning the amount of times you can spend in the country in a time frame of 3 years without triggering your tax residency there. Others, like Italy, would consider also your economic family ties – like having a spouse that is not a resident of Paraguay – before accepting the relocation of your tax residency.
When is a DTA a Good Thing to Have?
There are just a few scenarios where having a DTA can be advantageous. For instance, setting up an LLC in a country with a DTA with the U.S. can reduce withholding taxes on income from royalties and dividends sourced in the United States. This is because many DTAs with the U.S. include provisions that lower the withholding tax rates on payments of dividends and royalties.
In the absence of a Double Taxation Agreement with the U.S., the withholding tax on dividends and royalties will be 30%. If a resident of Paraguay sells Kindle books on Amazon, for instance, Amazon will withhold 30% of their royalties. The tax rate, however, can still be lowered by receiving dividends and royalties from the US through an offshore LLC, conveniently set up in a jurisdiction that has a favorable DTA with the U.S..
Conclusions
From the discussion, it’s evident that not having a DTA between your country of origin and Paraguay can simplify the process of transferring your tax residency. Without a DTA, you don’t have to meet stringent requirements such as spending a specific number of days in Paraguay or proving you have a permanent home here.
With this said, having an address in Paraguay can still be very convenient to clear the KYC of banks, brokerages and other institutions that mandate to declare a domicile in your country of residency. Our concierge service can provide you with an authentic residential address, which also aids in establishing economic ties to Paraguay.
If you would like to know more about our services to obtain residency in Paraguay and to successfully manage your tax residency here, feel free to get in touch with us.
In conclusion, while DTAs aim to prevent tax evasion and ensure fair taxation, their complex criteria often make it harder to change tax residencies compared to situations where no such agreement exists. Moving your tax residency to Paraguay under these circumstances can be more straightforward, offering clearer, simpler compliance with fewer requirements.