Paraguay’s Territorial Tax System: a Guide for Expats and Nomads

Paraguay is one of the countries that adopt a territorial tax system, which means only national income is taxed while income earned abroad is excluded from any form of taxation. This is one of the reasons why thousands of people every year, especially digital nomads and remote workers, move their tax residency to Paraguay.

That said, it is important to know exactly which incomes are considered “earned abroad” and which are considered “national,” just as it is important to know which incomes should be reported in the tax return and which are excluded. Avoiding mistakes is crucial to prevent issues with Paraguayan tax authorities and those of your home country, something we pay great attention to: every year, we help hundreds of digital nomads and more to move their personal and tax residence to Paraguay.

Introduction to Paraguay’s Territorial Tax System

A “territorial tax system” taxes only income generated within a country, while countries with a “global tax system” tax all resident income— or citizen income, as in the case of the United States— regardless of where it is generated. Paraguay is not the only country in the world to adopt a territorial tax system: Panama, Hong Kong, Costa Rica, Nicaragua, Seychelles, and a handful of other nations also do.

The two major differences between Paraguay and other countries with a territorial tax system are:

1. Obtaining residency in Paraguay is fast, requires few documents, and is inexpensive;
2. Maintaining residency in Paraguay does not require living 183 days or any specific period of time in the country each year, a great advantage especially for digital nomads interested in traveling most of the time.

Paraguay has always used a territorial tax system, but the rules have been updated and clarified by two important reforms. The first is Law 6380 of 2019, which simplified and modernized the country’s tax system; the second is General Resolution 73 of 2020, which specifically addresses digital services.

Which Incomes Are Considered Foreign Earned?

Article 6 of Law 6380 states that all income related to services, rights, or goods located or used in the country are considered Paraguayan-sourced income. Additionally, some “borderline” cases are presented to consider. Specifically, it is important to remember that:

• Services provided by a resident individual or entity, even to a foreign client, are considered Paraguayan income;
• Income from financial investments can be subject to taxation if:
  • The securities are physically stored in Paraguay
  • You trade shares or bonds of a company that is based in Paraguay
  • You trade shares of a company that is not resident in Paraguay, but by doing so you acquire rights over property that is located in the country

Additionally, theoretically, all personal income earned abroad on which no taxes have been paid in the country of origin is also considered income earned in Paraguay. Therefore, it is important to know exactly how to best manage your tax setup to ensure you pay as little as possible or even zero taxes in a completely legal and transparent way.

What Taxes Are Levied in Paraguay?

There are four types of taxes to know in Paraguay:

1. VAT (IVA, Impuesto sobre el Valor Añadido), which applies to the sale of services and products with a tax rate of 10%;
2. Income tax (IRE, Impuesto a la Renta), the income tax for individuals and companies, also with a tax rate of 10%;
3. Capital gains tax, with a tax rate of 8%;
4. Property tax on real estate located in Paraguay, usually between 1% and 2% of the municipal assessed value of the property.

Let’s focus on VAT and income taxes, which are the two most important taxes for those working online. Regarding VAT, General Resolution 73 of 2020 states that VAT is only applicable to digital services that are used or enjoyed in Paraguay. This means that a company or freelancer working from Paraguay but selling digital services to clients abroad does not need to include VAT on their invoices.

Regarding income taxes, if you operate as a personal business or as a company based in Paraguay, you are subject to taxation as a resident even if your clients are abroad and even if you sell digital services. You can choose to pay using the traditional system or the so-called “IRE SIMPLE”:

1. The traditional system involves paying taxes at 10% on your business profits. All revenues are considered, all costs are deducted, and 10% is paid on the difference between these two values;
2. IRE SIMPLE is a regime available for all activities billing less than 2 billion guaraníes per year (about $270,000), and involves paying taxes at 3% on your revenues. This is usually the most convenient system for digital nomads who want to establish their business in Paraguay.

Can a Digital Nomad Legally Pay Zero Taxes in Paraguay?

The solution we presented, valid for those who want to establish both their personal and business residency in Paraguay, is already very advantageous: compared to tax levels in Europe, North America, and Asia, we are talking about a very minimal tax burden.

But is it possible to pay zero instead of this 3% on turnover or 10% on profits? Yes, by conveniently moving your business outside the national territory.

The simplest way is usually to combine personal residency in Paraguay with an LLC in the United States, for example, in Delaware or Wyoming. This is an extremely common scheme among many digital nomads in Paraguay, especially because there is no need to physically go to the USA to open an LLC. It costs an average of $600 to open one and can be done entirely remotely in two or three days.

LLCs in the United States are passthrough entities, so they are not taxed per se: the tax burden falls on the business owner, in their country of residence. To avoid paying federal taxes in the United States, it is sufficient that:

1. The work is not performed from the USA;
2. The LLC has no US employees;
3. The business owner is not a US person;
4. The business income does not come from assets located in the United States.

If these conditions are met, no federal taxes are paid, regardless of whether LLC clients are in the USA or abroad. By choosing a favorable state, such as Delaware or Wyoming where there are no state taxes on business profits, the entire setup in the United States is completely tax-free.

At the same time, Paraguay considers the US LLC as a business, not a passthrough entity. And since the company is not based in Paraguay, it is not subject to local taxes in any way.

Another important point is that US LLCs enjoy an administrative tool called “owner’s draw“, which essentially allows the owner to use the LLC’s funds for personal expenses. This means that with your LLC card, you can pay for anything, whether personal or business-related, you can withdraw and do whatever you want, but theoretically, as far as Paraguay is concerned, you are using the money of an American company that is not based in the country.

So we have a person who performs all their work outside Paraguay, on behalf of a business based in the United States, and the money never officially changes hands from the business to the person residing in Paraguay. These are the three necessary and sufficient conditions for the Paraguayan tax authority to never say that this income is generated in the country and therefore must be taxed.

Combining a US LLC with Paraguayan Tax Residency

Combining a US LLC with tax residency in Paraguay has another major advantage, namely being able to operate with an American bank account. Usually, when you contact a company to open your LLC, you can also request the opening of a bank account associated with this entity, which is a great advantage. From an American account, it is much faster, simpler, and more efficient to send and receive money to and from anywhere in the world. For comparison, in Paraguay, it is possible to open a dollar-denominated account, but every transfer sent or received from abroad involves $35-50 in banking fees.

Considerations, Alternatives, and Useful Advice

Another entirely equal option is to place your LLC in the Caribbean island of Nevis instead of the United States, a more expensive choice but one that offers advantages. The most evident advantage is privacy, as the owner of an LLC based in Nevis does not appear in public records. Additionally, it is a system that is unlikely to change in the future, as it is a country that has built its entire administrative system to facilitate offshore company taxation. Conversely, in the United States, there is a greater probability that in the future states like Wyoming or Delaware could change their rules regarding LLC taxation and the capital these entities hold in local banks.

In any case, we always recommend choosing a low tax burden instead of zero, because paying zero—whether in Paraguay or any other country in the world—can cause difficulties in canceling tax residency in your country of origin and even after canceling it, you may face various problems. Our goal is to provide complete and transparent information so that everyone can choose what they prefer: to be cautious and pay little in Paraguay or opt for the zero-tax regime with an LLC in the United States, Nevis, or any other country where LLCs have the same characteristics.

If you have any doubts or would like a free consultation on how to optimize your tax position through residency in Paraguay, remember you can always contact us via email or WhatsApp through our contacts. We respond even on weekends, always within a few hours, and can help you both obtain residency in Paraguay and understand how to optimize your tax position through your residency.

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