On September 25th, 2019, the Executive Branch enacted the Law N° 6.380 of “Modernization and simplification of the national Tax System” (the “Law”). The Law will enter into force within 90 days after its enactment.
Below is a summary of the main changes that the bill introduces:
1. Unification of the Corporate Income Tax, which now comprises the former corporate income tax and the agricultural income tax (“IRE” as per its Spanish acronym)
- The general tax rate of the IRE is of 10% which is applied over the net income of the fiscal year.
- Includes as taxpayers of this tax to the “transparent legal structures”. These are: (i) trust business; (ii) investment funds; and (iii) shared-risk contracts or “joint venture"
- Modifies the source system and levies all incomes, benefits or profits obtained by an IRE taxpayer that come from activities developed both in Paraguay and abroad.
- Income taxes payed for activities levied abroad could be compensated from IRE, provided the payments does not exceed the tax amount.
- Allows the compensation of tax losses in up to five future tax years. The compensation of the fiscal loses can be performed in up to 20% of the net income of each year.
- Establishes two new simplified IRE settlement regimes for taxpayers according to their billing level. These regimes are: (i) “Simple”, for taxpayers whose annual turnover does not exceed G. 2.000.000.000, the settlement criteria will be the same to the established in the current Income Tax of the Small Taxpayer; and (“IRPC” as per in Spanish acronym) (ii) “Resimple”, for taxpayers whose annual turnover does not exceed G. 80,000,000, is settled by paying the 0.1% of their monthly income. Resimple taxpayers will not be VAT taxpayers and will issue sales tickets for their operations.
- The taxpayer that exceeds the 1.000 minimum wages of social capital must keep an accounting.
- Introduces transfer pricing rules, as well as rules defining related-party operations.
- Limits the deductibility of expenses for loans, payments for technical assistance and royalties, when they come from operations conducted between related companies.
- Introduces rules that allow the calculation of market value in transactions made between two or more related companies. Seven methods are introduced to know the market value of the transaction.
- Continues the exemption of income from export freight. Nevertheless, only companies that issue international transport documentation can obtain this benefit.
- The following net income obtained by international operations are calculated through a legal presumption: (i) radiograms, telephone calls and audio, internet and similar transmission are calculated through a legal presumption; (ii) use of containers; and (iii) international transport.
2. Creates a new tax on the distribution of dividends (“IDU” as per its Spanish acronym)
- The IDU rates are the following: (i) 8% over dividends obtained by Paraguayan residents; and (ii) 15% applicable over dividends obtained by non-Paraguayan residents.
- The effective tax rate for the distribution and remittance of dividends for non-Paraguayan residents is reduced, from 27.32% to 23.50%.
- Creates a new tax for local shareholders of companies that perform activities which were taxed under the former IRAGRO. The effective tax rate under the IDU is 17.20% for local share and quota holders.
- Paraguayan companies will have to withhold the tax amount and will be jointly liable with shareholders for the payment thereof.
- Presumptions of profit distribution are maintained in the case of loans granted by companies to their partners or shareholders. This presumption will apply if the corporate purpose of the company is not the granting of loans and the loans granted to partners or shareholders do not exceed the 2% of the loan portfolio.
- The law introduces a legal presumption of profits distribution when the company decides the capitalization of accumulated profits and that capitalization is not formalized within 12 months after the decision.
- If the companies have accumulated profits from previous tax years, they will be able to proceed to the distribution of profits paying a reduced rate during the first year of the tax reform law enforcement. These rates are of 5% of IDU when profits are distributed to Paraguayan residents and 10% of IDU to of Paraguayan nonresidents.
In case that an investment in capital goods equal to or greater than USD 5,000,000 is made in order to obtain the industrialization of agricultural products, the rates corresponding to IDU will be reduced in 20% when the companies that made the investment proceed to distribute the profits.
3. Changes to the Personal Income Tax are introduced (“IRP” as per its Spanish acronym)
- The IRP taxes: (i) capital income and gains, excluding the income taxed by the IDU; and (ii) income originated by employees or independent services providers in the rendering of personal services.
- Partially adopts the worldwide system of taxation in connection with income obtained by Paraguayan taxpayers.
- The applicable tax rates are modified: (i) 8% over capital income; and (ii) 8%, 9% and 10% over income from personal activities, depending on the origin and quantity of the net income.
- For tax purpose, conjugal communities will no longer be taxpayers of IRP. Each spouse will assess the tax over the 100% of their income.
- Expenses incurred abroad will be deductible only when they come from health and education
- Consider as Paraguayan source all income earned abroad when they come from services in favor of IRE and IRP taxpayers.
- Includes to undivided successions as taxpayers of IRP.
- It allows the use of receipts generated by the use of debit and credit cards to support the deduction of expenses.
4. A Nonresident tax is created (“INR” as per its Spanish acronym)
- Applies a tax rate of 15% over the percentages of legally presumed net income, that range from 30% to 100% of the gross income from Paraguayan source.
- Under the INR: (i) the effective tax rate of certain taxable events is increased; (ii) the tax rates applicable to interests originated in loans, leasing and sale of real estate located in Paraguay, as well as related parties’ operations, is decreased; and (iii) operations that were not previously taxed, such as the transfer of stock, are now taxed.
- It will no longer be considered as Paraguayan source the income that originates from the repair of aircraft, boats and vehicles that take place abroad.
- The obligation to withhold originates when the first of the following events take place: (i) payment; (ii) provision of funds; (iii) compensation; (iv) novation; (v) transaction; and (vi) any other means admitted for the cancellation of the obligation.
5. Modifications to the Value Added Tax are introduced (“VAT” as per its Spanish acronyms)
- Introduces definitions such as digital services, operations with financial derivatives and obligations to abstain.
- In digital services, the financial entities will be responsible for the payment of the tax by withholding the tax amount from the user account.
- Introduces a broader definition of the source principle.
- Exporters of raw agricultural goods will no longer be able to recover VAT credit contained in the invoices for the acquisition of exported such raw materials. All other exports will keep the benefit of VAT credit reimbursement.
- Will be able to request the VAT credit reimbursement only the taxpayers that perform export freights and issue the international transport receipt.
- The real state rental will be levied at the rate of 5% only when the real state will be allocated to housings. In any other case will be levied at the rate of 10%.
RESIMPLE taxpayers will not be taxpayers of VAT.
6. Modifications to the Selective Consumption Tax (“ISC” as per its Spanish acronyms)
- The tax rates thresholds applicable to tobacco products are increased.
- The import of goods such as aircrafts and vessels with a value over USD 30,000 and packaged foods products which calories up to 500 for each 100 grams, are now reached by the ISC.