Tax Guide for US Expats Living and Working in Paraguay
Who Is Liable For Income Taxes in Paraguay
Law No. 2421/04, which was enacted on 5 July 2004, introduced a personal income tax, effective from 1 January 2006. Law No. 3307, which was enacted on 25 October 2007, postponed the effective date of the personal income tax until 1 January 2009. Law No. 3712, dated 23 June 2009, further postponed the effective date until 1 January 2010. Law No. 4064, dated 22 November 2010, further postponed the effective date of the personal income tax until 1 January 2013.
In general, the personal income tax is imposed on Paraguayan-source income derived by individuals and certain other income (see Income subject to tax).
Income subject to tax
Employment income and other amounts received for services. Employment income, directors’ fees, management remuneration and all other remuneration for personal services performed in
Paraguay is subject to personal income tax locally and, in certain cases, value-added tax (VAT) at a rate of 10%.
Investment income. Under Law No. 2421/04, 50% of dividends received from companies subject to corporate income tax in Paraguay is subject to personal income tax.
Interest, commissions and capital yields will be subject to personal income tax.
Self-employment and business income. A productive unit owned by a single individual and registered in the Income Tax Office as a sole proprietorship that uses capital and labor is subject to corporate income tax.
Exempt income. The following items are exempt from personal income tax:
- Income earned by diplomats, consulate agents and foreign government representatives, only if reciprocity exists
- The beneficiaries of severance payments in the case of death or total or partial incapacity, illness, maternity, accidents or dismissals
- Retirement income received from companies established in Paraguay if the individual contributed to entities specified in Paraguayan laws
- Exchange-rate differences resulting from deposits in national or foreign entities, as well as the valuation of the patrimony
- Interest payments and other benefits derived from investments, deposits and certificates of deposit in local financial entities governed by Law No. 861, as well as from cooperatives
- Income received from investments in securities and other debt instruments of local companies whose shares are traded on the Asuncion Stock Exchange
Capital gains. Capital gains derived from the occasional sale of real estate or from transfers of certain specified capital interests are subject to personal income tax.
Fifty percent of capital gains derived from the sale of real estate is subject to personal income tax. If more than two real estate properties are sold in a year, the sales are subject to corporate income tax.
Deductions. All expenses incurred by an individual in Paraguay are deductible if they are supported by documentation that complies with the tax rules. Deductible expenses include the following:
- Medical and dental insurance premiums
- Social security contributions
- Pension plan contributions
- Family and amusement expenses
Under Law No. 2421/04, individuals may also deduct from annual taxable income a specified portion of savings deposits maintained for more than three years.
Rates. The personal income tax rate will be 10% (currently postponed until 1 January 2013) for individuals earning more than 10 minimum salaries per month (approximately US$4,000 in 2010). For individuals earning less than 10 minimum salaries per month, the tax rate will be 8%.
Relief for losses. Under Law No. 2421/04, losses may be carried forward five years.
B. Social security
Social security tax is levied on employee compensation. Employees pay contributions at a rate of 9% (11% for banking employees), and employers at a rate of 16.5% (17% for banks), on employees’ salaries. Under Law No. 2421/04, personal services that are not subject to social security tax will be subject to value-added tax at a rate of 10%.
Tax treaties
Paraguay has entered into double tax treaties related to corporate international freight with Argentina, Belgium, Germany and Uruguay. These treaties do not apply to personal income tax.
Paraguay has entered into a double tax treaty with Chile to avoid double taxation on income tax, including personal income tax.
To learn more about the history, culture, economy and other information about Paraguay
We have been preparing US income tax returns for US Citizens and permanent residents living in Paraguay for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Paraguay and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Paraguay.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a consultation by phone, skype or email