Paraguay is at a key transition point in its international tax framework. The country has historically been valued for its fiscal simplicity, low rates, and special regimes that have stimulated foreign investment in strategic sectors. However, growing pressure from the international community—mainly due to the OECD/G-20 BEPS 2.0 initiative—the increasing digitization of the economy, and emerging global standards are forcing policy decisions that could redefine Paraguay’s competitive advantages in the coming years.
Expansion and Modernization of the Network of Treaties and Agreements
To date, Paraguay operates with a limited number of double taxation treaties (DTTs). The most relevant include Chile, China-Taiwan, Uruguay, Qatar, the United Arab Emirates, and, as a new addition, Spain since 2025. These treaties shape withholding taxes (WHT), the application of business services, dividends, interest, and royalties, as well as information exchange standards.
The treaty with Spain stands out not only for adhering to the OECD model, but also for granting explicit benefits in terms of reduced withholding taxes (e.g., on dividends) and ensuring that many business services are considered taxable only in the country of residence, without the need for withholding in Paraguay. On the other hand, ongoing negotiations with Chile seek to update anti-abuse clauses, strengthen transparency mechanisms, and ensure that treaties reflect post-BEPS standards.
Withholding Taxes, Digitalization, and Digital Services Regime
The Paraguayan withholding tax regime remains relatively competitive compared to other countries in the region. In general, the withholding tax on dividends is 15%, although under some DTTs it is reduced to 5% or 10%, depending on the nature of the investors or structures. For interest and royalties, rates of 15% also apply, adjusted in certain cases with related or unrelated entities when treaties allow.
Paraguay has also implemented specific measures for digital services since 2021. In these cases, an effective withholding tax of 4.5% applies to digital services provided by non-residents, along with a 10% VAT. In business-to-consumer transactions, the non-resident supplier assumes responsibility for tax compliance, while in business-to-business cases, the withholding obligation falls on the local company. This scheme positions Paraguay in increasing alignment with international practices, especially in Latin American countries that already allow similar mechanisms for digital services.
BEPS 2.0: Pillar Two and Special Tax Incentives
Perhaps the most disruptive component of the international tax change for Paraguay is the implementation of BEPS 2.0’s “Pillar Two,” which sets a global minimum tax of 15%. This has direct implications for Paraguayan regimes such as the maquila system or free trade zones, which currently offer effective tax burdens well below that threshold (around 7-10% for some exporting companies).
These differences could expose multinational groups with operations in Paraguay to top-up taxes in their home jurisdictions, thereby neutralizing Paraguay’s tax advantages from abroad. In this context, Paraguay faces the dilemma of maintaining its tax incentives as tools to attract investment or adopting a Qualified Domestic Minimum Top-Up Tax (QDMTT) to align with international standards and avoid tax losses.
Several policy alternatives are envisaged: it may choose not to adopt any changes and retain the current regimes, albeit with possible tax leakage; it may adopt partial measures (e.g., a QDMTT applicable only to large multinational groups); or it could fully adopt the 15% minimum tax, although this would erode the attractiveness of the current incentives. However, the stated political commitment until at least 2028 is not to raise taxes, which would delay any substantial reform.
Policy Challenges and International Reputation
Paraguay faces a balancing act: how to maintain a tax framework that is competitive enough to continue attracting investment, without compromising tax revenues or falling behind in international transparency. The decisions taken in the coming years will be crucial in determining whether Paraguay manages to consolidate its position as a regional benchmark or whether, on the contrary, its competitive advantage is weakened by external reforms or changes in conditions in the countries of origin of investors.
Strengthening the treaty network, improving anti-abuse rules, clarifying withholding mechanisms, adapting digital regimes, and eventually adopting Pillar Two are the pillars on which Paraguay must design its future strategy, ensuring consistency between competitiveness, international legality, and fiscal sufficiency.
Source: ITR