• TaxUpdate

On May 29th, the Paraguayan Official Gazette published the promulgation of the Paraguay – Spain Double Tax Treaty (“DTT”) signed on March 25th, 2023, from which we highlight the following aspects:

1. Scope: Individual, Corporate, and Non-Residents Income Taxes, Dividends, and Profits Tax.

2. Permanent Establishment (“PE”):

An individual or entity is closely linked to an entity if, in light of all the facts and circumstances, one has control over the other or both are under the control of the same individuals or entities. In any case, it shall be considered that an individual or entity is related (closely linked) to an entity if one of them directly or indirectly holds more than 50% of the participation rights on the benefits of the other (or more than 50% of the total voting rights and the value of the shares or participation rights), or if a third individual or entity holds directly or indirectly more than 50% of the participation rights on the benefits of the other (or more than 50% of the total voting rights and the value of the shares or participation rights) in any of the individuals or entity or both of them.

A PE is also deemed to exist if (i) a building site, or (ii) a construction or installation project continues for more than 9 months.

3. Withholding Tax Rates:

  • Dividends: 0% – 5% – 10%.
  • Interest: 5%
  • Royalties: 5% 

4. Entitlement to Benefits Provision (“LOB”):

This DTT shall not apply to any person not considered the effective beneficiary of the income arising from the other Contracting State.

This DTT shall not prevent the Contracting States from applying their domestic regulations on International Tax Transparency (Controlled Foreign Companies) and thin capitalization.

The benefits of this DTT shall not be granted when it is reasonable to conclude that the instrument or transaction has within their main purpose the generation of such benefits unless it is determined that granting the relevant benefits is aligned with the goals and objects of the DTT applicable provisions.

When an entity of a Contracting State obtains income arising from the other one, and the former State considers such income as attributable to a permanent establishment that such entity has in a third State, and the benefits attributable to such permanent establishment are exempt from taxes in the State mentioned in the first place, the benefits of this DTT shall not apply to any income over which the tax levied by the said third State is less than 60% of the tax that the firstly mentioned State would have imposed it should the permanent establishment was located there. In such case, all the income to which this section applies shall be subject to tax according to the domestic legislation of the other Contracting State, regardless of this DTT.

5. Exchange of Information: The DTT requires the competent authorities to exchange information considered foreseeably relevant to carrying out the provisions of the Treaty or the domestic laws of both of the Contracting States

6. Double Taxation Relief: Both countries apply the deduction method to eliminate double taxation.