Digital Nomad Tax Guide

Paraguay Tax for Digital Nomads

"0% tax on foreign income" is everywhere online. But most guides oversimplify. Here's the truth about what it takes to actually pay zero tax in Paraguay.

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The Real Answer

Yes, Paraguay has 0% tax on foreign-sourced income. But if you work FROM Paraguay (even for foreign clients), that income is considered local and taxable at 3-10%. To achieve true 0% tax, you need to structure your income through a foreign entity like a US LLC—which is legal, but requires proper setup and compliance.

See Structure Options

0%

Foreign Income Tax

3%

IRE Simple Rate

10%

Standard IRE

~$270K

IRE Simple Threshold

Work FROM Paraguay = Taxable Income

This is the most misunderstood concept in Paraguay tax planning.

Income source is determined by where the work is performed, not where your client is located. If you sit in Asunción working for a US company, that's Paraguayan-sourced income—taxable under IRE Simple (3%) or standard IRE (10%).

"Foreign clients" does NOT equal "foreign income."

How Income Source is Determined

Paraguay's territorial tax system is straightforward: local income is taxed, foreign income is not. But determining which is which can be confusing.

TAXABLE Paraguayan-Sourced Income

  • Work performed while physically in Paraguay
  • Freelancing from your Asunción apartment
  • Remote work for foreign employer while in Paraguay
  • Consulting calls made from Paraguay
  • Any services where YOU are in Paraguay doing the work

Tax Rate: 3% (IRE Simple) or 10% (IRE)

0% TAX Foreign-Sourced Income

  • Work performed while physically abroad
  • Dividends from foreign companies (like US LLC)
  • Interest from foreign bank accounts
  • Rental income from foreign properties
  • Capital gains from foreign investments

Tax Rate: 0%

The Key Question:

Where were you physically located when you performed the work?

If the answer is "Paraguay," the income is Paraguayan-sourced—regardless of who your client is, where they're located, or where the money is deposited.

Structure Options for Digital Nomads

You have three main options for structuring your income in Paraguay. Each has different tax implications, complexity, and trade-offs.

Compare Your Options

Tax Structure Comparison

Feature IRE Simple (3%) US LLC (0%) PY Company (10%+)
Effective Tax Rate 3% on gross 0% on dividends 10% IRE + 8% IDU
Setup Complexity Low Medium High
Ongoing Compliance Monthly Form 120 PY filing + US filing Full accounting
Local Invoicing Yes (E-kuatia'i) No Yes
Best For Local clients, simple ops High earners, no PY clients Employees, local ops
Revenue Threshold < ~$270K/year No limit No limit

Choose based on your income level, client locations, and tolerance for complexity. There's no one-size-fits-all answer.

1

Option A: IRE Simple (3% Tax)

Work as a personal freelancer in Paraguay and pay 3% tax on your gross revenue. Simple, legal, and compliant.

How It Works:

  • • Register for RUC as individual
  • • File monthly Form 120 via Marangatú
  • • Pay 3% on gross revenue (not net profit)
  • • VAT exempt on exported services (RG 73/2020)

Limitations:

  • • Revenue limit: ~G. 2B/year (~$270K)
  • • Can't have employees
  • • Single establishment only
  • • Must be individual (not company)

Best For

Digital nomads with income under ~$270K/year who want simplicity, occasional local invoicing, and don't mind paying 3% tax. Good for those who prioritize peace of mind over tax minimization.
2

Option B: US LLC (0% Tax)

Own a US LLC that earns income and distributes dividends to you. Paraguay treats these dividends as foreign-sourced income (0% tax).

How It Works:

  • • Form US LLC (Wyoming, Delaware, etc.)
  • • LLC contracts with clients and earns income
  • • LLC distributes dividends to you
  • • Dividends = foreign income = 0% in Paraguay

Requirements:

  • • US LLC formation (annual maintenance required)
  • • US bank account for LLC
  • • Proper documentation (operating agreement, minutes)
  • • Still need Paraguay RUC and filings

Place of Effective Management Risk

If your LLC is entirely managed from Paraguay (all decisions, all work, no substance abroad), SET could argue it has a "permanent establishment" here and should be taxed locally. Maintain some operations outside Paraguay and document that the LLC has substance beyond just you.

Best For

Higher earners who don't need to invoice Paraguayan clients, are comfortable with medium complexity, and want to minimize taxes to 0%. Requires discipline with documentation.
3

Option C: Paraguayan Company (10%+ Tax)

Form a Paraguayan company (SRL or SA) that operates locally. Higher taxes, but full local presence and capability.

How It Works:

  • • Form SRL (simple) or SA (larger scale)
  • • Pay 10% IRE on net profits
  • • Pay 8% IDU on dividend distributions
  • • Full accounting and compliance

When It Makes Sense:

  • • Need to hire local employees
  • • Significant Paraguayan client base
  • • Want local business presence
  • • Planning to scale operations

Best For

Digital nomads building a real local business with employees, Paraguayan clients, or significant local operations. Overkill for solo freelancers working remotely.

US LLC + Paraguay: The Details

The US LLC strategy is popular because it legally achieves 0% tax in Paraguay. Here's how to do it properly.

Step-by-Step Setup

  1. 1

    Form US LLC

    Choose a state (Wyoming, Delaware, and New Mexico are popular). Use a registered agent service.

  2. 2

    Get EIN (Tax ID)

    Apply for an Employer Identification Number from the IRS. Free, but may require faxing if you don't have a US SSN.

  3. 3

    Open US Bank Account

    Open a business bank account for your LLC. Mercury, Relay, or traditional banks with remote onboarding work well.

  4. 4

    Create Operating Agreement

    Document your LLC's ownership and operation. Essential for proving the LLC is legitimate.

  5. 5

    Bill Clients Through LLC

    All client contracts and invoices should be with the LLC, not you personally.

  6. 6

    Distribute Dividends to Yourself

    Transfer money from LLC to your personal account as dividend distributions. Document each distribution with board minutes.

Documentation Checklist

Keep these documents to prove your foreign income is legitimate:

  • □ LLC Operating Agreement - Ownership and governance structure
  • □ Board Resolutions / Meeting Minutes - Documenting each dividend distribution
  • □ LLC Bank Statements - Showing income and distributions
  • □ Annual Financial Statements - Simple P&L and balance sheet
  • □ BCP Exchange Rate Documentation - For converting USD to Guaraníes
  • □ Client Contracts - Showing LLC (not you) is the service provider

US Citizens: Special Considerations

US Citizens Are Still Subject to IRS Taxation

Moving to Paraguay does NOT eliminate your US tax obligations. The IRS taxes US citizens on worldwide income, regardless of where you live.

Paraguay's 0% has no effect on what you owe the IRS.

What US Citizens Need to Know:

  • No US-Paraguay Tax Treaty: There's no treaty to prevent double taxation or reduce rates.
  • FEIE (Foreign Earned Income Exclusion): You may exclude up to ~$126,500 (2024) of foreign earned income from US taxes if you meet the bona fide residence or physical presence test.
  • FTC (Foreign Tax Credit): If you pay taxes to Paraguay (e.g., IRE Simple), you can credit those against your US taxes.
  • FBAR and Form 8938: You must report foreign bank accounts and assets above certain thresholds.
  • Self-Employment Tax: US citizens living abroad still owe self-employment tax (~15.3%) unless they have specific exemptions.

Get Professional Help

US tax law is complex, especially for expats. Work with a US tax professional who specializes in expat taxation. The cost is worth avoiding IRS problems.

Real Scenarios

SCENARIO 1

Sarah - Freelance Designer from UK

Works from her apartment in Asunción for US and European clients. Earns $80K/year.

Reality: Her income is Paraguayan-sourced (work performed in Paraguay). She should register under IRE Simple and pay 3% = $2,400/year.

Alternative: Form a US LLC and pay herself dividends to achieve 0%.

SCENARIO 2

Marcus - Software Developer from Germany

Has a Wyoming LLC that contracts with a US tech company. Earns $200K/year through the LLC. Lives in Paraguay.

Reality: His LLC earns the income and distributes dividends to him. Paraguay treats dividends from foreign companies as foreign-sourced income = 0% tax.

He must maintain proper LLC documentation and ensure some substance exists outside Paraguay.

SCENARIO 3

John - US Citizen, Consultant

US citizen working for US clients from Paraguay. Earns $150K/year. Has a US LLC.

Reality: Paraguay = 0% (LLC dividends are foreign income). But he's still a US citizen = IRS wants their share. He can use FEIE to exclude ~$126K and owes US taxes on the rest, plus self-employment tax.

Total tax burden: Likely 10-15% effective after FEIE, not 0%.

Staying Compliant

Regardless of your structure, you need to stay compliant with Paraguay's tax authority (SET).

Minimum Requirements:

  • ✓ Get a RUC - Required even if reporting zero local income
  • ✓ File monthly declarations - Form 120 via Marangatú, even if "sin movimiento"
  • ✓ File annual IRP return - Report all income, including exempt foreign income
  • ✓ Keep documentation - Prove foreign income is truly foreign-sourced
  • ✓ Maintain records for 5 years - SET can audit up to 5 years back

Don't Operate in the Gray Zone

Many digital nomads skip registration and hope for the best. This works until it doesn't—and SET catching up can mean back taxes, penalties, and interest. The compliant path isn't complicated. Do it right from the start.
Common Questions

Digital Nomad Tax FAQ

Partially true, but often oversimplified. Paraguay's territorial tax system means foreign-sourced income is taxed at 0%. However, if you work FROM Paraguay for foreign clients, that income is considered Paraguayan-sourced and IS taxable. To achieve true 0% tax, you need to structure your income through a foreign entity (like a US LLC) that pays you dividends.
No. This is the biggest misconception. Income source is determined by WHERE THE WORK IS PERFORMED, not where your client is located. If you sit in Asunción writing code for a US company, that income is Paraguayan-sourced and taxable under IRE Simple (3%) or standard IRE (10%).
IRE Simple is a simplified tax regime with a 3% rate on gross revenue (not net profit). It's available for individuals and businesses with annual revenue under approximately G. 2 billion (~$270K USD). It's good for digital nomads who want a simple, low-rate option and don't mind paying some tax.
When you own a US LLC, the LLC earns income and then distributes it to you as dividends. Paraguay treats these dividends as foreign-sourced income (0% tax). The key is that the LLC—not you personally—is performing the services. However, you must be careful about "place of effective management" rules.
If your foreign LLC is entirely managed from Paraguay (all decisions made here, no substance abroad), Paraguay's tax authority could argue it has a permanent establishment in Paraguay and should be taxed locally. To avoid this, maintain some operations/decision-making outside Paraguay and keep documentation.
No. US citizens are taxed on worldwide income regardless of where they live. Paraguay's 0% foreign income tax doesn't affect your US tax obligations. You may qualify for Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC), but consult a US tax professional. There's no US-Paraguay tax treaty.
To prove foreign-sourced income, keep: (1) LLC operating agreement, (2) Board resolutions/minutes for dividend distributions, (3) LLC bank statements, (4) Annual LLC financial statements, (5) BCP exchange rate documentation for transfers. Without proper documentation, SET could challenge your 0% treatment.
No. Under Resolución General 73/2020, digital services exported abroad are VAT exempt. If you're working under IRE Simple and all your clients are foreign, you won't charge or pay VAT on those services.
If you work from Paraguay without proper structure, your income is technically Paraguayan-sourced and taxable. The risk is SET auditing you later and assessing back taxes, penalties, and interest. Many expats operate in a "gray area"—but it carries risk.
It depends: Choose IRE Simple (3%) if you want simplicity, need to invoice local clients, and don't mind paying a small tax. Choose US LLC (0%) if you're a higher earner, have no Paraguayan clients, and want to minimize taxes—but be prepared for more complexity and compliance.
No. Paraguay has not joined the CRS automatic information exchange network. This means Paraguayan banks don't automatically report your account information to other countries' tax authorities. However, this doesn't mean you can hide income—your home country can still make manual requests.
Common red flags include: large bank transfers without supporting documentation, years of "sin movimiento" (zero income) declarations while having obvious lifestyle expenses, inconsistencies between reported income and banking activity, and operating without a RUC.
See All Tax Questions →

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