Paraguay's Territorial Tax System: Complete 2026 Guide

Legal Framework

Paraguay's territorial tax system is not a loophole or gray area—it's established law. The foundation is Law 6380/19, formally titled "Law on Modernization and Simplification of the National Tax System," which passed on September 25, 2019, and took effect on January 1, 2020.

Article 6 of Law 6380/19 defines what constitutes Paraguayan-source income:

"Income derived from activities carried out in the Republic, from assets located or rights economically used in the Republic shall constitute income from Paraguayan sources."

This means the law explicitly states that only income from sources within Paraguay is subject to taxation. Everything else—income from foreign employment, foreign investments, foreign real estate, foreign business activities—is outside the tax net.

Additional Legal Support

• General Resolution 73/2020: Clarifies tax treatment of digital services and remote work
• Constitutional Basis: Paraguay's constitution supports territorial taxation principles
• 30+ Year History: The territorial system has existed in various forms since 1991
• No Sunset Clause: Unlike time-limited programs (like Portugal's NHR), Paraguay's system has no expiration date

The law also unified corporate taxation under the IRE (Impuesto a la Renta Empresarial) at a flat 10% rate, replacing previous separate taxes for commercial, industrial, and agricultural activities.

How Territorial Tax Works in Practice

The core principle is simple: income is taxed WHERE IT IS EARNED, not where you live.

For income to be considered "foreign-sourced" and therefore tax-free in Paraguay, it must meet these criteria:

1. The service was performed outside Paraguay OR for a foreign entity
2. The client or payer is a foreign entity (not Paraguayan)
3. The economic activity did not occur within Paraguay's territory
4. The product or service is consumed outside Paraguay

In practice, if your income comes from foreign clients, foreign employers, foreign investments, or foreign assets, it's taxed at 0% in Paraguay. Let's look at specific examples.

Real-World Income Scenarios

Green rows = 0% tax (foreign source). Pink/red rows = taxed in Paraguay (local source).

What Income is NOT Taxed (0% Rate)

If you're a Paraguay tax resident with foreign-sourced income, you pay zero income tax on the following:

Employment and Self-Employment

• Remote employment: Working for foreign companies while living in Paraguay
• Foreign freelance income: Consulting, services, or work for foreign clients
• Foreign business income: Operating a business that serves foreign markets
• Digital nomad income: Online work for international clients

Investment Income

• Foreign stock dividends: From US, European, or other foreign equities
• Foreign bond interest: Interest from foreign government or corporate bonds
• Foreign capital gains: Profit from selling foreign stocks, bonds, or property
• Foreign rental income: Rent from properties located outside Paraguay

Retirement and Passive Income

• Foreign pensions: US Social Security, UK state pension, private pensions from abroad
• Foreign annuities: Annuity payments from foreign sources
• Royalties from foreign sources: Intellectual property income from abroad

Cryptocurrency (Current Interpretation)

• Crypto trading on foreign exchanges: Binance, Coinbase, Kraken, etc.
• Crypto capital gains: Profit from selling crypto on foreign platforms
• Crypto staking rewards: From foreign DeFi protocols
• NFT sales: If sold on international platforms to foreign buyers

US LLC Income (Special Case)

If you operate a US LLC from Paraguay:

• The LLC itself is a foreign entity
• If the LLC serves foreign clients (not Paraguay clients), the income is foreign-sourced
• Paraguay taxes it at 0%
• Important: US citizens must still report to IRS (see our US citizens tax guide)

What Income IS Taxed in Paraguay

While foreign income is tax-free, income generated from Paraguayan sources is taxed at relatively low rates:

Personal Income Tax (IRP - Impuesto a la Renta Personal)

• Paraguay employment: 10% on wages from local employers
• Local freelancing: 10% on income from Paraguay clients
• Local rental income: 10% on rent from Paraguay properties
• Progressive rates: Technically 8-10%, but effectively 10% for most earners

Corporate Income Tax (IRE - Impuesto a la Renta Empresarial)

• Paraguay business profits: 10% flat rate on local business income
• IRE Simple option: 3% on gross revenue (if under ₲2 billion/year, approximately $270,000)
• Dividends from Paraguay companies: 8% withholding tax

Value Added Tax (VAT)

• 10% VAT: On goods and services sold in Paraguay
• Export exemption: Exports are typically VAT-exempt

No Wealth or Inheritance Taxes

Paraguay does NOT impose:

• Wealth tax
• Inheritance tax
• Gift tax
• Capital gains tax on foreign assets
• Exit tax (when leaving Paraguay)

Paraguay vs Other Territorial Tax Countries

Paraguay isn't the only country with a territorial tax system. Here's how it compares to other popular options:

Paraguay's Unique Advantages

• No investment requirement: Unlike Panama (bank deposit) or Costa Rica (income proof), Paraguay requires no minimum investment
• No CRS implementation: Paraguay hasn't implemented Common Reporting Standard, unlike Panama, Costa Rica, UAE
• 30+ year history: The system has existed since 1991, unlike Portugal's 10-year NHR program that ended
• Low local tax: 10% local tax vs Panama's 25% or Costa Rica's 15-25%
• Easy residency: Quick, inexpensive residency process with minimal requirements
• Low cost of living: 60-70% lower than popular expat destinations

Common Questions About Territoriality

What if I spend 6 months in Paraguay, 6 months elsewhere?

Your tax residency and where your income is sourced are separate questions. If you're a Paraguay tax resident (have RUC, file returns) and your income comes from foreign sources, it's still 0% taxed regardless of how much time you spend in Paraguay. However, to obtain and maintain a tax residency certificate, you typically need to spend 120+ days per year in Paraguay.

Can I invoice from a Paraguay company and still get 0% tax?

No. If you form a Paraguay company and invoice clients through it, the source of the income becomes Paraguay (even if the clients are foreign). The company would owe 10% IRE on profits. The territorial advantage works best with:

• Direct foreign employment (W2/payroll from foreign company)
• Invoicing as an individual to foreign clients
• Using a foreign entity (like a US LLC) to invoice foreign clients

What about remote work WHILE IN Paraguay?

Being physically located in Paraguay while working doesn't change the source. If you're working for a US company, being paid by that US company, the income is US-sourced (foreign to Paraguay) and taxed at 0% in Paraguay. What matters is:

• Who is the client/employer? (Foreign = 0%)
• Where is the service consumed? (Foreign = 0%)
• Where is the payer located? (Foreign = 0%)

How does SET (tax authority) enforce this?

Paraguay's tax system is largely self-declared. You file annual tax returns (IRP) declaring your income sources. You categorize income as:

• Paraguay-source (taxed at 10%)
• Foreign-source (taxed at 0%)

SET can audit if they suspect misclassification. Triggers include:

• Large Paraguay bank deposits with declared $0 Paraguay income
• Invoicing Paraguay clients but declaring foreign source
• Inconsistencies in reported income vs lifestyle

Most expats keep clear documentation:

• Employment contracts (showing foreign employer)
• Client invoices (showing foreign client names/addresses)
• Payment records (showing foreign source)
• Bank statements (foreign accounts)

What documentation should I keep?

Keep records of:

• Employment contracts or client agreements
• Invoices sent to clients (showing foreign addresses)
• Payment receipts (showing foreign bank transfers)
• Bank statements from foreign accounts
• Tax returns from previous countries (if applicable)
• Proof of where services were consumed

A local contador (accountant) familiar with expat taxation can guide you through these requirements.

Why Paraguay's System is Unique

Several features make Paraguay's territorial tax system stand out:

1. No CRS Implementation (Yet)

Most territorial tax countries (Panama, Costa Rica, Malaysia, UAE) have implemented the Common Reporting Standard (CRS), which means they automatically report foreign residents' financial accounts to their home countries. Paraguay has NOT implemented CRS as of 2026, providing an additional layer of privacy.

Note: This could change. International pressure for financial transparency is increasing.

2. No CFC Rules

Paraguay has no Controlled Foreign Corporation (CFC) rules. If you own a foreign company (like a US LLC), Paraguay doesn't attribute that company's income to you personally. The income only becomes taxable if you bring it into Paraguay or it's from Paraguay-source activities.

3. No Wealth, Inheritance, or Capital Gains Tax

Beyond territorial income tax, Paraguay imposes:

• No wealth tax: You can accumulate wealth offshore without annual taxation
• No inheritance tax: Pass foreign assets to heirs tax-free
• No gift tax: Transfer foreign assets without tax consequences
• No capital gains tax: Sell foreign stocks, property, crypto tax-free

4. Established 30+ Year Track Record

Paraguay's territorial system isn't new or experimental. It has existed in various forms since 1991—over 30 years. Law 6380/19 modernized and codified the existing system but didn't create it. This long history suggests stability.

5. No Political Pressure to Change

Unlike Portugal (which ended NHR due to EU pressure and housing concerns) or other countries facing pressure to increase taxes, Paraguay has:

• No powerful political movement to change the system
• A business-friendly culture that values low taxes
• No EU membership pressuring tax harmonization
• A stable political environment favoring continuity

6. Extremely Low Local Tax Rates (10%)

Even when you DO owe Paraguay tax (local income), the rate is only 10%—one of the lowest in Latin America and globally. Compare:

• Paraguay local income: 10%
• Panama local income: 25%
• Costa Rica local income: 15-25%
• US: 10-37%
• UK: 20-45%

Is Paraguay a Tax Haven?

No, Paraguay is not a tax haven. Here's the distinction:

Tax Havens (Offshore Centers)

• Secrecy-focused (hiding money)
• Often have no tax on anything
• Designed for shell companies and trusts
• Examples: British Virgin Islands, Cayman Islands, Panama (for companies)
• Often have substance requirements to avoid being labeled "tax haven"

Territorial Tax Systems (Like Paraguay)

• Transparent tax policy
• Tax local income (10% in Paraguay's case)
• Don't tax foreign income
• Codified in law
• People actually live there (not just mailbox companies)
• Examples: Paraguay, Singapore, Hong Kong, Malaysia, Panama (for individuals)

Paraguay's system is legal, transparent, and established in law. You still:

• File annual tax returns (even if $0 owed)
• Register with SET (tax authority)
• Declare your foreign income (just not taxed on it)
• Pay tax on local income (10%)

This is tax optimization using legal structures, not tax evasion.

Will This End Like Portugal NHR?

Portugal's Non-Habitual Resident (NHR) tax regime ended in 2024 after 10 years. Many wonder if Paraguay's system could meet the same fate. Here's why it's unlikely:

Why Portugal NHR Ended

• Time-limited by design: NHR was a 10-year program from the start
• EU pressure: European Union pushed for tax harmonization
• Housing crisis: Blamed (fairly or not) for pricing locals out of housing
• Political backlash: Became politically unpopular
• Wealthy expat resentment: Perception of wealthy foreigners not paying fair share

Why Paraguay's System is Different

• No sunset clause: Paraguay's system has no expiration date
• 30+ year history: In place since 1991, not a recent program
• No EU membership: No external pressure to harmonize taxes
• No housing crisis: Paraguay has abundant affordable housing
• Low expat numbers: Not enough expats to create political backlash
• Business-friendly culture: Low taxes are part of Paraguay's economic strategy
• No political movement to change: No major party campaigning to end it

Frequently Asked Questions

Next Steps: Becoming a Paraguay Tax Resident

Understanding the territorial tax system is step one. To actually benefit from 0% tax on foreign income, you need to:

1. Obtain Paraguay residency - See our residency guide
2. Get your RUC (tax ID) - See our RUC registration guide
3. Register as a tax resident - File with SET and obtain tax residency certificate
4. File annual tax returns - Even if $0 owed on foreign income
5. Keep proper documentation - Prove your income is foreign-sourced