Doing Business in Paraguay 2011

The Financial Times Business Ltd., stated in “The Banker Supplement” September 2010 Edition: “PARAGUAY: GREEN AND GROWING” and the Sudameris Bank of the Abbey Group inserted in said Supplement an ad highlighting titled “THE SUN SHINES BRIGHTLY IN PARAGUAY”; both headlines reflecting that this land locked country ( 406.752 sq/km – with a population of 5.504.146 people), with a record-high GDP growth of 15 percent in 2010, located in the Southern Cone of South America neighboring with Brazil, Bolivia and Argentina, has started to call international investor´s attention.

IMF´s latest Country Report (No. 11/239 – August 2011) read as follows: “Paraguay’s economy has recently experienced particularly large output swings, opening again the question of what its potential growth rate is.  Notably, in only two years, the economy went from a half-a-century record-low GDP contraction of 3¾ percent in 2009—after the severe and widespread drought of that year and the adverse international environment due to the global crisis—to a record-high GDP growth of 15 percent in the subsequent year, led by the unprecedented boom in the agricultural sector during 2010.......the economic boom (and the output gap) of 2010 was driven not only by the historically large agricultural sector, but also by a broad-based economic expansion and boom.  Finally, estimations show that the spillovers from agriculture are limited, with construction being the sector that is most influenced by the swings of the Paraguayan agricultural sector”

Recently (August 2011), Standard and Poor´s slightly increased Paraguayan debt rating from B+ to BB-, maintaining its position in the speculative category; but however, moving in the right direction by placing the country  two steps away from the investment grade level.

Paraguay, together with Argentina, Brazil and Uruguay, forms the major commercial block in the region, MERCOSUR, an integrated market of more than 200 million consumers.  MERCOSUR’s short-term goal is to achieve the free movement of goods, services, and production inputs.

Paraguay’s geographic location, in the center of high productive territories in natural gas and iron ores (Bolivia), natural gas & agro industries (Argentina), Hydroelectric energy and ethanol and soya beans (Brazil); provides an excellent opportunity for logistics investment (railroads, gas pipelines, intercontinental cross roads) among the mentioned countries and serves as a link country for the trades between the Atlantic and Pacific Oceans.

Paraguay is permeated by rivers and sits on top of the Guarani aquifer, one of the world`s largest underground reservoirs of fresh water and is suitable for human consumption.

A modern four towers Centre is being built to serve as the site of World Trade Center. Furthermore, the construction industry is becoming a key growth factor in the national economy and a food producer and exporter, mainly of soya beans, wheat, sesame and meat.

The Itaipú Hydroelectric Dam, which Paraguay co-owns with Brazil, and the Yacyreta Hydroelectric Dam, which the country co-owns with Argentina, make the country a clear energy exporter.  The country lack of electricity network, roads and rail system, hamper the country’s potential to maintain a regular and sustainable growth ratio.  The multinational Rio Tinto Alcan is planning to invest $2.5bn in an aluminum conglomerate plant and if negotiations go well it might start operating in 2016.

Paraguay also boasts a young population, with more than 70% of its inhabitants under the age of 34. Paraguay has a low population density: 11 inhabitants per square kilometer. Paraguay is bigger in size than Japan or Germany; however, its population is significantly smaller than both countries which consequently constitutes in an incentive, calling the attraction to immigration particularly from highly density countries.  Most of Paraguay`s 6 million people live  in the Eastern Region while the Chaco, in the west, stretches  across 60% of the country but is inhabited by only 3% of the population.

Foreign investments in Paraguay are free of any administrative restrictions although mandatory declarations or permits are required in special cases. In general, investors are able to acquire Paraguayan companies or create their own legal entity and buy or rent property, without having to comply with any specific undertakings, including minimum investment or job creation levels.  The repatriation of capital is also free of any restrictions, with the exception of some specific cases where there are declaratory requirements.

In certain business sectors as banking, mining, telecommunications, private security services, etc. an authorization is required to acquire a controlling interest and the direct or indirect acquisition of all or part of a business line.

TAXATION: The taxation of Paraguayan companies is based on a territorial principle. Therefore, Paraguayan companies carrying on their business outside Paraguay will not be taxed in Paraguay (subject to some exceptions) on their foreign source income.  The standard income tax rate is 10% on the net profits. Almost all expenditures are treated as deductable expenses, but Tax losses cannot be carried forward. In addition, there is a 5% tax for the distribution of profits or dividends.  The remittance of profits abroad is subject to a withholding tax of 15% on the amount remitted or credited.

The value-added tax (VAT) is the lowest in South America.  The sales of good, services and the definite importation are subject to Value Added Tax at the rate of 10%, except for financial services, real estate transactions, medicines, some food products, and the lease of movables, which are subject at the rate of 5%.  The sale of agriculture products and animals are exempted. The transfer of shares is subject to VAT at the rate of 10% on the sale price which exceeds the nominal value of the shares. However, this tax is exempted if the seller renders notice to the Minister of Finance in due time.

There are no restrictions to importation of capital and 100% of the capital of a Paraguayan company can be owned by foreigners, either individuals or legal entities.

In Paraguay there is a free exchange market for the importation and repatriation of capital and for any transaction in the country. It is legal to have contract in any foreign currency.

MAQUILA is a production legal scheme which allows foreign manufacturing companies to produce in Paraguay goods and services for outside destinations.  The production of the goods and services is done under the direction of the head office located outside the country. The operations under the Regime of Maquila are exempt from all taxes or others charges related to the production process.  Only a single tax of ONE PERCENT is charged on the value added to the product in Paraguay.  This production scheme which is well known in the good manufacturing existing on the bordering lines between Mexico and the U.S., provides the great advantage of opening the whole Mercosur market (200 million people) to the industry or manufacturer or assembling units producing under this special legal /custom regime.

Paraguay, a country that learned to live under full democratic political regime, is entering into the international investment picture with good basis.  However, there are still important issues pending; mainly, to have general education as one of its driver force of growth, to be competitive worldwide and to have a judicial system sound and mature deploring and condemning corruptive practices.

Mersan Abogados was founded in 1943 

The Firm has maintained over 65 years a sufficiently well known and qualified reputation in tax and corporate matters.

The firm has earned a solid national and international reputation, providing legal advice and consultancy services representing well known national, international and multinational clients, associations; chambers of commerce and several foreign embassies.

British American Tobacco has distinguished the Firm with their Derby Winner Award among 180 contestants firms worldwide for its outstanding achievements in litigations whilst representing the Company in Paraguay.  Oscar A. Mersan can be contacted on +595 981 4022 57 or by email at oscar@mersanlaw.com.