The Government of Paraguay sanctioned and enacted Law No. 5.542/15 (the "Law"), which guarantees the stability of Income Tax rate, equal treatment and legal security for those companies that apply to the regime established therein, through the execution of an investment contract with the government authorities. Likewise, when the investment involves high social impact, the Law foresees additional benefits such as, exemption from additional Income Tax rates on distribution of profits and up to 50% reduction of the withholding tax rate on dividend remittances abroad.
The Law is applicable to both new investment projects, as well as investments existing prior to its entry into force, provided such existing investments comply with the requirements set out in the Law, including approval of the investment project and the execution of the investment contract.
The Law shall be further regulated by means of a Presidential Decree within 120 days of enactment.
Scope of the Law
The protection of capital investment in industry and other productive activities in the country, when they contribute to:
- Employment generation; and
- Economic and social development of the Nation, through the incorporation of added value to local or imported raw materials.
Either natural or legal entities, whether local or foreign, who invest capital in companies that meet the above mentioned requirements, either by creating/incorporating them or adapting already existing companies to such requirements.
Combination with Law N. 60/90 "Of Incentives to Capital Investments"
- Investments in physical goods may benefit from the incentives foreseen in Law 60/90 when the company applied to such law1.
Exchange rate for the valuation of the investment and money transfers
- Conversion of monetary investments in local currency (for operational, tax or other purposes), as well as remittances of capital and profits abroad, will be made at the most favorable exchange rate the beneficiaries may obtain in any bank or financial institution subject to Law No. 861/96 "Of Banks and Financial Institutions".
Transfer of capital and net profits
- Net profits obtained from the transfer of capital invested shall be exempt of all taxes up to the invested amount;
- Transfer abroad of the profits resulting from the investment shall be free and without any restriction, while remittances of the capital invested shall be allowed after two (2) years of the date the company started its operations.
- The income tax levied on the activity
of the company shall remain stable at the same rate in force at the
time of execution of the corresponding contract, for a term that
shall begin at the initiation of the project (start of the
operations of the company funded with the investment) and shall
- 10 years for investments of up to USD 50,000,000;
- 15 years for investment above USD 50,000,000 and less than USD 100,000,000;
- 20 years for investments equal or exceeding USD 100,000,000.
Equal treatment and legal security
- These investments will enjoy a special non-discrimination guarantee in relation to other similar investments, being afforded therefor a special claims proceeding against any type of administrative act, which may be initiated within 1 year after its realization. Such claim shall be resolved by the competent authority within 60 days.
- Investments will not be subject to any type of appropriation or confiscation.
Special regime for exports
- If the project involves the export of
part or all of the goods produced, the respective company may hold
a percentage of foreign currency abroad:
- When such funds are needed to pay obligations abroad; or
- To make remittance of net profits as a result of the investment.
Additional benefits for industries with high social impact and its shareholders
Investments with high social impact shall be those that meet the following criteria2:
- Are established in areas of the country with relatively lower development and low employment offer for a population with high employment demand;
- Demand a significant amount of manpower and promote the formation of middle rank positions;
- Have the objective of incorporating added value to raw materials through industrialization;
- Do not cause significant or irreversible harm to the environment.
Investments with high social impact shall enjoy the following additional benefits:
- Exemption of the 5% additional Income Tax rate on the distribution of profits; and
- Decrease of the 15% additional tax rate applied on the remittance of profits abroad, at a percentage of 1% for every 100 jobs directly created, up to a maximum of 50% of the total value of the applicable rate.
How to access the benefits
The benefits of the Law shall be effective since the initiation of the approved investment, prior execution of the contract between the State and the company that will undertake the enterprise as a result of the approval of the project submitted by the interested investors. The investment shall be channeled through a stock company (sociedad anónima) duly incorporated in the country.
The Investment Council (Consejo de Inversiones) shall advice on the investment projects that apply to benefit from the Law. However, approval of the projects shall be made by the National Economic Team (Equipo Económico Nacional) through the Ministry of Industry and Commerce and the Ministry of Finance.
Execution of Investment Contract with the State
After approval of the project, the investor shall:
- Incorporate a stock company, created for undertaking the activities provided in the contract executed with the State;
- Execute an Investment Contract with the State through public deed;
- Pay-in the share capital within the deadlines set out in the Investment Contract, which shall not exceed five (5) years for investments above USD 5,000,000, and two (2) years for investments below such amount; and
- If the stock company already exists at the time of execution of the Investment Contract, then such company shall adapt its bylaws and comply with the capital integration requirements within the terms foreseen above.
Applicable Jurisdiction to Investment Contracts
- National courts, or;
- Arbitration in accordance with local law (based on UNCITRAL Model Law).
Investments made prior to entry into force of the Law
Investments existing prior to the entry into force of the Law may apply to the benefits of the Law by requesting the approval of the investment project and executing the Investment Contract as established in the Law and its regulation.
1 Law No. 60/90 establishes tax benefits for import and local purchase of capital goods and materials, including exemption of import duties, among other.
2 The areas with lower relative development, workforce and further requirements will be defined in the corresponding regulation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.