Impact of the Double Taxation Agreement between Paraguay and Spain on the Real Estate Sector

The Agreement to Avoid Double Taxation and Prevent Tax Evasion or Avoidance (DTA) between Paraguay and Spain, signed on March 25, 2023, entered into force on October 14, 2024, and its tax effects began to apply as of January 1, 2025. This agreement has a significant impact on the taxation of Spanish investors in Paraguay, especially in the real estate sector, providing greater legal certainty, reducing duplicate tax burdens, and encouraging foreign direct investment in real estate.

Palacete Peris, headquarters of the Embassy of Spain in Paraguay.

Article 6 of the CDI addresses the taxation of real estate income and stipulates that income from real estate located in Paraguay, obtained by Spanish residents, will be subject to tax in Paraguay. This includes income from rentals, leases, or any other form of exploitation of the property, whether residential, commercial, or industrial. However, to avoid double taxation, Spanish investors may deduct the taxes paid in Paraguay when filing taxes in Spain. In other words, although these incomes will be taxed locally, Spanish investors will not have to pay additional taxes on those same income in their country of residence, offering significant tax relief for those investing in Paraguayan properties.

Article 13 of the CDI addresses capital gains derived from the sale of real estate located in Paraguay. When a Spanish investor sells a property in Paraguay, the profits generated may be taxed in Paraguay. Furthermore, if these gains arise from the sale of shares or interests whose value is derived, directly or indirectly, from more than 50% of real estate located in Paraguay, they will also be subject to Paraguayan taxation. This is especially relevant for developers or investors who structure their operations through corporate vehicles whose principal investments are real estate. The advantage for these investors is that they will be able to deduct the tax paid in Paraguay when filing their tax returns in Spain, ensuring that there is no duplicate tax burden.

Article 10 of the CDI regulates the withholding of taxes on dividends distributed by Paraguayan companies to residents in Spain. If a Paraguayan company distributes dividends to a Spanish company that owns at least 50% of the capital of the Paraguayan company for at least 365 consecutive days, the maximum applicable withholding will be 5% of the gross amount of the dividends. In cases where the shareholding is less than 50%, the withholding may not exceed 10%. This provision is especially advantageous for investors who participate in real estate projects through Paraguayan companies, as it allows for the repatriation of profits with a reduced withholding tax, thus improving the net profitability of their investments.

Article 11 of the CDI also addresses interest derived from investments and establishes that interest paid from Paraguay to residents in Spain may be subject to a withholding tax not exceeding 10% of the gross amount. This primarily affects investors who finance real estate projects through loans or structured financing schemes. The reduction in withholding tax allows these investors to optimize their financial flows and minimize associated costs.

Furthermore, Article 26 of the CDI introduces a mechanism for the exchange of tax information between the tax authorities of Paraguay and Spain. This exchange ensures greater transparency and reduces the risk of tax evasion in cross-border transactions. For real estate investors, this means operating in a safer and more predictable environment, where regulatory compliance and proper income reporting become key factors in avoiding tax risks and maintaining confidence in their investments.

Direct Impact of the CDI on the Paraguayan Real Estate Market

The elimination of double taxation and the reduction of withholding rates encourage the influx of Spanish capital into the Paraguayan real estate market. This new tax framework makes Paraguay more attractive to Spanish developers seeking to diversify their portfolios and explore opportunities in emerging markets with high growth potential. The legal security offered by the agreement also allows for the execution of large-scale projects, such as mixed-use developments, shopping centers, and residential developments, increasing Paraguay's competitiveness as a destination for real estate investment.

The CDI also promotes the creation of strategic alliances between Paraguayan and Spanish companies, facilitating the transfer of technology, know-how, and best practices. This synergy fosters the development of innovative projects that can be executed more efficiently and with lower tax risks, further invigorating the Paraguayan real estate sector. Furthermore, by strengthening tax cooperation between the two countries, the agreement contributes to an environment of greater transparency and market formalization, which increases investor confidence and consolidates Paraguay as a reliable destination for foreign capital.

Opportunities for Investors and Developers

The agreement offers significant opportunities for Spanish investors seeking to diversify their real estate portfolio in Paraguay. The reduction in the tax burden on dividend distributions and the possibility of avoiding double taxation through tax credits allow for optimized investment returns. For developers, this means the ability to more easily attract foreign capital, offering competitive and predictable tax conditions. Investors who properly structure their transactions under this new framework will be able to maximize tax benefits and minimize tax risks.

On the other hand, Paraguayan developers wishing to attract Spanish investors must adequately structure their projects to offer favorable tax conditions. This means considering the incorporation of companies with foreign participation that can benefit from reductions in withholding taxes on dividends and other passive income, optimizing the tax burden for all involved.

The Double Taxation Agreement between Paraguay and Spain represents a historic opportunity to boost the Paraguayan real estate sector and position the country as a competitive destination for foreign investment. By eliminating tax barriers, guaranteeing a secure legal environment, and promoting tax transparency, this agreement establishes the ideal conditions for Spanish investors to actively participate in the growth of the Paraguayan real estate market. With its tax effects applicable as of January 1, 2025, the agreement opens the door to a new era of opportunities for the development of high-impact real estate projects and for the consolidation of Paraguay as a key hub for real estate investment in the region.