Tax regimes vary greatly throughout Latin America. While some countries are investor friendly, others are not so open. There are several benefits (i.e. retirement programmes, tax discounts) but also some tax obligations. In this section we provide an analysis of the different tax structure in each country where January First Real Estate lists properties. This information may be very important for you to choose you retirement destination or where to invest. Keep in mind that there are related visa and residence issues which are discussed in Visa/Residence Requirements. Real estate assets are, without doubts, one of the most secure and profitable ways of investment. There are two main reasons for this: One, properties always tend to increase their value in the long term. They generate an income for their exploitation (rental/yields). And two, International real estate is set to be the biggest and best investment market of the next several years.
Income earned by nonresidents from leasing property is taxed at the standard nonresident income tax rate of 35%. The taxable income is deemed to be 50% of the gross rent. No other deductions are allowed. Consequently, the effective tax rate is 17.5% on the gross income. Strictly speaking, Paraguay does not have a personal income tax (though one is now being introduced). The single most important tax is Value Added tax (VAT), and its rate is low at only 10%. Services, such as the lease of real estate, are VAT exempt. In July 2004 the new Duarte government’s Tax Reform Law (Ley No. 2421/04) was approved, but is not yet in force.
Real Estate Tax (Impuesto Inmobiliario)
Real Estate Tax is levied annually at 1% of the cadastral value of property, as assessed by the national cadastre service. Assessed property values increase annually according to the consumer price index, but such increases cannot exceed 15% per annum.
This tax rate is reduced to 0.5% for rural properties smaller than five hectares used for small scale farming. In the case of rural properties, improvements or buildings are not computed in the tax base.
Capital Gains Tax
Capital gains earned by nonresidents from the sale of property are taxed at a flat rate of 35%. The taxable gain is 50% of the gross gain. No other deductions are allowed. The effective tax rate is therefore 17.5% on the gross gains.
Individual income tax at the rate of 10% applies to residents, starting 1 January 2006. The taxable income is the net income exceeding 10 minimum monthly wages.
Capital gains earned by residents from selling real estate properties are generally not taxed in Paraguay.
However, capital gains derived by persons who are habitually engaged in purchasing and selling real estate properties are taxed as ordinary income. A person is deemed to be engaged in habitual activity when he sells more than two properties in a given tax year.
Realtors’ and Lawyers’ Fees in Paraguay and Other Property Purchase Costs
Fee / % / Who Pays?
Judiciary Tax / 0.74% / buyer
Agent’s Fee / 5.00% / buyer
Notary Fee / 0.75% – 2% (+10% VAT) / buyer
Municipal Tax on Transfers / 0.30% / buyer
Costs paid by buyer: 5.74 %
Costs paid by seller: 1.125% – 2.5%
Roundtrip transaction Costs: 6.86% – 8.24%
Property Purchase Process in Paraguay
There are no restrictions on the ownership of property by foreigners, who may also engage in commerce or industry without limitations. For a property to be titled in Paraguay, the following procedures are normally followed: In buying/selling of real estate, the Notary Public plays a very important role. Generally, Notary fees vary from 0.75% – 2.00% of the property value, plus 10% VAT.
The Notary Public obtains the following certificates in order to prepare the Transfer of Deed:
– Tax Compliance from the Ministry of Finance;
– Non-Encumbrance and Free Disposability of Assets from the General Direction;
– Tax Clearance from the Municipality; and
– Cadastre or Zoning Certificate from the National Service of Cadastre
The above-mentioned certificates cost around PGY 228,406 or US$36.
Once the Transfer of Deed has been notarized, a Municipal Tax on transfers will be paid. It is 0.3% of the property price, if the property is located in Asuncion or 0.2% if located in other cities in the country.
The last step in the titling of the property is the registration of the notarized documents at the Public Registry by the Notary Public. Registration fee is PGY200,000 (US$36) and Administrative expenses are PGY187,000 (US$32). Lastly, there is a Judiciary Tax of 0.74% of the property value.
The whole process of registering a property can be completed in around 48 days.
Inheritance and gifts are not taxed in Paraguay.
The main laws governing inheritance in Paraguay are The Civil Code, and the Civil and Commercial Procedure Code. If a minor is involved, the Child and Teenage Code also applies.
The inheritance laws of Paraguay affect everyone who owns property in Paraguay. The Paraguayan legal system does not make any distinctions based on nationality, race, religion or gender. Foreigners have the same rights, and are treated in the same way as any other citizen.
The general principle in inheritance matters (real property excepted) is that the law of the deceased’s permanent residence applies. It makes no difference if one spouse belongs to one nationality (or religion) and the other spouse to another. However inheritance of real property located in Paraguay is governed by the law of Paraguay, regardless of the nationality and place of residence of the deceased.
The Civil and Commercial Court of the deceased’s permanent residence deals with inheritance issues. Decisions about non-resident foreigners’ property are made primarily in this court.
Inheritance cases which are not contested take approximately 4 to 6 months.
A certain portion of the estate (the ‘reserved portion’) must be distributed to certain persons, and is not available for division in accordance with the will (if any). What portion is reserved, depends on what inheritors are available.
If descendants are alive, 4/5th of the estate goes to them
If descendants are not alive, but ascendants are, 2/3rds goes to them
If a spouse owns property jointly with the deceased, s/he inherits ½ of the reserved portion. If not, s/he inherits the same proportion as the descendants, or 1/3 part if there are only ascendants.
When there are no descendants or ascendants, ½ is reserved for the spouse
For adopted persons, the reserved portion is ½ of that applicable to other descendants
These rules apply equally to foreigners and members of different religions. The residue of the property, i.e., that portion outside the reserved portion, can be freely willed, with no restrictions.
If there is no will, the deceased’s ascendants, descendants and spouse inherit the estate in the above mentioned proportions. If the deceased has no heirs and does not leave a will, the Government inherits the estate.
It is normal to formally make a will in Paraguay. It advisable for a foreigner to make a local will because the inheritance process is easier and faster in local courts, especially if the property is located in Paraguay.
There are four types of will, with different formalities:
Must be written, dated and signed by the testator, in his own handwriting, on all pages.
Can be made in any language.
Public instrument will:
Must be performed before a public notary and three local witnesses.
The testator must manifest the will orally in front of the notary and witnesses, or read a written version in front of them. If s/he can not talk, s/he can sign the will in front of witnesses.
Must contain the place and date when signed, the name, ages and addresses of the witnesses, and whether oral or written.
If the testator cannot speak Spanish, the will must be performed before two translators, in two languages, both of which the witnesses must understand.
The fulfillment of these requirements must be written in the will for its validity.
Those who sign the act cannot be beneficiaries.
Can be handwritten or typed, and must be signed on all pages by the testator.
The testator must give the will to the notary in a closed envelope in the presence of five local witnesses and manifest that it contains his will.
The notary records the circumstances, in the front part of the enclosed will, and the notes are signed by him/her, the testator and the witnesses.
The testator must declare if the will is written and signed by him/her, in handwriting or typing, or written and signed by another person at his/her request. The notary must record all these circumstances.
The notary must seal the enclosed will so that it can not be opened without breaking. S/he must also register what was written in the front of the sealed envelope. It must be signed by the notary, the testator and the witnesses.
The enclosed will remains with the notary for its conservation.
The special will:
Members of the military who are far from the general population must make their will before an officer with rank not inferior to captain. But if there is no superior officer, they can make the will before an inferior rank officer, or the person in charge. If the testator is sick or wounded, he can give his will to the doctor who assists him. The will must be written in the presence of two witnesses and include the place, date, and names of the testator and witnesses. The will expires in 90 days if the testator survives. If he dies, the will is sent to the Defense Minister, who sends it to the judge of the last address of the testator, for its validation.
A will can be made abroad, but it must be done personally by the testator, not by a representative.
An owner can freely donate property to anyone, prior to his/her death. However after an inventory of the estate is done, if such a donation includes a part of the “reserved portion”, the affected heir can challenge the transaction and bring it back into the estate.
Problems of Inheritance
The law looks primarily at the title deeds to determine the owner of property. Married partners can own property jointly or separately, but if the property is not located in Paraguay, the court applies the law of the country where the married partners were living at the time of death.
Property (or part of it) may be inherited by a child or children not of legal age, or to others not legally adult. If one parents dies, the other acts as the legal guardian. A legal guardian can be appointed in the will if the minor has no parents. The court might also appoint a guardian, if necessary, who can be one of the parents, an older brother, an uncle, or another responsible person outside the family.