Exploring the Myths: Common Misconceptions about Paraguay Tax Residency

Executive Summary

Tax residency in Paraguay has attracted increasing attention in recent years among international entrepreneurs, digital nomads, and individuals earning income outside their country of residence. Along with growing interest, however, numerous simplifications, myths, and imprecise interpretations of the regulations have emerged.
The purpose of this article is to clarify key concepts and address the most common misconceptions based on applicable regulations and tax practice.

What Is Tax Residency?

Tax residency determines the country that recognizes an individual or legal entity as its resident for tax purposes. This status defines:
- the scope of tax liability,
- the rules for taxing income,
- reporting and compliance obligations.

Contrary to common belief, tax residency alone does not automatically determine worldwide taxation of income — the structure of a country’s tax system is decisive.

Paraguay’s Tax System – The Principle of Territoriality

Paraguay applies a territorial tax system.

This means that:
- only income sourced within Paraguay is subject to taxation,
- foreign-sourced income is not taxable in Paraguay, even if earned by a Paraguayan tax resident.

This fundamental feature distinguishes Paraguay from most countries in Europe and North America.

How Is Tax Residency Determined in Paraguay?

Tax residency is assessed based on several factors considered collectively:

Most commonly applied criteria:

• physical presence in the country – typically more than 183 days in a tax year,
• holding a residence permit (temporary or permanent),
• center of vital or economic interests,
• nature and continuity of stay.

It is important to note that:
- immigration residency (right of residence) is not always equivalent to tax residency,
- the 183-day threshold is relevant in practice but is neither the sole nor an absolute condition.

Common Misconceptions About Tax Residency in Paraguay

Myth 1: A Paraguayan tax resident pays no taxes at all

This is incorrect.

A Paraguayan tax resident:
- pays tax on income sourced within Paraguay,
- does not pay tax on foreign-sourced income, provided it does not have a Paraguayan source.

The system does not imply “no taxes,” but rather a limited scope of taxation.

Myth 2: Obtaining residency automatically optimizes taxes

Obtaining a residence permit or tax residency:
- does not eliminate tax obligations in other countries,
- does not automatically terminate prior tax residency,
- does not replace proper exit planning from the previous jurisdiction.

Failure to conduct an appropriate analysis may result in:
- dual tax residency,
- disputes with tax authorities,
- exposure to penalties.

Myth 3: Paraguay has no double taxation treaties

Paraguay maintains a limited network of double taxation treaties, including an agreement with Uruguay.

At the same time:
- in a territorial tax system, such treaties play a less significant role than in worldwide taxation systems,
- correct determination of income source is more important than the treaty itself.

Myth 4: Paraguayan tax residency is a universal solution

Paraguay is not an optimal solution for everyone.

Particular caution is required for:
- individuals owning operating companies in high-tax jurisdictions,
- structures with substantial economic substance outside Paraguay,
- individuals subject to specific regulatory regimes in their country of origin.

Each case should be assessed individually.

Regulatory and International Considerations

• Income tax: governed by Paraguayan tax legislation (IRE / IRP).
• CRS (Common Reporting Standard): Paraguay participates in CRS; however, the scope of reporting and practical implications depend on asset structures and banking residency.
• No wealth-based taxes: no wealth tax, no exit tax, no classic CFC rules.

Myth 5: One Day in Paraguay Is Enough to Obtain Tax Residency

One of the most frequently repeated claims about Paraguay is that a single day of physical presence is sufficient to obtain tax residency. This assertion requires important clarification.

Legal framework (de iure)

From a legal standpoint:
- there is no regulation granting tax residency based on a one-day stay,
- the 183-day physical presence threshold remains the primary reference point,
- alternatively, factors such as:
- permanence of stay,
- center of vital or economic interests,
- nature and intent of the stay
are taken into account.

A one-day presence does not meet these criteria in a normative legal sense.

Administrative practice (de facto)

In practice, Paraguay demonstrates considerable administrative flexibility:
- tax authorities rarely conduct in-depth investigations into actual physical presence,
- procedures often rely on taxpayer declarations,
- it may be possible to obtain a tax residency certificate with very limited physical presence.

This practice has led to the simplified “one-day” narrative. It must be emphasized, however, that this reflects administrative practice rather than a statutory right.

The key risk: the exit jurisdiction

The primary risk associated with the “one-day” approach lies not in Paraguay, but in the taxpayer’s former tax residence.

Tax authorities in most countries:
- do not consider a Paraguayan tax residency certificate to be determinative,
- examine the taxpayer’s actual life circumstances, including:
- place of habitual residence,
- number of days spent in the country,
- place of work,
- personal and economic ties.

As a result, a situation may arise in which:
- Paraguay recognizes the individual as a tax resident,
- the former country does not recognize an effective transfer of tax residency.

This can lead to dual residency or tax disputes.

When minimal presence may be applicable

Limited physical presence may be used:
- as part of international structuring,
- in cases where the individual does not genuinely meet tax residency criteria in any other country,
- when combined with a carefully planned and well-documented exit from the previous jurisdiction.

However, this is not a universal or broadly applicable solution.

Conclusions

The claim that one day in Paraguay is sufficient to obtain tax residency is an oversimplification that overlooks:
- applicable legal regulations,
- cross-border risks,
- the practices of foreign tax authorities.

Tax residency should be assessed holistically, and tax relocation decisions should be based on a comprehensive, individual analysis.

Summary

Tax residency in Paraguay can represent a legal and efficient tax solution, but only when accompanied by:
- correct determination of income sources,
- proper termination of tax residency in the previous country,
- an informed approach to reporting and compliance obligations.

Simplified narratives and “one-size-fits-all” schemes often lead to incorrect decisions.
For this reason, any tax relocation should be preceded by an individual assessment.

If you are considering Paraguayan tax residency or wish to review your situation, contact the Zentra team for professional guidance.