The agreement between Spain and Paraguay, which will come into force on October 14, 2024, is a significant advance in the fiscal and economic relations between both countries. This agreement, whose purpose is to avoid double taxation and combat tax evasion, has a direct impact on the taxation of income derived from transnational activities, and seeks to provide a clearer and more predictable framework for investors and companies operating in both nations.
Context and objectives of the agreement
Double taxation refers to the situation in which a person or entity is taxed on the same income in two different tax jurisdictions. This agreement, signed between Spain and Paraguay, has as its main objective to eliminate this barrier, which often discourages foreign investment. By preventing income from being taxed in both countries, the agreement fosters a more attractive and predictable business environment, which can encourage both Spanish investment in Paraguay and Paraguayan investment in Spain.
Another of the key objectives of the agreement is the fight against tax evasion. By including information exchange and administrative cooperation measures, the agreement allows tax authorities in both countries to work together to ensure that taxpayers do not use complex structures to evade taxes.
Categories of income covered
The agreement covers a wide range of income, providing clarity on how and where it should be taxed. Specific categories include:
- Real estate income: Income generated by real estate located in one of the countries will be taxed in that country.
- Business profits: Profits earned by companies operating in both countries will be taxed primarily in the country where the economic activity is carried out, except in cases of permanent establishment in the other country.
- Maritime and air transport: Profits derived from international transport by sea or air will be taxed in the country where the headquarters of the operating company is located.
- Dividends, interest and royalties: These incomes will be subject to a withholding tax regime, but with specific limits on the tax rate that each country can apply.
- Capital gains: The rules for taxation of profits derived from the sale of assets are specified, with particular attention to real estate and securities.
International standards
The agreement also incorporates the recommendations of the Organisation for Economic Co-operation and Development (OECD) on tax matters, which ensures that the policies of both countries are aligned with international best practices. This is especially important in a global context where international cooperation is crucial to avoid base erosion and profit shifting (BEPS).
Impact on economic relations
This agreement is seen as a crucial step in the consolidation of economic relations between Spain and Paraguay. By providing legal certainty to investors, this agreement is expected to facilitate a more constant flow of investments between the two countries, benefiting both companies and local economies. In addition, strengthening cooperation in the fight against tax evasion contributes to creating a fairer and more transparent business environment.
In short, the agreement between Spain and Paraguay not only avoids double taxation and combats tax evasion, but also strengthens economic ties and fosters a more favourable investment climate between the two countries.
