How Living in Paraguay Affects U.S. Expats (When it comes to Taxes)

A couple of interesting fact about Paraguay: (1) Instead of greeting people with a “hello,” you say “adios” which actually means goodbye. This is meant to be an indication to people who you bump into that you can’t really spare the time to stop and catch-up. (2) Dueling between two people is legal, but the competitors have to be registered blood donors.

If you are planning to become a U.S. expat in Paraguay, or have been one for a while, it’s important to know the tax laws of the country and the potential impact on your U.S. tax return. Expat taxes can get complicated. Fortunately, we have outlined the key points below.

Photo by: Marissa Strniste

How Living in Paraguay Impacts U.S. Taxes

As a U.S. citizen or permanent resident (Greencard), you are required to file U.S. taxes even if you live in Paraguay. Plus, if you have assets in foreign financial accounts (e.g., foreign banks), there are informational reports you may be required to file. For example, U.S. Expats Living in Paraguay with $10,000 or more in foreign banks must file the FBAR (now known as FinCen 114).

Fortunately, the U.S. government provides various forms of tax relief that can lower or eliminate U.S. tax obligations

• The Foreign Earned Income Exclusion – It allows you to exclude a certain amount of income earned outside the U.S.
• The Foreign Housing Exclusion/Deduction – This one relates to additional income that can be excluded for household-related expenses tied to living abroad.
• The Foreign Tax Credit – It allows you to offset foreign taxes paid against U.S. tax obligations.

In most cases, the foreign earned income exclusion is preferable to the foreign tax credit if you live in a country with a lower tax rate than the U.S. (assuming your income is not above the applicable threshold). However, it’s a good idea to speak with an expat tax specialist to discuss the best application of these tax reliefs.

Taxation in Paraguay

Let’s start by understanding who is required to pay taxes in Paraguay. Both residents and non-residents are generally taxed on Paraguay-source income only. Foreigners who intend to reside in Paraguay more than 120 days in a calendar year are considered residents for tax purposes.

The applicable income tax rates are:

• Employment Income for residents: 8% or 10% (depending on income level);
• Employment Income for non-residents: Effective tax rate of 10%;
• Taxation on Interests: For residents, 50% of interest is taxable (at the same rate as employment), while for non-residents, there is effective tax rate of 15%;
• Taxation on Dividends: same as with interest income;
• Taxation on Capital Gains: Same as employment income.

Paraguay and the U.S. do not have a social security tax agreement in-place. Therefore, certain U.S. expats will be required to pay into both social security programs.

FATCA and Paraguay

The U.S. government is increasingly interested in knowing about the foreign assets held by its citizens and residents. As a result, it has been busy inking deals with other countries whereby foreign financial institutions (FFIs) will be required to:

• Identify accounts of U.S. persons;
• Report certain information to the IRS regarding those accounts;
• Withhold a 30% tax on certain payments to non-participating FFIs and account holders unwilling to provide the required information

As of the publication of this article, roughly 80 countries have either signed intergovernmental agreements with the United States or are in discussions. It’s important to know that Paraguay does have a FATCA agreement in-place with the U.S.

If you have any questions regarding your U.S. expat taxes, contact us today. We are here to help.