Moving To Paraguay To Pay 0% Taxes? Think Again.

Summary

In this video, the speaker addresses a common tax myth that Spain taxes income generated in Paraguay for individuals living there. The speaker explains Paraguay's territorial tax system, which only taxes income earned within the country, and contrasts it with Spain's worldwide taxation system. The video also explores how the double taxation agreement between Spain and Paraguay works, emphasizing that Spain cannot tax income unless there is a clear link to its territory. Using a practical example, the speaker highlights how one can legally optimize their tax situation by changing tax residency to Paraguay without falling into tax pitfalls.

Takeaways

• 😀 Spain does not tax income generated in Paraguay if you're not a tax resident there.
• 😀 Paraguay follows a territorial tax system, meaning it only taxes income generated within its own borders.
• 😀 If you live in Paraguay and earn income from abroad, it won't be taxed by Paraguay.
• 😀 Spain taxes residents on their worldwide income, but only taxes non-residents on income derived from Spain.
• 😀 Spain could potentially tax income from Spanish clients if there is a sufficient connection to Spain, such as a permanent establishment or managing the business from Spain.
• 😀 The key to determining if Spain can tax foreign income is where the economic activity takes place, not the nationality of the clients.
• 😀 According to the double taxation agreement, if Paraguay doesn't tax foreign income, Spain could attempt to tax it if there's a clear link to Spain.
• 😀 Spain can only tax income generated abroad if it can prove the economic activity is linked to Spain, such as through a permanent establishment or working from Spain.
• 😀 A person who is correctly a tax resident in Paraguay and has no business or property in Spain is not subject to Spanish taxes on income from outside Spain.
• 😀 Pepito, a Spaniard living in Paraguay, is not a tax resident in Spain because he doesn’t meet the residency criteria (spending more than 183 days, having a center of economic interests in Spain, or family in Spain).
• 😀 Changing tax residency from Spain to Paraguay involves more than just leaving the country; it requires meeting legal criteria to ensure you're no longer considered a Spanish tax resident.
• 😀 It's crucial to get professional international tax advice before changing tax residency to ensure you don’t leave any loose ends that could trigger tax issues with Spain.

Q & A

Does Spain tax income generated offshore in Paraguay if you're not a tax resident there?

No, Spain does not automatically tax income generated offshore in Paraguay if you are not a tax resident in Spain. Spain taxes based on the concept of tax residency and only taxes income with a Spanish source, or if there is a clear link to Spain.

What tax system does Paraguay operate under, and how does it affect income tax?

Paraguay operates under a territorial tax system, meaning it only taxes income generated within its own borders. Income earned abroad, even by residents of Paraguay, is not subject to Paraguayan tax.

How does the concept of 'source of income' impact taxation in Paraguay?

In Paraguay, the source of income determines whether it is taxable. Income generated from activities within Paraguay is taxed, while income from foreign sources is not taxed, regardless of the taxpayer’s residence.

Can Spain tax income from Spanish clients if the income is generated outside of Spain?

Spain can attempt to tax income generated from Spanish clients if it can prove that the income has a sufficient link to Spain. However, Spain can only tax this income if the economic activity generating it is linked to Spain, such as having a permanent establishment or office there.

What is the double taxation agreement between Spain and Paraguay, and how does it affect tax obligations?

The double taxation agreement between Spain and Paraguay establishes that income generated in Paraguay, which is not taxed there due to the country's territorial system, may not automatically be taxed by Spain unless there is a clear connection to Spanish economic activity.

What criteria must Spain meet to tax foreign income generated by a non-resident?

Spain can only tax foreign income if it can demonstrate that the income is derived from a Spanish source. This is typically linked to economic activity carried out in Spain, a permanent establishment, or a clear economic tie to Spain.

What is the importance of Article 25.5 in the double taxation agreement?

Article 25.5 outlines that if Paraguay does not tax income generated outside its territory, Spain could try to tax it based on its own domestic legislation. However, Spain must prove that the income has a link to its territory for this to apply.

In practice, can Spain tax a digital entrepreneur living in Paraguay and working with clients in Spain?

In practice, Spain cannot tax a digital entrepreneur living in Paraguay and working remotely with Spanish clients, unless it can prove that the economic activity is managed from Spain or there is a permanent establishment there.

What are the key factors that determine whether someone is a tax resident in Spain?

The key factors are: spending more than 183 days in Spain per year, having the center of economic interests in Spain, and having the center of vital interests in Spain. If none of these criteria are met, a person cannot be considered a tax resident in Spain.

What steps should a person take to ensure they are legally disassociated from Spain’s tax system?

To ensure legal disassociation from Spain's tax system, a person must meet the criteria for tax residency in another country, such as Paraguay. They should also avoid any loose ends that could be interpreted as maintaining links with Spain, such as having property, business interests, or a physical presence there.