What is a Double Taxation Agreement (DTA)
A Double Taxation Agreement (DTA, or CDI in Spanish: Convenio de Doble Imposición) is a bilateral treaty between two countries that establishes clear rules on which country has the right to tax certain types of income when a person or company has economic ties to both.
Without a DTA, in theory, both countries could claim the right to tax the same income. In practice, territorial systems like Paraguay's already resolve much of the problem by their own logic: Paraguay only taxes income sourced within Paraguay, so it does not conflict with other countries over foreign-source income. The problem lies on the other side: if your country of origin still considers you a tax resident, it will want to tax all your worldwide income, including income that Paraguay does not touch.
A DTA typically includes: tie-breaker rules to determine where you are resident when both countries claim you, methods to eliminate double taxation (exemption or tax credit), and clauses for information exchange between tax administrations.
Paraguay's DTA network: very limited
Paraguay has one of the most limited double taxation agreement networks in the world. Unlike countries such as the UAE (which has DTAs with over 80 countries) or Panama (with a broader network), Paraguay has signed very few treaties in force.
Among Paraguay's international tax treaties, the most relevant include agreements with Chile, Taiwan and the United Arab Emirates, plus some Tax Information Exchange Agreements (not full DTAs, but TIEAs) with several OECD countries.
| European country | DTA with Paraguay | TIEA (info exchange) | Implication |
|---|---|---|---|
| Germany | No | Yes | AStG may apply; exit must be planned |
| France | No | Yes | Art. 4B CGI; historical ETNC risk |
| Italy | No | Yes | Art. 2 TUIR; 5-year monitoring |
| Belgium | No | Yes | SPF Finances; strict ties control |
| Netherlands | No | Yes | Belastingdienst; exit tax on shareholdings |
| Spain | No | Yes | Art. 9 LIRPF; 4-year follow-up |
Why Paraguay's territorial system almost solves the problem
This is the point that generates the most confusion and is worth understanding well. The lack of a DTA between Paraguay and your country of origin does not automatically imply double taxation, because Paraguay uses a pure territorial system.
Imagine you are a German consultant with clients in Germany who moves to Paraguay. Your fees are still German-source income (the clients are in Germany, the service is provided for the German market). Paraguay does not claim to tax that income: its territorial system expressly excludes it. Germany, for its part, only taxes German tax residents.
The conflict arises if Germany still considers you a German tax resident after your relocation. Then Germany will want to tax your worldwide income (including the German-source income you have), and without a DTA there is no automatic tie-breaker mechanism to protect you. That is why the key is not so much the DTA as the correct execution of the tax exit from your country of origin.
Germany: the Außensteuergesetz (AStG)
Germany has specific anti-avoidance legislation for emigrants to low-tax countries: the Außensteuergesetz (AStG, Foreign Tax Act). Section 2 AStG establishes that a German citizen who emigrates to a "Niedrigsteuerland" (low-tax country) may continue to be considered an unlimited tax subject in Germany for up to 10 years if certain criteria are met: maintaining essential economic ties with Germany and German income exceeding certain thresholds.
Paraguay falls into the low-tax country category under German law. This does not prevent relocation, but it means the break of ties with Germany must be clean and documented. Germans moving to Paraguay should consult a Steuerberater (German tax adviser) specialising in international tax law before starting the process.
France: art. 4B CGI criteria and ETNC
France determines tax residency through article 4B of the Code Général des Impôts (CGI), which establishes four alternative criteria: habitual home in France, main place of stay, main professional activity in France, or centre of economic interests in France. If any one criterion is met, you are a French tax resident.
Historically, France has used the concept of ETNC (État et Territoire Non Coopératif, non-cooperative state or territory) to impose additional conditions on transactions with certain destinations. Although the ETNC list is reviewed annually and Paraguay has not appeared on it consistently, the absence of a DTA leaves French residents in Paraguay without a bilateral framework. French tax exit requires convincingly documenting that none of the art. 4B criteria are met.
Italy: no DTA but no blacklist
As explained in detail in our guide on Italian AIRE, Paraguay is not on Italy's blacklist (Paesi a fiscalità privilegiata). This is an important advantage: the burden of proof is not reversed. However, the absence of a DTA means there is no bilateral tie-breaker mechanism for cases where the Agenzia delle Entrate and Paraguay's SET might have different criteria about a taxpayer's residency (which in practice rarely occurs, given Paraguay's territorial system).
Belgium: SPF Finances and ties control
Belgium is known for having one of the strictest tax exit controls in Europe. The SPF Finances (Service Public Fédéral des Finances) can challenge the change of tax domicile for up to 3 years after the exit declaration. Without a DTA between Belgium and Paraguay, there is no bilateral dispute resolution framework: if the SPF decides you are still a Belgian resident, there is no treaty tie-breaker to appeal to.
This makes it especially important for Belgians to thoroughly document the severing of ties with Belgium: closing or reducing Belgian bank accounts, selling property in Belgium, deregistering from Belgian social security, cancelling commune registrations, etc. We detail this process in our specific guide for Belgians and Dutch nationals.
Netherlands: Belastingdienst and exit tax
The Netherlands has a tax system with its own particularities. Box 3 (tax on financial wealth, taxed at a deemed rate on assets) disappears for non-residents, which is one of the main incentives for Dutch nationals to transfer their residency. However, the Belastingdienst (Dutch tax administration) applies strict criteria to recognise the change of residency.
Additionally, for those with substantial shareholdings in Dutch companies (more than 5% of capital), an exit tax on unrealised capital gains similar to the German Wegzugsteuer may apply. Without a DTA with Paraguay, there are no specific rules for deferral or instalment payment of this exit tax.
How to manage the absence of a DTA: the correct strategy
The absence of a DTA between Paraguay and most European countries does not make tax residency in Paraguay unviable. Millions of people live in countries without DTAs between them without problems. The key is to correctly execute the tax exit from the country of origin.
The fundamental strategic principles are:
- Priority on exiting the country of origin: The main objective is for your country of origin to recognise you as a non-tax-resident. If this is achieved correctly, the absence of a DTA becomes irrelevant for most situations.
- Thorough documentation: Without a DTA, in case of a dispute with the origin country authorities, the taxpayer must be able to demonstrate with solid evidence that they effectively reside in Paraguay.
- Dual advisory: You need a tax adviser in your country of origin (for the exit) and an adviser in Paraguay (for the arrival and Paraguayan compliance). Coordination between both is critical.
- Severing significant ties: Properties in the country of origin, bank accounts, insurance, business registrations: these must be reduced or eliminated in a justified and documented manner.