Paraguay Ana Añazco, Juan Carlos Boggino & Paolo Doria Peroni Sosa Tellechea Burt & Narvaja Introduction All matters relating to the possession, acquisition, transfer or encumbrance of real estate are governed by the Paraguayan Civil Code. Such Code provides the contractual grounds by which owners and occupiers may regulate their relationship. In general, the Paraguayan Civil Code grants the parties the autonomy to negotiate the terms of a lease or sales contract as long as those terms do not overrule any mandatory provision. Paraguay has a free system of land ownership or occupation, except for restrictions placed on land within 50 kilometres from the borders with neighbouring countries: Brazil, Argentina and Bolivia. In February 2005 Law No. 2535/05, or the Border Security Law was enacted. This is a legal regulation which creates a 50-kilometre “security area”, adjacent to territory and rivers that make up natural borders with neighbouring countries. The effect of this law is to prevent any natural or juridical person born in (for the former), or originating from (in case of the latter), Argentina, Bolivia or Brazil (whether individuals or legal entities, where a majority of members are citizens of any of these countries) to acquire, jointly own or usufruct rural real estate within this 50-kilometre area. As an exception to this rule, a waiver may be granted by the Executive Branch through a Decree, based on public interest grounds. Such grounds can include activities that generate employment for Paraguayan labour within the border security area. Apart from the Border Security Law, there are no restrictions on ownership or occupation of Paraguayan real estate by foreigners; there is no especial foreign investment registry other than Paraguay’s Official Land Registry, the Registro Nacional de la Propiedad (hereafter the National Land Registry). Finally, the Foreign Investment Law 117/91 grants foreign investors the same guarantees, rights and obligations as those applicable to Paraguayan investors. The competent authority in all matters related to property is the municipal and departmental government to which the land corresponds. Key leasing provisions In order to lease a property for corporate purposes, the owner and the occupier must be capable of entering into a contract and the owner must have all the required property rights. For example, the Title Deed for the property must be duly registered at the Public Registry. The effect of registering a Title Deed is that the owner has possession of the land and an inviolable right of property against third parties. If the parties have signed a private sales contract without the certification of a Notary Public or registration thereof, the contract shall be binding only between the parties, and not effective against third parties. The provisions for sales contracts contained in the Paraguayan Civil Code are applicable to lease contracts, where appropriate. Specific conditions, such as length of term, rent, remedies for nonpayment, rent review, among others, shall be established in the lease contract. In this regard, as stated above, parties may freely agree upon certain conditions of the lease contract, although there are some general rules established by the Paraguayan Civil Code. GLI - Corporate Real Estate First Edition
73
www.globallegalinsights.com
Peroni Sosa Tellechea Burt & Narvaja
Paraguay
(a) Length of term: no longer than five (5) years; unless the property is leased particularly for building or planting which is expected to have long-term results, in which cases it could have a maximum length of twenty (20) years. (b) Rent (frequency, basis of calculation): The Paraguayan Civil Code does not provide for a frequency for rent to be paid, as it is left to the parties’ discretion and for them to determine. It does, however, mention that the lessee shall pay the price for the rent on the established dates, and in case of failure to set these dates, they will be fixed in accordance with regular practices. (c) Remedies for non-payment of rent and breach of other covenants (including forfeiture): In the event that the lessee’s rights of use and enjoyment are disturbed, the following provisions shall be applied: i)
if the disturbance derives from serious defects in the property, the lessor shall be liable, even if it was unaware of them or they became evident during the lease. The lessee may ask for a reduction of price or termination of the contract, unless it had been aware of these defects;
ii)
if the disturbance derives from an action by third parties which intend property, usufruct or easement rights over the land, the lessee may claim a proportional reduction of the price, insofar as it had duly notified these circumstances to the lessor in advance;
iii) in the cases provided in subsection ii) above, if the lessee had been sued to evict the property it shall notify the lessor, and be excluded from the lawsuit at its request. The lessor is obliged to take action in defence of the lessee; iv) the lessor may not be forced to take guarantee for the lessee against third parties’ extrajudicial measures that do not intend to exercise rights in rem over the property; v)
the lessee shall notify the lessor, as soon as possible, of encroachment or further events that could undermine its rights over the property, as well as any law suit filed regarding the property, its use or enjoyment. Failure to notify will make the lessee liable for damages and may not request a guarantee from the lessor;
vi) if the lessor were to lose a lawsuit over a part of the property, the lessee may claim a reduction of price, or termination of the contract, insofar as the lost part was a main portion of the leased property, as well as damages. If the lessee, at the time of contracting, was aware of the risk of eviction, it may not claim damages; and vii) if the disturbance were caused by unforeseeable circumstances or force majeure, the lessee may request termination of the contract, or non-payment during the disturbance. (d) Rent review: Parties who have entered into a lease contract are free to renegotiate the rent amount. The lessee may unilaterally modify the rent, but in practice, the lease contract establishes that such rent, or any kind of modification, shall be modified by mutual agreement of the parties. (e) Maintenance, repairs and alterations: Among other obligations, the landlord undertakes to hand in and keep the property in good and proper condition, making the necessary repairs, caused not only by unforeseeable circumstances or force majeure or by the property itself, its inherent defects or vices, or derived from its regular use. Repair expenses and those expenses incurred by the lessee, when these could not have been delayed without damaging the property are deemed necessary expenditures. Expenditures of other nature shall be borne by the lessor. When the lessor, regardless of the notice given by the lessee of the impairments, failed to repair them or delayed in doing so, the lessee may withhold the price corresponding to repair expenses and in case of urgency, make the expenses on the lessor’s behalf. The lessee, in turn, undertakes to keep the property in good and proper condition and to be liable for damages caused on its own account, or by members of its family that live with him, or by its guests, employees and sub lessees, to repair minor damages caused regularly and to notify the lessor, as soon as possible, of any defect or vice that may be evinced during the term of the contract, in order to adopt the necessary measures. Improvements and other acts performed on the property during the term of the contract shall be governed by the following principles: GLI - Corporate Real Estate First Edition
74
www.globallegalinsights.com
Peroni Sosa Tellechea Burt & Narvaja
Paraguay
i)
permission granted by the lessor to make these improvements may only be proven in writing;
ii)
should the lessee be authorised to make the improvements, it shall be expressly appointed to do so;
iii) when the improvements are not made by the lessee, the lessor may either require the lessee to comply with this obligation within a certain period, or urge termination of the contract. When the lessor incurs any expenses or reduces the price in light of these improvements, it may require reimbursement thereof plus interest, or the total price of the lease, notwithstanding any compensation; iv) the lessee may not make improvements that alter the property without authorisation; v)
should the lessee make modifications that are not allowed under the contract or that could alter the property, without authorisation, the lessor may stop them or require the lessee to restore the property to the same conditions as received; and
vi) the lessee shall have a withholding right for all the improvements introduced and the expenses incurred in this regard, that should be borne by the lessor. The lessee may oppose the lessor altering the property or introducing changes other than for repair, requesting payment of damages. The lessor may, however, introduce changes to the accessories of the property; insofar as they do not damage the property itself. (f) Assignment and subletting: The lessee may, unless otherwise stipulated by the contract, sublet the property as a whole or a part thereof. Subletting constitutes a new lease governed by the provisions of the Paraguayan Civil Code regarding that matter. The sub lessee shall use the property according to its nature and the agreed purposes, pursuant to the main contract and the lessor shall have the right to claim the property be restored in a proper condition. Rights and privileges of the lessor over the modifications introduced to the property, comprise those introduced by the sub lessee. On the other hand, the sub lessee will have the rights and privileges pertaining to it under the lease by payment of the subletting. If, regardless of prohibition in the contract, the lessee sublets the property, or does so without the lessor’s authorisation (if such authorisation is needed), the sub lessee may not reject the sublet alleging these circumstances, if it had entered into a contract acknowledging them. In such case, the subletting shall produce its effects. Meanwhile, the lessor may request eviction of the sub lessee and that the lessee restores the leased property. Additionally, it shall have the right to claim damages, or termination of the contract, with the corresponding compensation. (g) Sale by landlord: Unless the parties agree otherwise, there are no restrictions for the landlord to sell a leased property, as long as the lease contract remains in effect for the entire term. In practice, a notice to the lessor is required. (h) Permitted use: The lessor shall authorise the lessee to use the property for the leased rights, in the proper conditions for the agreed use. Use of the property in ways contrary to what the parties had agreed upon, or abusive use causing damages, authorises the lessor to stop this use, as well as to request compensation, and according to the circumstances, the termination of the contract. The lessee shall limit itself to the use and enjoyment agreed upon, or presumed taking into account the nature of the property and the circumstances, even if this use would not cause damages to the lessor. Use and enjoyment within the contract comprises the results and products from exploitation of the property, when corresponding to the lessor. (i) Planning law: It is worth mentioning that the correspondent Municipality must approve all construction plans submitted by the investors. These permits or approvals are granted only after payment of the construction tax, which is around 0.2% (economic public interest housing developments) and 4% (buildings destined to be used as hotels, restaurants, commercial stores, financial and luxury entities) over the claimed value. Such claimed value is based on the cost spreadsheets that are attached to the plans and submitted to the Municipality. GLI - Corporate Real Estate First Edition
75
www.globallegalinsights.com
Peroni Sosa Tellechea Burt & Narvaja
Paraguay
Taxes and other occupational costs In Paraguay, corporate investments may be carried out with foreign or national capital. As for tax matters, IRACIS (corporate income tax) and VAT (value added tax) apply to sales or lease of property. Furthermore, foreigners may be legally considered taxpayers in Paraguay only after obtaining temporary or permanent residency in the country (particular investors) or a Commercial Licence (foreign company). Otherwise, they cannot engage in any economic activity within the national territory. (a) The following taxes must be paid for the sale of a property: VAT: There are two options, a 5% rate over 30% of the property value, or 1.5% over the sale amount. This is a mandatory tax in all cases, including rural properties, horizontal properties (Condominus), etc. VAT is also mandatory, whether the seller is a Paraguayan person or entity or a foreign entity or investor. In case the seller has its domicile in Paraguay, an invoice must be issued to the buyer including VAT. If the seller is not domiciled or registered in Paraguay (foreign investor), the VAT is retained by the buyer or the Notary Public who elaborated the property sale’s Public Deed, and later paid to the State. Finally, the fees of the Notary Public who elaborated the property sale’s Public Deed must be paid. Normally the fees are between 0.75% and 2% over the sale amount. IRACIS: Sales of property are levied additionally by IRACIS, if the seller is a corporation, regardless of whether it is domiciled in the country or not, having a different procedure in each case because of the tax base to be applied. The profit would be levied by this tax as the income has a Paraguayan source, and therefore the general and additional rates for the tax are applicable, where appropriate. For corporations domiciled within the country, the income is based on the difference between sales price and its acquisition cost; hence, the profit would be levied by the 10% rate (general rate). Moreover, if the corporation distributes profits for the fiscal year, an additional 5% rate shall be applied and in case of having shareholders abroad (not domiciled in Paraguay), for the transfer or remittance of these profits, an additional 15% shall be withheld from this amount. In case the seller of a property is a foreign corporation (not domiciled in Paraguay), the IRACIS is equally applicable. In this case, the tax base would be 30% of the sales price, after having deducted VAT, to which a sum of the IRACIS general rate (10%), the additional rate for distribution of profit (5%), and the additional rate for transfer or remittance of profit to shareholders abroad, shall be applied. Finally, and as for VAT, the fees of the Notary Public who elaborated the property sale’s Public Deed must be paid. (b) In relation to municipal fiscal matters: Tax on real estate transfers within Asunción (Paraguay’s capital city): Tax of 0.3% of the amount of the transaction must be paid to the municipal government on sales, exchanges, donations and in any transfer of ownership of real estate located within its jurisdiction. The tax base must in no case be less than the tax valuation. Tax on real estate transfer outside Asunción: Tax of 0.2% of the amount of the transaction must be paid to municipalities outside Asunción on sales, exchanges, donations and any transfer of ownership of real estate located within the relevant municipal district. Again, for tax purposes, the amount of the transaction must not be less than the tax valuation. (c) The following taxes must be paid for leasing a property: VAT: In case an occupier has entered into a lease contract for a property, 5% VAT over the agreed rent must be paid. The owner of the property is responsible for payment of the municipal fiscal taxes. Property taxes: This tax is applied exclusively to real estate property located in national territory, and taxpayers are owners or users thereof. When ownership is shared, tax is paid by any one of the owners. Exempted from payment are: real estate owned by the State and municipalities; real estate owned GLI - Corporate Real Estate First Edition
76
www.globallegalinsights.com
Peroni Sosa Tellechea Burt & Narvaja
Paraguay
by religious entities recognised by competent authorities, devoted on a permanent basis to public service; lands declared to be historic national monuments; lands owned by recognised public welfare associations; in general any piece of land devoted to hospitals or public welfare services; real estate owned by foreign governments; real estate used as permanent premises by political parties and educational, cultural, social, sports or labour unions whether owned or held in usufruct; properties of Chaco War veterans provided they or their surviving spouse live thereon; properties owned by the Rural Welfare Institute and lands set aside for settlement by INDERT; and national parks and nature conservation reserves. The tax base is a fiscal valuation of real estate as set by the National Survey Service. Property values shall be increased until they match prices set by the market following the Consumer Price Index (IPC for its Spanish acronym), but increases shall not exceed 15% per year. In case of rural properties, any improvements or buildings shall not be computed in the tax base. The tax rate for the Property Tax is 1% of fiscal value per year, reduced by 50% in case of rural properties under five hectares, in areas utilised for small-scale farming, and rural properties with approved forestation/reforestation programmes, under Law 536/94. Other developments in the market In practice, there are types of real estate investment in which an individual or a company contracts a mortgage over the land with a financial institution for the construction of a corporate building or private neighbourhood. The building is later divided into horizontal properties (Condominiums) and private neighbourhoods into housing units. Later on, the main mortgage is divided into several ones for each separate unit, and the new occupiers become the financial institution’s debtors. It should be noted that it is necessary to obtain a building permit before starting any new construction, as well as payment of the planning and construction taxes. Such permits are issued by the municipal government and depending on the type of investment, an environmental licence may also be required. This is so, since the Environmental Law establishes that any individual or company that carries out industrial or agricultural activities must file an application before the SEAM (SecretarĂa del Medio Ambiente) to request legal environmental permits if the activity to be performed may have a potential impact on the environment.
GLI - Corporate Real Estate First Edition
77
www.globallegalinsights.com
Peroni Sosa Tellechea Burt & Narvaja
Paraguay
Ana Añazco Tel: +595 21 319 9100 / Email: ana.anazco@pstbn.com.py Born in Asunción, Paraguay, and licensed in 2002, Ana was educated at the Universidad Nacional de Asunción (Lawyer and Notary Public), the Universidad Nacional de Asunción (Post-graduate specialisation in University Teaching), the Universidad Autónoma de Asunción (Specialisation course in Taxation Management), Instituto de Fomación Tributaria y Empresarial (Specialisation course in Taxes and Proceedings), and Instituto de Formación Tributaria y Empresarial (Post-graduate Specialisation in Labour Law and Proceedings). Her areas of practice are: Taxation Law, Administrative Law, Foreign Investment. She speaks Spanish.
Juan Carlos Boggino Tel: +595 21 319 9100 / Email: juancarlos.boggino@pstbn.com.py Born in Asuncion, Paraguay, licensed since 1988. Education: Catholic University of Asuncion (Lawyer). Agent of Industrial and Intellectual Property. Counsellor for the Municipality of Asuncion; Consultant of the Inter-American Development Bank, the World Bank, U.S.A.I.D., the UNDP. Public and Tax Law, Contentious-Administrative. Languages: Spanish and English.
Paolo Doria Tel: +595 21 319 9100 / Email: paolo.doria@pstbn.com.py Born in Asuncion, Paraguay; licensed since 2013. Education: National University of Asunción (Lawyer, Honor Roll). Areas of Practice: Corporate and Commercial law, International law and Arbitration. Languages: Spanish and English.
Peroni Sosa Tellechea Burt & Narvaja Eulogio Estigarribia 4846, Asunción, Paraguay Tel: +595 21 319 9100 / Fax: +595 21 319 9103 GLI - Corporate Real Estate First Edition
78
www.globallegalinsights.com