2009 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
February 2009
Report

Openness to Foreign Investment

The Government of Paraguay encourages foreign investment. Paraguay guarantees equal treatment of foreign investors, and most sectors are open for private investment. There are no formal restrictions on foreign investment in Paraguay. National treatment of foreign investors is guaranteed by law 117/91, as is full repatriation of capital and profits by law 60/90. The fiscal incentive package includes an exemption from certain taxes on the establishment of operations and an important reduction of customs duties on imports of capital goods.

Historically, Paraguay's tax burden has been the lowest in Mercosur. The basic corporate income tax rate is currently ten (10) percent, and there is a ten (10) percent value added tax on most goods and services.

Government efforts to attract foreign investment through privatization have progressed slowly because of political opposition. Four state-owned companies have been privatized in the past: the airlines in 1994; the state-owned liquor producer, bought by its workers in 1995; the state merchant marine, split into five separate entities, three of which were sold in 1996; and the state steel company, sold in late 1997. The GOP refinanced the liquor producer after privatization and now the state is again the majority shareholder. Political realities render further outright privatizations unlikely in the medium-term. The large state-run companies most attractive to foreign buyers (such as the telecom and electricity distribution companies) employ thousands and are outlets for political patronage. The telephone and electricity companies were in the process of being privatized when the government suspended their privatization in June 2002, bowing to political pressure. Activities that are reserved for state monopolies include oil, cement, electricity, water, and telecommunications.

Paraguay has a legal framework for maquila operations – businesses that process goods or services for export. The value-added in the process is subject to a tax rate of one (1) percent. In most cases, inputs are allowed to enter Paraguay tax free, and up to ten (10) percent of production is allowed for local consumption, albeit after paying import taxes and duties. Maquila operations are not restricted geographically or by industry. Existing operations include software design and other services as well as manufacturing. The Ministry of Industry and Commerce has a special office for promoting maquila investments: http://www.maquila.gov.py. In 2005, a law took effect that prohibits citizens of Brazil, Bolivia and Argentina from owning land within 50 kilometers of Paraguay’s borders. The judicial sector is a weak point in the investment climate. Many investors find it difficult to adequately enforce contracts due to judicial inefficiency and corruption, and are frustrated by lengthy bureaucratic procedures. The World Bank's 2009 "Doing Business" Index ranks Paraguay 115 out of 181 countries for the ease of doing business.

Conversion and Transfer Policies

There are no restrictions on the conversion or transfer of foreign currency. In late 1994, the government permitted foreign currency contracts, legitimizing a long-standing practice. Law 60/90 permits the repatriation of capital and profits. There are no controls on foreign exchange transactions, apart from reporting requirements to banking authorities for transactions in excess of US$ 10 thousand. The free floating exchange rate on January 15, 2009, was 4,870-4,970 guaranies to the U.S. dollar.

Expropriation and Compensation

Private property has historically been respected in Paraguay as a fundamental right. There have been several cases, though, of expropriations of land without prompt and fair compensation over the past few years. In 2005, Paraguay’s Congress approved the expropriation of a large chunk of foreign-owned land in Paraguay’s Chaco region. The Paraguayan government compensated the landowners after lengthy negotiations.

Over the course of 2008, groups of “landless” peasants, calling on the government to give them land for farming, carried out a series of “land invasions,” occupying large farms owned in some cases by Brazilians or Paraguayans of Brazilian descent. In January 2009, the new government announced its agrarian reform program and authorized the military to support the police in removing the peasants from some of the “invaded” properties.

Dispute Settlement

Law 117/91 guarantees national treatment for foreign investors. This law allows international arbitration for the resolution of disputes between foreign investors and the government. Paraguay became a member of the International Center for the Settlement of Investment Disputes (ICSID -- also known as the Washington Convention), http://icsid.worldbank.org/ICSID/Index.jsp, in October 1982 (Law 944/82). The InterAmerican Development Bank financed the creation of a center for alternative dispute resolution.

Improvements to the legal system have been incremental at best. There is one Supreme Court vacancy, and judicial reform, as well and the appointment of new Supreme Court judges is highly politicized. A Council of Magistrates appoints appellate and lower court justices as well as prosecutors and public defense attorneys.

In late 2008, former President Duarte Frutos signed a modification to the Penal Code into law, which included tougher provisions on money laundering, trafficking in persons, and intellectual property rights. The new code becomes effective July 16, 2009. However, current criminal procedures such as time limits on investigations and disclosure requirements hinder the prosecution of complex crimes. Both the commercial and civil codes cover bankruptcy and give priority for claims first to employees, then to the state, and finally to private creditors.

While efforts are underway to strengthen the rule of law and make the judicial process more transparent, unbiased and fair, corruption, patronage and bias are features of the current judicial system.

Performance Requirements and Incentives

A number of fiscal incentives (mainly tax breaks), contained in law 60/90, are available to investors. Voting board members of any company incorporated in Paraguay must have legal residence. This has posed some obstacles to potential foreign investors.

Another potential roadblock is Paraguay's law protecting agents and distributors (law 194/93). The law features strong penalties for severing relations with a local distributor or agent. This has on occasion led to expensive out-of-court settlements, since just cause must be proved for severing the relationship and indemnification must be paid. However, courts have ruled against distributors in a few cases when just cause has been established.

Right to Private Ownership and Establishment

Foreign and domestic private entities may establish and own business enterprises. Foreign businesses do not need to be associated with Paraguayan nationals for investment purposes. There is no restriction on repatriation of capital and profits. Private entities may freely establish, acquire, and dispose of business interests.

Protection of Property Rights

The 1992 constitution guarantees the right of private property ownership. While it is common to use property as security for loans, the lack of consistent property surveys and registries often makes it impossible to foreclose. Acquiring title documents for land can take two years or more. A World Bank project aimed at standardizing registration in the department (state) of Alto Parana concluded in year 2000, but only covered a small area.

Intellectual Property Rights:

Paraguay is recognized as a regional distribution and manufacturing center for counterfeit merchandise. The re-export trade to Brazil, catering to consumer demand for electronics, CDs/DVDs, and designer clothing/footwear is rife with piracy. Based on the seriousness of industry concerns, Paraguay was designated as a Priority Foreign Country in January 1998 by the U.S. Trade Representative. In November 1998, Paraguay and the United States signed a Memorandum of Understanding (MOU) detailing a plant to combat IPR crime and to protect intellectual property rights, and placing Paraguay under Section 306 Monitoring. That MOU expired, but the United States and Paraguay signed additional MOUs in 2004, 2006, and 2007.

Under the new penal code, IPR offenders will face stiffer penalties (two to eight years jail time and/or fines) and, a fraudulent imitation of a product is separately recognized as an offense. Paraguay ratified all the Uruguay Round accords, including TRIPS, in late 1994 and has ratified two WIPO copyright treaties.

In recent years, seizures and destruction of counterfeit and pirated goods have increased markedly and the government has cooperated closely with industry groups to help fight piracy and counterfeiting. In addition, measures by Brazil to control the trafficking of pirated and contraband goods coming in from Paraguay are having a significant positive effect. Nevertheless, IPR crime remains a major source of illicit income in Paraguay, particularly in Ciudad del Este, the Paraguayan city on the border with Brazil and Argentina.

Paraguay does not have a framework for safeguarding confidential data associated with regulatory approvals. As a result, some companies have decided not to market certain products, such as the latest pharmaceuticals, in Paraguay.

Transparency of Regulatory System

The Civil Code and Law 1.034/83 regulate business and industrial activities in the country. Under the existing framework, the Ministry of Industry and Commerce (http://www.mic.gov.py) is charged with overall industrial policy coordination; the Ministry of Finance (http://www.hacienda.gov.py) handles tax and fiscal policy; and the Central Bank (http://www.bcp.gov.py) is the principal coordinator of monetary policy.

All businesses need to be registered in three places: the municipality for a business permit, the Ministry of Industry and Commerce unit at the central civil registry, and the Finance Ministry for tax purposes. The registration procedure involved multiple steps which took over three months to complete. However, in late 2006, with USG assistance the government instituted a coordinated system among all the offices involved (http://www.suae.gov.py), reducing the number of steps and the time to less than one month, also lowering the cost to the registrants from US$ 840.00 to approximately US$ 250.00.

The Ministry of Health (http://www.inan.gov.py) and the Municipality of Asuncion (http://www.mca.gov.py) both regulate food safety issues, which can include processed food imports and imports for fast food franchises.

Regulatory agencies for sectors such as telecommunications, energy, and potable water are relatively new or in the process of being established. CONATEL, the telephone regulatory agency, (http://www.conatel.gov.py), is only nominally independent. A regulatory framework for potable water has been established, but the energy sector shows little indication of establishing a regulatory framework in the near future.

Draft laws are often introduced into Congress by special interest groups with few opportunities for public comment. Public participation often requires direct lobbying and press campaigns.

Efficient Capital Markets and Portfolio Investment

Paraguay has a relatively small Asuncion capital market that began operating in 1993. In 2004 the market handled US$ 15.16 million in transactions. In 2005 it reached US$ 24.10 million and in 2006 US$ 55.58 million. Transaction volumes reached US$ 44 million in 2007 and US$ 79.60 million in 2008.

There are currently 81 companies traded. The high cost of capital makes the market an attractive alternative, but the fear by family enterprises of losing control has tempered enthusiasm for public offerings. Most of the exchange’s volume occurs in fixed income securities.

Credit is available through numerous sources. High collateral requirements are generally imposed. The banking system is generally sound, but remains overly liquid.

As of July 2007, the top eight private banks, of the twelve operating in the market, had 86.8 percent of the US$ 3,541.6 million total assets of the local private banking system. Non-performing loans totaled 1.7 percent of total loans in 2007.

Independent audits of financial statements are not legally mandatory. Paraguay’s institute of accountants has adopted the international audit guidelines issued by the federation of accountants.

Political Violence

Paraguay has not traditionally been affected by political violence. While Paraguay has been spared the large number of kidnappings that occur in neighboring Latin American countries, the 2005 high-profile kidnapping and murder of former Paraguayan President Cubas’ daughter increased concern over the security situation in the country. Violent demonstrations broke out in late 2006 in response to an unpopular, controversial court decision involving defendants implicated in the 2004 supermarket fire that caused almost 400 deaths. Late 2008 was characterized by civil protests in the form of peasant land invasions.

Corruption

One of the most serious problems facing Paraguay is the legacy of institutional corruption after decades of dictatorship. Paraguay ranks 138th out of 179 countries in Transparency International's Corruption Perceptions Index for 2008. There are mechanisms to combat corruption, such as the comptroller’s office, but investigations are often politicized and seldom completed. The slow pace of judicial reform and continued impunity are barriers to development.

The government has taken several important steps, including the creation of a transparent internet based government procurement system; the reform of the process for selecting prosecutors and judges; the appointment of respected apolitical officials to some key posts; and increased civil society input and oversight. However, weak state institutions, the lack of a rational civil service system, and uneven political will are impediments to reform.

Bribery is a crime in Paraguay, but one that is rarely prosecuted. Paraguay has signed the UN Convention against Corruption, but is not a party to the OECD Convention on Combating Bribery.

Bilateral Investment Agreements

Paraguay has bilateral investment agreements or treaties with the following countries: Argentina, Brazil, Chile, France, South Africa, Taiwan, United Kingdom, and Uruguay.

Paraguay has signed other investment agreements with Austria, Benelux, Costa Rica, Ecuador, El Salvador, Germany, Hungary, Korea, Netherlands, Peru, Romania, Spain, Switzerland, and Venezuela.

Paraguay has signed the following agreements with the United States: Agreement relating to investment guaranties (OPIC), 1955; Agreement relating to investment guaranties (OPIC), 1992. A complete listing of bilateral agreements can be found via the following link: http://www.state.gov/documents/treaties.

Paraguay and the U.S. discuss investment and trade priorities in the annual Joint Commission on Trade and Investment (JCTI). JCTI is bilateral U.S.-Paraguay mechanism to advance common investment and trade objectives.

OPIC and Other Investment Insurance Programs

The United States and Paraguay signed a 1992 investment guaranties agreement, allowing OPIC, http://www.opic.gov, to begin full operations in Paraguay. OPIC has financed telecommunications and forestry projects, and is now involved in several transactions with local banks to expand access to credit for SMEs. OPIC is also looking to support renewable energy projects in Paraguay.

Paraguay is a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA), http://www.miga.org, which offers foreign investment guarantees against non-commercial risks, such as inconvertibility of foreign currency, discriminatory expropriations, contract non-fulfillment, civil uprisings and war. Paraguay also ratified the agreement creating the International Center for the Settlement of Investment Disputes (ICSID), http://icsid.worldbank.org/ICSID/Index.jsp, between states and nationals, and nationals of other states, in order to access a mechanism of international arbitration and conciliation.

Labor

As of December 2007, the labor force was estimated at 4.73 million workers. The Paraguayan labor force data includes persons ten years of age and older. About 100,000 people enter the workforce each year. Total open unemployment for 2007 officially stood at 5.6 percent and total underemployment for 2007 stood at 26.5 percent.

With a population growth rate above two percent annually, a key challenge is the creation of enough jobs to meet increasing demand. While the supply of workers is relatively large and growing, a weak education system limits the supply of well-educated workers. Local businesspersons cite the lack of a skilled work force as a major obstacle to growth.

Foreign-Trade Zones/Free Ports

Paraguay is a landlocked country with no seaports. However, it has been granted free trade ports and warehouses in neighboring countries' seaports for the reception, storage, handling, and transshipment of merchandise transported to and from Paraguay.

About three-fourths of goods are transported by barge on the large river system that connects Paraguay with Buenos Aires (Argentina) and Montevideo (Uruguay). The Paraguayan port authority manages the free trade ports and warehouses. Paraguayan free trade ports are located in Argentina (Buenos Aires and Rosario); Brazil (Paranagua, Santos, and Rio Grande do Sul); Chile (Antofagasta and Mejillones); and Uruguay (Montevideo and Nueva Palmira). To date, the three Brazilian free trade ports, Nueva Palmira in Uruguay, and the two Chilean free trade ports are in full operation.

Foreign Direct Investment Statistics

As of March 2007, the total stock of foreign direct investment in Paraguay stood at US$ 1,602.52 million, up from US$ 1,564.3 million in December 2006, and US$ 1,126.46 million in 2005, according to Central Bank statistics. The United States was the largest foreign investor in Paraguay, with US$ 616.50 million, followed by Brazil with US$ 230.85 million, and the Netherlands with US$ 130.14 million.

Large U.S. investments include about US$ 200 million by Millicom, a mobile phone operator with shares listed on the NASDAQ exchange, and US$ 37 million invested by Mastec to develop another wireless communication network (this network was later sold to Hutchison Communications Ltd. of Hong Kong, and resold in 2005 to America Movil, of Mexico).

Other investments include the US$ 25 million purchase of a grain crushing facility by Cargill; approximately US$ 60 million invested in a river transportation company; US$ 27 million invested by Exxon; and several million dollars worth of investments by fast food companies (Pizza Hut, Burger King, McDonald's).

From January to November 2007, Paraguay’s Ministry of Industry and Commerce approved US$ 128.4 million in investment projects falling under special law 60/90, which establishes tax exemptions for new investments. The 2007 projects were split between domestic capital (64.26 percent) and foreign capital (35.74 percent). Sectors to benefit from approved investments are the industrial sector (principally the chemical product and food products industries) with 53.79 percent, followed by the services sector with 44.47 percent of total investments.

Web Resources

Business Software Alliance: http://www.bsa.org

OPIC--Overseas Private Investment Corporation: http://www.opic.gov

Paraguayan-American Chamber of Commerce: http://www.pamcham.com.py

Paraguayan Census and Statistics Bureau: http://www.dgeec.gov.py

Paraguayan Central Bank: http://www.bcp.gov.py

Paraguayan government offices link: http://www.paraguaygobierno.gov.py

Paraguayan Ministry of Finance: http://www.hacienda.gov.py

Paraguayan Ministry of Industry and Commerce: http://www.mic.gov.py

Reference site for Paraguayan laws: http://www.leyes.com.py

U.S. Trade Representative: http://www.ustr.gov


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