Thinking about moving to Paraguay for the tax benefits? Paraguay’s territorial tax system can be extremely attractive — but if you’re a U.S. citizen, the “move to Paraguay and pay 0% tax” advice online leaves out some very important details.
In this video, Stephen Morris, CPA, MBT, CCIM breaks down how Paraguay taxes foreign income, why U.S. citizens are still taxed on worldwide income, and what real estate investors, digital nomads, and business owners need to know before making the move.
We cover:
Paraguay’s territorial tax system
Why U.S. citizens still owe U.S. tax abroad
Foreign Earned Income Exclusion basics
U.S. real estate income while living overseas
FBAR and foreign bank account reporting
Foreign corporations and Form 5471
Why international tax planning needs structure — not TikTok advice
If you’re considering Paraguay residency, foreign real estate, or an international tax strategy, get proper tax advice before moving money or setting up entities.
Contact Advise RE: contact@advisere.tax
TRANSCRIPT:
Hello, hello, Stephen Morris here with AdviseRE. Today, we are going to set our sights more globally and head down south—specifically to South America, to the lovely country of Paraguay.
Why do we love Paraguay so much? Well, there is a whole number of reasons. The people are amazing, the food is fantastic (especially if you love steak), and we also love the fact that it has a very low tax rate. It is almost zero for most people, especially folks who are earning money internationally.
Let’s talk about what this means. What could you do to perhaps take advantage of Paraguayan tax benefits, and how does it affect your real estate holdings if you have them here in the United States?
The Paraguayan Tax System: Territorial Taxation
Let’s do a brief primer on what is going on with Paraguayan taxes. Paraguay has a territorial tax system. What that generally means is they tax you only on income that is sourced within Paraguay—from Paraguayan businesses, from Paraguayan employers, or Paraguayan real estate. All that good stuff is going to be taxed at no more than 10%.
If you earn any income outside of Paraguay while living in Paraguay, they don’t want a piece of it. I know it’s hard to imagine being a US citizen, but if you have French income and you have some real estate over in the United States, Paraguay is going to tax you at a rate of 0%.
The US System: Worldwide Taxation
So, why don’t we all move there tomorrow? Well, I wish it were only so easy. Unfortunately, the US has a different tax system than Paraguay. We have a tax system that is based on worldwide taxable income, and we are one of only two countries in the world that has this type of system in place (the other one being Eritrea, located in Africa).
The way that worldwide tax system works is no matter where you live in the world, the US has the right to tax you on that income. So, if you’re living in Antarctica and you’re making money studying penguins, the US still wants a cut of that penguin income, even though Antarctica isn’t a country and they aren’t taxing it there at all.
The Digital Nomad Myth
How does this play into all the advice you may have seen online, on YouTube, Instagram, and other social media platforms about how moving to Paraguay means you automatically pay zero taxes? It’s not quite the case. Let’s get into some of the nuances.
As I mentioned, the US is going to be taxing you no matter where you make money around the world. Let’s say, for example, you have a business that’s based in the United States. You’re clearing $1 million a year, and you decide to work remotely from Paraguay. Great idea—the cost of living is substantially lower than the United States, and you’re going to be enjoying the Paraguayan 0% tax rate because that income is being sourced from outside the country. However, the US is still going to want their cut, and they’re going to tax you at an upwards rate of 37%. That is unavoidable.
There are ways to structure your business dealings to potentially lower your tax rate. If you unlock the international tax laws, you could potentially source some income to Paraguay through a corporation, be an employee of that corporation, and up to $130,000 a year would be excluded under the Foreign Earned Income Exclusion (FEIE) at IRC Section 911. However, that takes a lot of heavy restructuring. If you’re just a digital nomad who decides to move there and live there for six to eight months out of the year (or even up to 10 or 11 months), you are not going to get this particular tax outcome. It’s going to be no different than had you been staying in the States.
US Real Estate Holdings
Furthermore, if you have real estate that’s within the United States, it is going to be taxed regardless of where you live. If you have an apartment portfolio in California and you decide that now is the best time to take a year off, do a sabbatical, and reflect on life, all the income that you earn in California from the apartments will not be taxable in Paraguay—wonderful! However, those will still be taxable in the United States at the federal income tax rate. And, because the properties are situated in California, the state is still going to want their cut as well.
International Tax Traps: FBAR and Form 5471
I should also mention some other international tax rules. If you decide to set up a bank account in Paraguay, or in any country outside of the US, strict rules apply. If at any point during the year the bank account balance hits $10,000—and I mean even for a second, let’s say $10,000 came in and $10,000 came out—you’re going to have to file FinCEN Form 114, commonly known as the FBAR. It is basically a report showing what your bank account is, the account number, and what the maximum balance was during the year. Failure to file this report will result in a $10,000 penalty. You heard me: $10,000 just for failing to file a report that tells the government where your offshore cash is.
Furthermore, if you take a step further and really decide to make this change—let’s say you want to start building real estate assets or start developing a life in Paraguay—you have to take into account that if you set up a corporation within that country, you need to file Form 5471. That is essentially a very long, very tedious report which basically says, “Here’s my corporation, here’s how much money I’m making from it.” There is a whole slew of information and different sub-schedules that go into it.
That form alone makes some people want to renounce their US citizenship. I’m not even joking with you. Failing to file that form (or filing an incomplete one) can trigger a massive penalty of $10,000 to $25,000+ per year. I want you to be aware of it—not to scare you, but so you are prepared. I don’t want you dealing with an IRS audit where the auditor asks what you did while living outside the country, and you say, “I was running a business over there, it has nothing to do with you guys.” It absolutely does require the 5471.
To make matters worse, failing to file Form 5471 keeps the statute of limitations on your tax return open forever. You don’t get the standard three-year protection period. It’s a big problem, and it is entirely worth the time to hire an international tax CPA who knows how to file these forms and keep you compliant so you don’t face crazy penalties years down the road. They aren’t going to tell you the year you missed it; they will audit you a few years later and hit you with penalties and interest.
Final Thoughts
I would say that moving down there is fantastic for a cost-of-living adjustment. If you decide to develop businesses down there and retain your US citizenship, that’s fine. I’d recommend generating or sourcing your income locally to at least take advantage of the Foreign Earned Income Exclusion. Those types of strategies are good.
But please pay no heed to the myth that says, “As a US citizen, I’m moving to this country and avoiding all taxes because I’m no longer in the US.” That is not going to fly as a tax strategy. You’re going to be very sad if you’re audited and they find out you didn’t report income just because you were physically located outside of the country.
Otherwise, I highly recommend it. Getting residency in Paraguay at the time of this video is actually relatively easy. It is a fantastic country with a lot of promise. Real estate development is booming—it has practically turned into a mini-Miami down in South America. I go several times a year now, building lots of connections and enjoying the food and the people. Overall, it’s just a wonderful place to be, and I couldn’t recommend it more.
If this is of interest to you, if you would like to maybe go down there at some point and check it out, or if you’re interested in investing down there and want to know how those investments interact with international and US tax rules, feel free to reach out to us here. We’ll be more than happy to assist you.
Thanks so much for watching!
