Tax-free in Paraguay? The German side of the calculation

Paraguay's territorial principle: 0% on foreign income, but no free pass

Paraguay taxes on the territorial principle. Income whose source lies outside Paraguay is not taxed there; only income earned within Paraguay falls under the local income tax at a maximum of 10%. From Paraguay's point of view, your German pension, your German rental income or a gain from German shares are therefore untaxed.

The catch lies on the other side. Because Germany and Paraguay have not concluded a comprehensive double taxation treaty, there is also no mechanism that limits Germany's reach into German sources of income. A treaty normally allocates which state may tax which income. Without a treaty, the rule is simply: what stems from a German source remains taxable in Germany, and Paraguay's 0% changes nothing about that.

Extended limited tax liability: the 10-year tail (Section 2 AStG)

The extended limited tax liability under Section 2 of the Foreign Tax Act (AStG) applies to German nationals who were subject to unlimited tax liability in at least 5 of the last 10 years, move to a low-tax country and keep substantial economic domestic interests. If all three conditions are met, Germany taxes, for the year of departure and the following 10 years, not only the classically limited-taxable income but, in extended form, all non-foreign income, and does so subject to the progression clause (Progressionsvorbehalt).

Paraguay regularly counts as a low-tax country in this sense: the low-tax test applies if the income-tax burden on a comparative income of 77,000 EUR lies more than a third below the German level, or if a preferential tax regime exists. With a territorial system and an income tax of roughly 10%, Paraguay typically meets this in the assessment of tax practitioners. That is a professional assessment in the individual case, not an official country list, and rebuttable in the individual case.

"Substantial economic domestic interests" are, for example, a German permanent establishment or shareholdings, German income of more than 30% of total income or above 62,000 EUR, as well as German assets of over 30% or more than 154,000 EUR. Ongoing German rental income can also establish such a domestic interest. There is a de minimis threshold: the extended taxation only applies if the affected income exceeds 16,500 EUR per year.

Exit tax on GmbH shares from 1% (Section 6 AStG)

The exit tax (Wegzugsbesteuerung) under Section 6 AStG applies to people who were subject to unlimited tax liability in at least 7 of the last 12 years and hold at least 1% in a corporation as private assets (GmbH, AG, also foreign companies, within the meaning of Section 17 EStG). On departure, the law deems these shares to have been sold at fair market value. Tax on the fictitious gain determined this way falls due immediately, even though you sold nothing and received not a single euro.

On application, the tax can be paid in 7 equal annual installments, as a rule interest-free, but typically only against the provision of security, which in practice is the hardest part. There is a returnee rule: if the absence is only temporary and you return within 7 years (extendable by 5 to a total of 12 years), the tax claim lapses retroactively, provided the shares were not sold and distributions did not exceed 25% of the share value.

New since 2025: exit tax also on ETF and fund shares

Until the end of 2024, pure securities investors without a company shareholding could usually emigrate tax-free. That has changed. With the Annual Tax Act 2024, the exit tax was extended as of January 1, 2025 to shares in investment funds and ETFs held as private assets (Sections 19(3), 49 InvStG). It applies if you either hold at least 1% of the shares of a fund or reach acquisition costs of at least 500,000 EUR per fund.

The mechanics match those for corporate shares: on departure, a sale of the fund gain is deemed to have occurred and taxed, and the rules on installment payment and return apply accordingly. As a result, the exit tax now also captures wealthy ETF investors who could previously emigrate without a German tax burden. Anyone who bundles a large portfolio into a few funds should know the 500,000 EUR limit per fund before planning the deregistration.

German rental income: limited tax liability from the first euro (Section 49 EStG)

If you keep a rented property in Germany after departure, you remain subject to limited tax liability in Germany on the rental income (Section 49 EStG). The decisive difference from unlimited tax liability: under limited tax liability, the basic tax-free allowance (2025: 12,096 EUR) is not granted. Your German rental income is therefore taxed from the first euro, and the annual German tax return remains mandatory.

In addition, ongoing rental income counts as a "substantial economic domestic interest" and can thereby trigger the extended limited tax liability under Section 2 AStG (see above). German rental property and German tax reach are therefore connected: the property not only keeps you subject to tax on an ongoing basis, it can also help trigger the 10-year tail of Section 2 AStG.

What this means for the process

For most emigrants without a company shareholding, without large fund assets and without a German rental property, the departure is tax-wise manageable: no treaty problem, no exit tax, at most the question of limited tax liability on remaining German income. The four critical constellations are GmbH shares, large fund positions, a German rental property and the combination of low-tax country and domestic interests.

The order matters: the exit tax and the low-tax test attach to the point in time of departure. Anyone who only clarifies the tax side after deregistration has already given away the decisive lever. That is why the tax review comes before deregistration, not afterwards. Our Business Complete package includes an honest tax onboarding session on the territorial principle; it explains the mechanics and the limits, but it does not replace individual advice from a tax adviser.