US LLC + Paraguay Tax Strategy 2026
How entrepreneurs combine a US LLC with Paraguay's territorial tax system to achieve a legal 0% effective tax rate on foreign-sourced income.
TL;DR — The "South-North Shield"
- Non-US entrepreneurs: Form a US LLC (Wyoming/NM) + Paraguay residency = 0% tax on foreign income. LLC is tax-neutral in the US; Paraguay doesn't tax foreign-sourced income.
- US citizens: FEIE excludes $132,900 (2026) + S-Corp election reduces SE tax. Not 0% but dramatically lower effective rate.
- Key requirement: LLC must not be "Engaged in Trade or Business in the US" (no US employees, no US office, owner not in US while working).
- Compliance: File Forms 5472/1120 annually ($25,000 penalty for non-filing). Establish genuine Paraguay tax residency with RUC.
How the Strategy Works
1. US LLC
Form a single-member LLC in Wyoming or New Mexico. Gives you US banking, Stripe, and credibility.
2. Paraguay Residency
Establish tax residency with cedula + RUC. Foreign income (your LLC revenue) is 0% taxed.
3. Result
Income flows: Foreign clients → US LLC → Paraguay resident. No entity taxes the foreign-sourced income.
The LLC must NOT be "Engaged in Trade or Business in the US." This means: no US employees, no US office or fixed place of business (virtual mailboxes are fine), and the owner must not be physically in the US while performing income-generating work.
Paraguay's Territorial Tax System
Under Law 6380/19, Paraguay only taxes income generated from activities, assets, or rights within its national territory. Foreign-sourced income is legally invisible to the tax authority (DNIT).
Tax-Free (Foreign-Sourced)
- • Remote work for foreign clients
- • SaaS revenue from international customers
- • Foreign stock dividends & investments
- • Overseas real estate income
- • Foreign pension & retirement income
- • Crypto gains from foreign exchanges
Taxed (Local Income Only)
- • Personal Income Tax (IRP): 8-10%
- • Corporate Tax (IRE): 10%
- • VAT/IVA: 10%
- • No wealth, inheritance, or gift taxes
- • No capital gains tax on foreign assets
Paraguay's "Triple 10": 10% corporate, 10% personal, 10% VAT. Government ruled out tax increases in early 2026.
| Residency Pathway | Financial Requirement | Duration | Min. Stay |
|---|---|---|---|
| Temporary Residency | Proof of ~$1,300/mo income | 2 years (renewable) | 1 visit/year |
| SUACE (Investor) | $70,000 over 10 years | Permanent (90 days) | 1 visit/3 years |
| Retirement/Pension | Monthly pension > $1,022 | Permanent | 1 visit/3 years |
Choosing Your LLC State
The state of formation affects costs, privacy, and annual obligations. Here's the 2026 comparison.
| State | Formation | Annual Fee | Privacy | Best For |
|---|---|---|---|---|
| Wyoming | $100 | $60 | High | Solo entrepreneurs (recommended) |
| New Mexico | $50 | $0 | High | Cost-conscious users |
| Delaware | $90 | $300+ | Moderate | VC-backed startups |
| Nevada | $425 | $350 | High (declining) | High-revenue entities |
For US Citizens: FEIE + S-Corp Strategy
US citizens can't achieve true 0% (citizenship-based taxation), but combining the FEIE with an S-Corp election dramatically reduces the total burden.
| 2026 Tax Marker | Amount | Change from 2025 |
|---|---|---|
| FEIE Maximum | $132,900 | +$2,900 |
| Standard Deduction (Single) | $16,100 | +$350 |
| Standard Deduction (Joint) | $32,200 | +$700 |
| Social Security Wage Base | $184,500 | +$8,400 |
| Foreign Housing Exclusion | ~$39,870 | Inflation adjusted |
FEIE Qualification
- Physical Presence Test: 330 full days outside the US in any 12-month period
- Bona Fide Residence: Full calendar year as a tax resident abroad (Paraguay cedula + RUC provide this proof)
- Joint filers: Both spouses can each exclude $132,900 = $265,800 total
S-Corp Election
- When: Earning over ~$80,000 annually
- How: Pay yourself a "reasonable salary" (subject to 15.3% SE tax)
- Benefit: Remaining profits distributed as dividends — exempt from SE tax
- Savings: $10,000-15,000/year on $180k income
Example: US Citizen Earning $180,000/year in Paraguay
Without Strategy (US resident)
- Federal income tax: ~$32,000
- SE tax: ~$27,000
- State tax (CA): ~$12,000
- Total: ~$71,000
With Paraguay + S-Corp
- FEIE excludes $132,900
- Federal on remaining $47,100: ~$6,000
- SE on reasonable salary (~$80k): ~$12,200
- Paraguay local tax: $0
- Total: ~$18,200 (saving ~$53,000)
Breaking State Tax Ties
Leaving the US doesn't automatically end state tax obligations. "Sticky" states like California and New York aggressively audit departed residents.
| State | Difficulty | Key Mechanism | Strategy |
|---|---|---|---|
| California | Hard | Closest Connections Test | 546-Day Safe Harbor or Clean Break |
| New York | Hard | Domicile vs. Residency | Permanent Place of Abode Test |
| Virginia | Medium | 183-Day Rule | Establish new domicile intent |
| Florida / Texas | None | No state income tax | Use as "launchpad" state |
California Clean Break Checklist
- Sell or long-term lease California real property
- Establish domicile in a tax-free state (FL, TX, WY) — driver's license, voter registration, bank accounts
- Close California bank accounts and cancel local memberships
- Update wills, trusts, and legal documents to reflect new domicile
- Keep return visits under 45 days/year for the 546-day safe harbor
Compliance: What You Must File
This strategy is legal but requires strict compliance. Missing these filings can result in severe penalties.
US LLC Filings (Non-US Owners)
- Form 5472 + pro-forma 1120: Annual informational return tracking LLC-owner transactions
- Penalty: $25,000 per violation for non-filing
- Due: April 15 (or with extension)
- FinCEN BOI: Domestic LLCs currently exempt (March 2025 interim rule)
US Citizen Filings
- Form 1040: Annual tax return (worldwide income)
- Form 2555: FEIE claim
- FBAR (FinCEN 114): If foreign accounts exceed $10,000 aggregate
- FATCA (Form 8938): Foreign assets over $200,000 (expat threshold)
Paraguay Obligations
- RUC registration: Tax ID from DNIT — essential for formalizing tax residency
- Economic substance: Maintain local address, phone number, utility accounts to demonstrate genuine residency
- CRS reporting: Paraguay is a CRS signatory — banks report resident account balances to other countries' tax authorities. Establish a clean break from your previous jurisdiction.
Paraguay + US LLC vs Alternatives
| Structure | Effective Tax | Annual Cost | Min. Stay |
|---|---|---|---|
| Paraguay + US LLC | 0% | $500–1,000 | 1 day/year |
| Estonia e-Residency | 20–22% on distributions | $3,000–4,000 | None |
| Dubai (UAE) | 0% | $5,000–10,000 | 1 day/6 months |
| UK LLP | Varies (FIG 4yr limit) | $2,000–5,000 | Varies |
Paraguay + US LLC offers the lowest cost and simplest maintenance. Dubai matches on tax but costs 5-10x more to maintain. Estonia taxes distributions. The UK's new FIG regime limits the tax-free window to just 4 years.
Virtual Infrastructure Setup
Running this strategy requires a virtual infrastructure that maintains your US business presence and Paraguay tax home.
US Virtual Mailbox
- Traveling Mailbox — best for high-volume users (cloud integration)
- iPostal1 — 3,500+ physical addresses
- US Global Mail — 2-4 hour scan turnaround
- Virtual Post Mail — includes registered agent service
Use a Florida address (no state income tax). Notarize USPS Form 1583 remotely via Notarize.com.
Banking Strategy
- US LLC banking: Mercury, Relay, or Wise Business (multi-currency, Stripe/PayPal compatible)
- Paraguay banking: Local account (Sudameris, Itaú, Atlas) for compliance — expensive for international transfers ($35-50/transfer)
- Personal: Wise or Schwab for low-cost international transfers
Keep primary liquidity in US fintech. Use Paraguay account for local expenses and RUC compliance.
Frequently Asked Questions
How does the US LLC + Paraguay tax strategy work?
Non-US entrepreneurs form a US LLC (typically in Wyoming or New Mexico) and establish tax residency in Paraguay. The LLC is a 'disregarded entity' for US tax purposes — since the owner isn't a US person and has no US-based income, the LLC pays $0 federal tax. Paraguay's territorial system then taxes only locally-sourced income, so foreign LLC income is 0% taxed there too. Result: legal 0% total tax.
Can US citizens use this strategy?
US citizens are taxed on worldwide income regardless of where they live. However, by combining Paraguay residency with the Foreign Earned Income Exclusion (FEIE), US citizens can exclude up to $132,900 (2026) from federal tax. An S-Corp election can further reduce the 15.3% self-employment tax. The strategy still saves significant money but doesn't achieve true 0%.
Which US state is best for forming an LLC?
Wyoming is the top choice for most entrepreneurs: $100 formation, $60/year renewal, high privacy (no names on public record), and no state income tax. New Mexico is cheapest ($50 formation, $0 annual), and Delaware is standard for VC-backed startups ($90 formation but $300+/year). Avoid Nevada ($425+ formation, declining privacy benefits).
What is the FEIE exclusion amount for 2026?
The Foreign Earned Income Exclusion for 2026 is $132,900 (up from $130,000 in 2025). If both spouses qualify, the total exclusion reaches $265,800. You must pass the Physical Presence Test (330 days outside US in any 12-month period) or the Bona Fide Residence Test. The Foreign Housing Exclusion can add approximately $39,870 in additional deductions.
What forms do foreign-owned US LLCs need to file?
Foreign-owned single-member LLCs must file Form 5472 and a pro-forma Form 1120 annually with the IRS, even if no tax is owed. These are informational returns tracking transactions between the LLC and its owner. The penalty for non-filing or inaccurate filing is $25,000 per violation in 2026. This is the most critical compliance requirement.
What is the S-Corp election and how does it reduce taxes?
US citizens earning over ~$80,000 can elect S-Corp status for their LLC. As an employee-shareholder, you pay yourself a 'reasonable salary' (subject to 15.3% SE tax) but distribute remaining profits as dividends (exempt from SE tax). For someone earning $180,000, this could save $10,000-15,000 annually in self-employment taxes.
How do I exit a high-tax state like California?
California uses a 'closest connections' test and aggressively audits departed residents. The safest approach is the 546-Day Safe Harbor: be outside California for 546+ consecutive days under an employment contract, with return visits under 45 days/year. Alternatively, do a 'clean break': sell/lease property, establish domicile in a tax-free state (Florida/Texas), close CA bank accounts, and update all legal documents.
Does Paraguay have a totalization agreement with the US?
No. This means US citizens in Paraguay cannot opt out of US Social Security and Medicare taxes (15.3% self-employment tax). The FEIE does not cover these taxes. The S-Corp election is the primary mitigation strategy, reducing the amount of income subject to SE tax by splitting it between salary and dividends.
Is this tax strategy legal?
Yes. This strategy uses established provisions of the US tax code (pass-through taxation, FEIE, S-Corp elections) and Paraguay's codified territorial tax system (Law 6380/19). It requires strict compliance: annual LLC filings (Forms 5472/1120), FBAR/FATCA reporting, maintaining non-ETBUS status, and establishing genuine Paraguay tax residency with a RUC. Tax evasion is illegal; tax optimization through legal structures is not.
What is the FinCEN BOI reporting exemption?
In March 2025, FinCEN issued an interim rule exempting domestic US entities (including LLCs formed in any US state) from Beneficial Ownership Information (BOI) reporting under the Corporate Transparency Act. While foreign entities registered in the US must still file, domestic LLCs owned by non-US persons are largely shielded from this reporting requirement as of early 2026.
Ready to Set Up Your Structure?
Start with calculating your Paraguay residency costs, then explore our full tax and residency guides.
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