The Supreme Court of Justice of Paraguay has issued a decisive ruling that redefines the application of Paraguay’s Distribution Law. In this precedent-setting decision, the Court determined that the Distribution Law applies to a Paraguayan Company controlled by a foreign corporation stating that merely maintaining a local legal structure is not enough to avoid the law’s reach when the underlying economic reality reveals operational and managerial subordination to a foreign parent company.
Legal Implications for Foreign Companies
The Court identified that, although formally incorporated as a Paraguayan company, the business operated under the control of its foreign parent company, thereby avoiding the effects of the Distribution Law. The foreign company held 99% of the shares in the local entity, constituting direct control under Article 1074 of the Paraguayan Civil Code. The Court concluded that the local company acted as a façade to bypass the law, thereby justifying the piercing of the corporate veil.
Requirements to Apply the Distribution Law
The Court established two necessary elements for considering a Paraguayan company as foreign:
- A discrepancy between economic reality and formal corporate structure.
- That such a discrepancy seeks to avoid the application of the Distribution Law, constituting fraud against the law.
This ruling establishes that the Distribution Law will apply whenever these elements are present, especially in cases of unilateral termination of contractual or commercial relationships between foreign firms and Paraguayan companies. This precedent broadens the scope for invoking the protection of the Distribution Law and will significantly impact how distribution contracts are structured in Paraguay.