The drill started with fictitious enemy troops taking over an air base near the northern city of Taoyuan, followed by a joint operation of Taiwan's military and air force to reclaim control of the base.
"Taiwan's National Day coincides with a month of combat preparedness training demonstrations, so we are using this opportunity to invite President Abdo and President Tsai to learn more about the efficiency of Taiwan's military training," defence ministry spokesman Chen Chung-chi said.
China regards Taiwan as a wayward province and it has never renounced the use of force to bring the island back under its control. It has intensified military activity surrounding Taiwan in recent years.
Taiwan's President Tsai Ing-wen and her Paraguayan counterpart Mario Abdo Benitez both attended the drill, Abdo was on the island to attend the National Day celebrations set to take place the following day.
Taiwan's Defense Ministry spokesman Chen Chung-Chi told media that the drill demonstrated the combat readiness and efficacy of Taiwan's military and will also have a positive effect on future exchanges between Taiwan and Paraguay.