Paddon, who led for the day and a-half, finished 3:05.4 behind Sebastien Ogier, who claimed his fourth win in six events.
Paddon and co-driver John Kennard finished strong by winning stage 20 on the final day, to take their stage wins to five.
The Hyundai driver said he was very happy with the result, especially after thinking his rally was over after suffering a gearbox problem on day two.
"To come home and get second place is an amazing result. A lot more than we expected from the weekend. Credit to the team and everyone involved who have helped us progress and improve coming into this rally," the 28-year-old said.
"It's obviously been very challenging since yesterday lunch time but after the problem it was just about nursing the car through and bringing home the result.
"It gives us a lot of confidence heading into rallies that we enjoy more and suit us better."
The previous best result outside New Zealand by a Kiwi crew was Possum Bourne and Rodger Freeth who were fourth at Rally Australia in 1990.
Paddon's best finish to date was fifth in Sweden earlier this year.
The second placing moves Paddon to ninth on the standings with 32 points. Frenchman Ogier sits clear ahead of the pack with 133 points, almost double that of second placed Mads Ostberg on 67.
