The Brazilian tax law contains a broad unilateral measure that grants foreign tax credits (FTCs) with respect to taxes paid abroad on profits of controlled companies or affiliates (subject to CFC taxation in Brazil), as well as on items of income that are subject to taxation in Brazil outside the CFC regime, such as income derived from services provided directly abroad and capital gains.

Specifically in the case of credits eligible for offsetting the income tax liability of a company domiciled in Brazil with respect to its controlled foreign companies (CFCs) or affiliates, the Brazilian tax law provides a very broad extent of taxes paid abroad, possibly to counterweigh the broad coverage of the Brazilian CFC rules (that covers not only abusive situations and passive income, but also active income in general).

As a result, the Brazilian investing company can claim a unilateral foreign tax credit for three different levels of taxation: (i) for the withholding tax imposed abroad on the distribution of profits (dividends), (ii) when the consolidation method of CFC taxation applies, also for the underlying corporate income tax paid by the invested company, and (iii) moreover, also the withholding tax charged by third countries can be claimed as FTC, in situations of income received through entities residing in low tax jurisdictions.

The definition of taxes levied abroad (and creditable in Brazil) covers any type of taxes charged in the foreign country over the profits or dividends, regardless of: (a) the type of tax involved and its official name, (b) the fact that it is charged by the federation or a unit of the federation of the country of origin, (c) and the mode of payment, which can be in cash or with transfer of other types of goods.

The foreign tax must be effectively paid abroad and, thus, no foreign tax credit is granted for a tax that was relieved abroad, in view of tax incentives of any kind.

The foreign tax credit is calculated at-the-top rate of the IRPJ applied on the taxable income of the corresponding year, since it is based on a calculation method that involves finding the difference between the IRPJ due for the year with and without the inclusion of the foreign income. The remaining credit can be utilized to offset the CSLL levied in Brazil.

A noteworthy feature of the Brazilian unilateral measures are the solutions for potential timing mismatches involving the payments of taxes abroad. Regarding the taxation of foreign profits, when the foreign tax is charged at a later point in time in comparison with the Brazilian taxes on the same income, the Brazilian company is entitled to a foreign tax credit in the year of payment of the foreign tax and can carryover such foreign tax credit to subsequent years. Furthermore, when the Brazilian company accrues losses in Brazil, the foreign tax credit can be carried over indefinitely to later years.

Lastly, there is no country limitation for the use of foreign tax credits. Particularly in the CFC rules, there are per-country limitations on the use of the consolidation method, but the utilization of foreign tax credits is not restricted whatsoever.

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