Tax losses generated in each period can offset the taxable income of the subsequent period, limited to 30% of the taxable income (i.e., for each BRL 1.00 of income, BRL 0.70 must be subject to taxation, regardless of the carrying value of losses). Despite this limitation, tax losses may be carried forward without limitation of time. However, Brazilian tax law does not allow retrospective offset of losses (carryback).

Non-operating tax losses derived from the disposal of fixed assets, corporate investments or intangibles may only be offset against non-operating profits, also subject to the 30% limit. The contrary, however, is admissible, i.e., tax losses derived from operating activities may be offset against non-operating profits.

Offsetting of profits and losses within the same tax period is not subject to any limitations, irrespective of the nature of the profits and losses.

An exception to this general rule was granted to the losses derived from rural activities, which are not subject to the 30% limitation when the profits to be offset are equally derived from rural activities.

Certain business restructurings or sales may result in the permanent cancellation of the carrying value of losses. When both a change in the corporate control and in the company's business activity occur, tax losses of prior periods will no longer be valid.

Tax losses will also be forfeited in cases of merger, amalgamation and spin-off. The company that is merged into another one loses its tax losses, but the recipient company does not forfeit its own losses. In cases of amalgamation, where two or more entities are combined into a new one, all amalgamated entities lose their tax losses. And in the case of spin-off, losses may be entirely lost when the net assets of spun-off entity are absorbed by the recipient entities, or losses may be partially lost when the spin-off only strips out a portion of the net equity of the spun-off entity.

Tax losses accrued abroad, by foreign controlled or affiliate companies, cannot be offset against profits accrued in Brazil. However, they can be offset indefinitely against the taxable income of such foreign controlled or affiliate companies. (see further details on the Brazilian CFC regime in Sec. 13.3.).

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