Double Taxation Brazil-USA: How to Avoid Paying Tax Twice

Brazil and the United States do not have a comprehensive bilateral treaty to avoid double taxation of income. This absence surprises many people, considering the number of Brazilians who live, work, and invest in the US. In practice, this means there are no negotiated rules between the two governments defining which country has priority to tax a certain type of income. However, double taxation is not inevitable: both American and Brazilian legislation offer internal mechanisms that allow taxpayers to reduce the tax burden for those who pay taxes in both countries.

Understanding how these mechanisms work is essential for anyone who maintains financial ties in both territories. The difference between proper planning and ignoring these rules can mean thousands of dollars paid in excess each tax year.

Why There Is No Treaty

More than 60 countries have double taxation treaties with the United States, including neighbors like Canada and Mexico and trade partners such as the United Kingdom, Germany, and Japan. Brazil, however, has never concluded a comprehensive agreement of this type with the US. There have been negotiations over the decades, but disagreements over the taxation of dividends, royalties, and the structure of the Brazilian tax system have prevented the ratification of a full treaty.

What exists between the two countries are more limited agreements:

• TIEA (Tax Information Exchange Agreement, 2007): tax information exchange agreement
• Totalization Agreement (2018): social security agreement that avoids double contributions to INSS and Social Security
• FATCA IGA: intergovernmental agreement for automatic exchange of information on financial accounts

None of these replace an income tax treaty. They cover specific aspects but do not define rules of tax priority over income.

Tax Residency in the US and Brazil

The first step to understanding your obligations is to determine where you are a tax resident. Each country has its own rules, and it is possible to be considered a tax resident in both simultaneously.

In the United States, you are a tax resident if you meet one of two criteria:

• Green Card Test: have permanent residency (Green Card) at any time during the year
• Substantial Presence Test: be physically present in the US for at least 31 days in the current year and 183 days in the weighted three-year period (current year counts fully, previous year counts 1/3, two years prior counts 1/6)

As a US tax resident, all your worldwide income (including income in Brazil) is subject to taxation in the US.

In Brazil, tax residency is established by staying more than 183 days in a 12-month period or by maintaining a permanent link. Brazilians who move to the US must file the Communication of Definitive Departure from the Country and submit the Declaration of Definitive Departure to the Federal Revenue. Without these procedures, Brazil continues to consider the person as a tax resident, generating the obligation to declare worldwide income to the Brazilian tax authorities.

Foreign Tax Credit (FTC) in the US

The main American mechanism to avoid double taxation is the Foreign Tax Credit (FTC), provided for in Section 901 of the Internal Revenue Code. It allows the taxpayer to use income taxes paid to foreign governments as a credit against the tax owed in the US on the same income. The credit is claimed through Form 1116.

The FTC works regardless of a treaty. Even without a bilateral agreement, any qualified income tax paid to Brazil can be credited on the American return, as long as it meets the requirements:

• The tax must have been actually paid or accrued
• It must be an income tax (taxes on consumption, property, or transactions do not qualify)
• The credit is limited to the amount of US tax that would be owed on that foreign income

If the tax paid in Brazil is greater than the US tax on the same income, the excess can be carried back (1 year) or forward (10 years) in many cases. Alternatively, the taxpayer may choose to deduct foreign taxes instead of crediting them, using Schedule A, although the credit is more advantageous in most situations.

Credit in Brazil

Brazilian legislation also provides for the offsetting of taxes paid abroad. If you are still a tax resident in Brazil and paid income tax in the US, you can use the amount paid as a credit on your Brazilian return (DIRPF), provided you prove the payment and that the foreign tax is levied on income also taxable in Brazil.

The credit is limited to the Brazilian tax that would be owed on the same income. The Federal Revenue requires documentary proof (US tax return, payment receipts) and the correct conversion of amounts to reais at the Central Bank’s exchange rate on the date of payment.

Practical Scenarios

The application of credit mechanisms varies according to the type of income:

• Salaries in the US: primarily taxed in the US. If the taxpayer is still a Brazilian tax resident, they can use the Brazilian FTC to offset the tax already paid to the IRS
• Rental income from property in Brazil: taxed in Brazil at source (carnê-leão) and also reported on the US return. The Brazilian tax generates a credit via Form 1116 in the US
• Capital gains on Brazilian investments: taxed in Brazil and reported in the US. The FTC can be used, but pay attention to the asset classification and differences in calculation basis between the two countries
• Dividends from Brazilian companies: currently exempt in Brazil for individuals, but taxable in the US. In this case, there is no Brazilian tax to credit, and the full amount is taxed by the IRS

Common Mistakes to Avoid

The complexity of the tax situation between two countries without a treaty leads to frequent mistakes that can be costly:

• Not filing the Definitive Departure from Brazil: generates double obligation to declare worldwide income and can result in fines from the Brazilian Federal Revenue
• Confusing FTC with exemption: the credit does not eliminate the obligation to declare. Foreign income must be fully reported, and the credit is calculated separately
• Ignoring exchange rate differences: currency conversion must follow specific rules from the IRS (usually the Treasury’s annual average rate) and the Federal Revenue (Central Bank rate on the date of the taxable event)
• Forgetting ancillary obligations: in addition to income tax, there may be obligations such as FBAR, Form 8938 (FATCA), and Form 3520 (foreign trusts)

The absence of a treaty makes tax planning more complex, but not impossible. A CPA with experience in international taxation or a tax attorney familiar with both systems can help structure the return to maximize credits and avoid unnecessary exposure.

Victoria Harper

Editor-in-Chief

Meet the author

Leading journalism and editorial content at Visto n’ Visa, Victoria helps make immigration topics clear, trustworthy, and easy to understand. Her focus is on delivering useful, human, and relevant content for people exploring new paths abroad.