The Brazilian Federal Revenue Service (RFB) issued Interpretative Declaratory Act (ADI) RFB No. 1/2026, clarifying and restricting the manner in which taxes paid abroad by controlled or affiliated companies may be deducted in Brazil. The interpretation is binding on tax audits and has significant implications for multinational groups.
- Scope of the Deduction: Strict Link to Recognized Foreign Profits
The ADI establishes that foreign taxes paid may only be deducted from IRPJ and CSLL in proportion to the profits of the controlled or affiliated company that have been effectively recognized in the calculation of the Brazilian company’s taxable profit (lucro real), through the investment value adjustment.
Any interpretation allowing broad deductions disconnected from the foreign profits actually taxed in Brazil is expressly ruled out.
- Express Prohibitions
The act expressly prohibits:
- broad offsetting in the manner provided for in Article 26 of Law No. 9,430/1996;
- the use of foreign taxes paid to offset monthly estimated payments of IRPJ and CSLL;
- the generation of negative balances from excess foreign tax credits.
- Control of Excess Amounts: Part B of the LALUR and LACS
Article 3 of the ADI further restricts the use of accumulated amounts:
- the deduction may not exceed the IRPJ and CSLL due in the relevant period;
- any excess does not generate a negative balance and must be recorded and controlled in Part B of the LALUR and LACS.
With this, the Federal Revenue Service puts an end to the controversy surrounding the “indiscriminate” use of such credits to offset domestic or foreign results.
- Effects on Administrative Tax Litigation
The Administrative Council of Tax Appeals (CARF) had been issuing divergent decisions regarding the deduction of foreign taxes, including in relation to estimated payments. With the issuance of the ADI, a trend toward stricter enforcement and greater alignment of administrative rulings with the restrictive position is expected, increasing the risk of tax assessments and unfavorable decisions for taxpayers.
- Cash Flow and Compliance Impacts
In practice, multinational companies that previously used foreign taxes paid in prior years to settle IRPJ and CSLL liabilities in Brazil are likely to experience an immediate cash flow impact, as they will now be required to pay taxes that were previously offset.
The ADI also guides the actions of tax auditors, reinforcing the need for robust controls and adequate documentation.
- Relationship with the STF Judgment
It should be emphasized that the ADI does not anticipate nor directly interfere with the Supreme Federal Court’s judgment on the taxation of profits earned by foreign controlled companies (RE 870,214).
While the STF is addressing the timing of taxation of such profits, the ADI deals exclusively with the deductibility in Brazil of taxes paid abroad.