Brazil US Tax Treaty: Is It in Effect?
The US-Brazil tax treaty is not in force. Understand the current rules for cross-border income and how they differ from the proposed agreement.
Tax treaties are agreements between countries that prevent double taxation by setting rules for how income is taxed. Although the United States and Brazil signed a comprehensive income tax treaty, it is not currently in effect. This means individuals and businesses operating in both countries must navigate the domestic tax laws of each nation to address potential tax overlaps. The primary recourse for mitigating double taxation for U.S. persons falls to provisions within U.S. domestic law.
Current Status of the Tax Treaty
The most recent tax treaty agreement between the United States and Brazil has been signed, but it is not legally binding until ratified by the U.S. Senate. As of early 2025, the Senate has not approved the agreement, leaving it unenforceable. This is not the first attempt; a treaty signed in 1967 also failed to gain Senate ratification, highlighting the political complexities involved. Until the current treaty is ratified, taxpayers cannot claim any of its proposed benefits, and the tax relationship between the countries is governed solely by their respective domestic laws.
Navigating Taxes Without a Ratified Treaty
Without a ratified treaty, the primary tool for U.S. taxpayers to avoid double taxation on income from Brazil is the Foreign Tax Credit (FTC). This U.S. Internal Revenue Code provision allows taxpayers to reduce their U.S. income tax liability by the amount of income taxes paid to a foreign government.
Individuals claim the credit by filing IRS Form 1116, Foreign Tax Credit. The credit is limited to the amount of U.S. tax that would have been due on the foreign-source income, which prevents using foreign taxes to offset U.S. taxes on U.S.-source income.
For example, consider a U.S. citizen who earns $100,000 in Brazil and pays $20,000 in Brazilian income taxes. If their U.S. tax on that income is $22,000, the FTC for the $20,000 paid to Brazil reduces their final U.S. tax bill on that income to $2,000.
Key Provisions of the Proposed Treaty
If ratified, the treaty would set maximum withholding tax rates on certain types of income, such as dividends, interest, and royalties, paid from one country to a resident of the other. These caps would provide more certainty for cross-border investments than the variable rates set by each country’s domestic laws.
The proposed treaty also includes a detailed definition of a “permanent establishment” (PE). This concept determines the threshold for when a foreign company’s business profits become taxable in another country. The PE article would specify the conditions that create a taxable presence, such as having a fixed office or a long-term construction project, offering clearer rules than the separate standards currently applied by the U.S. and Brazil.
Other US Brazil Tax Agreements in Force
While a comprehensive income tax treaty is not in effect, other bilateral agreements are active between the U.S. and Brazil. One is the Social Security Agreement, also known as a Totalization Agreement. It prevents workers who divide their careers between the two countries from paying social security taxes to both on the same earnings and helps individuals qualify for benefits by combining their periods of coverage under both systems. A U.S. citizen working temporarily in Brazil for a U.S. employer, for instance, can often continue paying only into the U.S. Social Security system by obtaining a certificate of coverage.
Another active agreement is the Tax Information Exchange Agreement (TIEA). The TIEA is narrower than a full tax treaty and facilitates the exchange of tax information between the IRS and Brazil’s tax authority, the Receita Federal, to help both countries enforce their domestic tax laws.