Foreign tax credit challenges for Latin American–US investments

Juan Gabriel Reyes Varea
Pérez Bustamante & Ponce, Quito
jreyes@pbplaw.com

Report on a session at the 17th IBA/ABA US and Latin America Tax Practice Trends Conference in Miami

Thursday 19 June 2025

Session Co-Chairs
Joshua Odintz Holland & Knight, Washington, DC
Pedro Ramírez Turanzas, Bravo & Ambrosi, Mexico City

Speakers
María Fernanda Becker Deloitte, Santiago
Mindy Herzfeld University of Florida, Gainesville
Ramon Tomazela Santos Mariz de Oliveira e Siqueira Campos, São Paulo
Juan Ignacio Troccoli Andersen Tax & Legal, Montevideo

Introduction

The panel explored the complexities and distinctions of foreign tax credit (FTC) regimes across various Latin American jurisdictions and their interaction with United States tax rules. Experts from Chile, Mexico, Brazil, Uruguay and the US shared insights on the challenges faced by multinational enterprises when navigating cross-border investments, particularly considering new regulations and treaty interpretations. The discussion highlighted the importance of understanding local tax systems, treaty networks and the implications of recent developments such as the US cost recovery requirements and the OECD’s Pillar Two rules.^[1]

Panel discussion

Cost recovery requirements and procedural limitations

The panel began with a discussion on the US cost recovery requirement and its implications for Latin American jurisdictions. Mindy Herzfeld noted that aspects of the current regulatory framework remain under development, and that taxpayers may in certain cases continue to rely on prior, more flexible rules pending further guidance. She emphasised that procedural limitations, such as invoice formalities in Mexico, are generally not treated as substantive limitations under the US rules when they do not affect the taxpayer’s ability to recover costs in a meaningful sense.

The Chilean tax system and treaty network

Chile’s extensive treaty network and comparatively flexible FTC regime were highlighted by María Fernanda Becker. Chile allows foreign taxes to be credited against both corporate and withholding taxes. The system distinguishes between treaty and non-treaty jurisdictions, with broader creditability for the former. Chile also permits multi-tier crediting, enabling credits from subsidiaries several levels down the ownership chain, provided certain conditions are met.

Uruguay’s territorial tax system and substance requirements

Juan Ignacio Troccoli discussed Uruguay’s territorial tax system, under which only locally sourced income is taxable. Amendments in 2022 introduced substance requirements for holding entities to maintain the non-taxable status of foreign income. These requirements include having qualified employees, facilities or contracting third-party services within Uruguay. Fulfilment of these conditions allows for FTC application and exemption of dividend payments from taxation.

Brazil’s full inclusion system and tax consolidation

Ramon Tomazela Santos explained Brazil’s temporary tax consolidation regime (in effect until 2029), which allows Brazilian companies to consolidate profits and losses from their foreign subsidiaries, but only if those subsidiaries meet two key criteria:

• first, an active income threshold under which at least 80 per cent of the subsidiary’s total income must come from active business operations (for example, sales, services or manufacturing), rather than passive sources such as interest, dividends or royalties; and
• second, a minimum tax rate requirement under which the foreign jurisdiction must impose a statutory corporate income tax rate of at least 17 per cent.

These conditions are designed to exclude entities located in low-tax or tax haven jurisdictions from the consolidation benefit. The rules aim to ensure that only genuinely operational and sufficiently taxed foreign entities are eligible for consolidation, thereby limiting base erosion through artificial offshore structures.

Mexico’s FTC rules and CFC regime

Pedro Ramírez outlined Mexico’s FTC rules, which allow crediting of foreign corporate taxes up to two tiers. Administrative rules provide limited flexibility for credits beyond statutory provisions. Mexico’s controlled foreign corporation (CFC) regime requires control and a tax rate below 75 per cent of the domestic rate to trigger inclusion. Challenges arise when foreign taxes are paid at lower tiers or when income is sourced differently than recognised under Mexican law, affecting creditability.

The US perspective and treaty implications

Joshua Odintz provided insights into the US perspective, particularly regarding the interaction between domestic regulations and treaty provisions. He noted that while US statutes can override treaties, regulations cannot. This distinction is important when assessing the creditability of foreign taxes under treaties with Chile and Mexico. The panel also discussed the implications of the OECD’s Pillar Two rules, including the treatment of qualified domestic minimum top-up taxes (QDMTT) and the undertaxed payments rule (UTPR), which remain areas of uncertainty in many jurisdictions.

Conclusion and final observations

The panel provided a concise overview of the diverse approaches to foreign tax credits across Latin America and their interaction with US tax rules. Key takeaways include the importance of understanding treaty networks, the impact of substance requirements and the challenges posed by multi-tier structures and evolving international standards. As jurisdictions continue to adapt to global tax reforms, including Pillar Two, multinational enterprises should remain attentive to emerging guidance to optimise tax outcomes and ensure compliance. The discussion underscored the need for continued dialogue and clarity from tax authorities to address the complexities of cross-border taxation.