What Is the Foreign Tax Credit?
The Foreign Tax Credit (FTC) is the technical instrument that allows a taxpayer to deduct from their home-country tax liability the tax already paid abroad on the same income. Its goal is to eliminate — or at least mitigate — juridical double taxation: the situation where a single item of income is taxed in two countries.
Unlike the exemption method (which directly excludes foreign income from the residence country’s tax base), the credit method includes foreign income in the base but allows the foreign tax to be offset against the domestic liability. The practical difference matters: if the foreign rate is lower than the domestic rate, the taxpayer pays the difference in the residence country; if higher, there may be excess credit that cannot be used (or that must be carried forward).
The FTC in Spain: Art. 80 LIRPF and Art. 31 LIS
Individuals (Art. 80 LIRPF)
Article 80 of Law 35/2006 (LIRPF) allows Spanish tax residents to deduct from their IRPF gross tax liability the lesser of:
- The foreign tax actually paid on income that is also included in the Spanish taxable base, provided that tax is analogous in nature to IRPF.
- The result of applying the IRPF average effective rate to the portion of the net taxable base attributable to the foreign income.
The credit requires that the foreign tax be of an identical or analogous nature to IRPF, that it was borne by the taxpayer (not a third party), and that the underlying income is included in the Spanish taxable base. It does not apply if a tax treaty already provides an exemption for the same income — the two methods are alternatives, not cumulative.
Corporate Entities (Art. 31 LIS)
For Spanish companies, Article 31 of the LIS provides the deduction to avoid international juridical double taxation: foreign tax paid on income included in the Corporate Tax base may be deducted from the Spanish tax liability, up to the Spanish Corporate Tax that would be payable on the same income. Any excess may be applied in subsequent tax years up to a ten-year limit.
The FTC in the US: IRC §§901-904
The US Foreign Tax Credit system is more complex and operates through a basket (category) system:
- Passive basket: dividends, interest, royalties, and other portfolio income.
- General basket: active business and employment income.
- GILTI basket: income attributed under the GILTI regime from CFCs.
- Branch basket: income attributable to foreign branches.
The credit limitation is computed separately for each basket using Form 1116 (individuals) or Form 1118 (corporations). Excess credits within each basket may be carried back one year or forward ten years under IRC §904(c).
The Critical Scenario: US Citizen in Spain With a CFC
The most frequent situation in our practice is a US national living in Spain who participates in structures generating income subject to attribution in both countries. For example:
- A Subpart F inclusion from the CFC was taxed in the US in the current year. Can that US tax be credited against Spanish IRPF that taxes the same income under the TFI rules (Art. 91 LIRPF)?
- Spanish IRPF paid on worldwide income — can it be credited on the US Form 1040 as an FTC under IRC §901?
The technical answer is “yes, in principle,” but the per-basket limitations, timing differences in income recognition between the two systems, and differing average effective rates create systematic excess credits on one or both sides. At BMC we run the dual-filer coordination before year-end — not after — to plan credit allocation and avoid credits expiring unused or inapplicable.
See also: Double Taxation · Tax Treaty · Subpart F · Transparencia Fiscal Internacional · Tax Residence in Spain