Tax Insight

Federal Circuit narrows treaty-based FTC relief

Insight
5 minute read
September 03, 2026

What happened?

The US Court of Appeals for the Federal Circuit on August 31, 2026, issued decisions in Estate of Paul Bruyea v. United States, No. 2025-1563, and Christensen v. United States, No. 2024-1284, holding that foreign tax credits (FTCs) available under the relevant provisions of the US-Canada and US-France income tax treaties cannot be used to offset the net investment income tax (NIIT) imposed under Section 1411.

In Bruyea, the Federal Circuit reversed the Court of Federal Claims and held that the US-Canada income tax treaty does not provide an FTC against the NIIT independent of the Internal Revenue Code. The court focused on treaty language providing that US relief from double taxation is available “in accordance with” and “subject to” the provisions and limitations of US law. The court referred to this treaty language as the “U.S. Law Limitation” and held that it incorporates domestic-law restrictions governing not only the computation of an FTC, but also whether the credit is available at all.

In Christensen, the court applied the same general approach to the US-France income tax treaty and held that a similar U.S. Law Limitation applies to Article 24(2)(b), even though that limitation is not expressly repeated in that subparagraph.

Why is it relevant?

The decisions specifically address the availability of treaty-based FTCs against the NIIT, but the Federal Circuit’s interpretation of treaty language making the relief subject to US law potentially could have broader implications for the interaction between US income tax treaties and domestic FTC rules. Many US income tax treaties require the United States to provide FTC relief “in accordance with the provisions and subject to the limitations” of US law. Bruyea reads that language broadly. The court treated domestic FTC law as governing both the amount and the availability of treaty-based credits and stated, in addressing the US-Canada treaty, that the Code governs “in all instances except when the Convention expressly states that it does not.”

The decisions do not hold that an income tax treaty can never modify domestic FTC rules. The Federal Circuit recognized that express treaty provisions can alter otherwise applicable Code limitations. In particular, the court pointed to provisions in the US-Canada income tax treaty that deem certain income to arise in Canada and thereby overcome the source-based limitation of Section 904. Those provisions are referred to as re-sourcing provisions.

The decisions nevertheless could place greater importance on identifying an express treaty basis for departing from an applicable domestic FTC restriction. Current treaty practice provides additional context. For example, the 2022 US-Croatia treaty uses the formulation “to the extent allowed under the law of the United States (as it may be amended from time to time),” making still more explicit the connection between treaty-based FTC relief and domestic-law limitations.

Actions to consider

Taxpayers and advisors with material positions that depend on treaty-based variations from the domestic FTC regime should consider reviewing those positions in light of Bruyea and Christensen. In particular, they should consider whether the treaty expressly departs from that restriction.