Foreign Tax Credit for Estate Tax Paid Abroad: How NIRC Section 86(E) Works

A Filipino resident citizen’s estate is taxed on worldwide property, so foreign-situated assets — a US condo, shares in a foreign company — sit in the Philippine gross estate right alongside domestic property. If that same foreign country also taxed the property at death, NIRC Section 86(E) lets the estate credit the foreign estate tax paid against the Philippine estate tax due, but only up to a formula-based limitation, not peso-for-peso.

What is the NIRC Section 86(E) foreign tax credit? #

NIRC Section 86(E) is the provision that keeps a resident citizen’s worldwide estate from being taxed in full twice on the same foreign asset — once by the foreign country where the property sits, and again by the Philippines, which taxes a resident citizen’s entire estate regardless of location. For an estate covered by our step-by-step TRAIN Law computation, the gross estate already includes everything the decedent owned worldwide. Section 86(E) doesn’t remove the foreign property from that gross estate — it instead credits the foreign estate tax already paid on that property against the Philippine estate tax computed on the whole estate. This only matters for decedents whose Philippine gross estate is worldwide in scope — resident citizens, nonresident citizens, and resident aliens — not for a nonresident alien, discussed further below.

How is the credit limitation computed? #

The credit is not simply “whatever was paid abroad” — it’s capped at the lower of the actual foreign tax paid or a proportionate limitation, computed per foreign country and then again on an overall basis if more than one country is involved. This mirrors the same structure used for the income tax foreign tax credit under NIRC Section 34(C): a taxpayer cannot use a foreign tax bill to wipe out more Philippine tax than that foreign-situated property actually generated in Philippine tax liability.

A commonly used restatement of the Section 86(E) limitation, consistent across Philippine tax review materials, describes the per-country cap this way:

“The credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent’s net estate situated within such country taxable under the Tax Code bears to his entire net estate.”

This site relied on a widely used secondary restatement of NIRC Section 86(E)’s limitation formula (the phrasing found in Philippine tax review and CPA-board materials) for this passage, as the codal PDF could not be fetched directly in this sandbox to re-verify the exact statutory wording — confirm the precise text of Section 86(E) against the official NIRC before relying on it for a formal filing position.

In practical terms: Per-country limit = (Net estate situated in that foreign country ÷ Entire net estate) × Philippine estate tax due. The estate compares that limit to the foreign tax actually paid, and the lower of the two is what’s creditable. If tax was paid to more than one foreign country, the estate also computes a second, overall limit — total foreign-situated net estate (all countries combined) ÷ entire net estate × Philippine estate tax due — and the total creditable amount cannot exceed either cap.

Worked example: a ₱30,000,000 estate with US-situs property #

This example is entirely fictional, illustrative only, and does not describe a real estate or BIR case — but the peso figures and every computation step follow the mechanism described above. A Filipino resident citizen decedent leaves a net estate (after standard deduction, family home deduction, and other allowable deductions) of ₱30,000,000. Of that net estate, ₱5,000,000 is real property located in the United States, which was subjected to a US estate tax equivalent to ₱1,200,000 after converting to pesos at the applicable exchange rate.

Step 1 — compute the per-country limit for the US:

(₱5,000,000 ÷ ₱30,000,000) × ₱1,800,000 = ₱300,000

Step 2 — compare the limit to the tax actually paid:

The estate paid ₱1,200,000 in US estate tax, but the Section 86(E) limitation caps the credit at ₱300,000 — the lower of the two figures. The remaining ₱900,000 of US estate tax is not creditable against Philippine estate tax and is not refundable here; it is simply absorbed as a foreign tax cost of holding property in that jurisdiction.

This is the step that catches heirs off guard: paying US estate tax does not mean the Philippine estate tax bill drops dollar-for-dollar. Only the ₱300,000 slice of Philippine tax “attributable” to the US property is offsettable, no matter how much more was actually paid abroad.

Why isn’t this credit available to a nonresident alien’s estate? #

A nonresident alien decedent’s estate has no use for Section 86(E) because there is no double taxation problem to solve in the first place — under NIRC Section 104, a nonresident alien’s Philippine gross estate already excludes foreign-situated property entirely. As covered in Is a Nonresident Alien’s Estate Taxed in the Philippines?, a nonresident alien’s Philippine estate tax return only ever reports Philippine-situated property — real property here, tangible property physically here, and domestic-corporation shares. A foreign asset such as a US condo never enters the Philippine gross estate for that decedent, so there is nothing foreign-taxed sitting inside the Philippine computation to credit against — the two mechanisms solve the same double-taxation problem from opposite directions, and only one ever applies to a given decedent.

How is the credit claimed on the estate tax return? #

The foreign tax credit is applied as a direct reduction of the computed Philippine estate tax due on BIR Form 1801, after the flat 6% rate has already been applied to the entire net estate — it is not a deduction from the gross estate itself.

1. Compute the entire net estate worldwide and apply the flat 6% rate under NIRC Section 84 to get the Philippine estate tax due before any credit.
2. Identify each foreign country where estate or inheritance tax was actually paid on property in the Philippine gross estate.
3. Compute the per-country limitation, and the overall limitation if more than one country is involved.
4. Compare the actual foreign tax paid (converted to pesos) against the applicable limit, and take the lower figure as the creditable amount.
5. Subtract that amount from the Philippine estate tax due, and pay the net amount when filing BIR Form 1801 within one year of the decedent’s death.

Keep the foreign jurisdiction’s estate tax return, its official receipt or assessment, and the peso conversion computation on file — an examining revenue officer can disallow an unsubstantiated credit claim, the same way an undocumented deduction gets disallowed elsewhere in the estate tax return.

Frequently asked questions #

What is the foreign tax credit under NIRC Section 86(E)? #

NIRC Section 86(E) allows a Philippine estate to credit estate or inheritance tax actually paid to a foreign country against the Philippine estate tax due, when the same foreign-situated property is included in the decedent’s Philippine gross estate. It exists because a resident citizen’s or resident alien’s worldwide estate is taxed by both the Philippines and, often, the foreign country where specific property sits — the credit is the mechanism that prevents that same property from being taxed twice at full rate in both places.

Is the Section 86(E) credit a full, peso-for-peso offset of the foreign tax paid? #

No. The credit is capped at the lower of the foreign estate tax actually paid or a computed limitation — the Philippine estate tax multiplied by the proportion that the net estate situated in that foreign country bears to the entire net estate. If the foreign tax paid exceeds this limitation, only the limitation amount is credited; the excess foreign tax is not creditable or refundable in the Philippines.

Who can claim the Section 86(E) foreign tax credit? #

Only a resident citizen, nonresident citizen, or resident alien decedent’s estate can claim it, because only those decedents are taxed on worldwide property in the first place. A nonresident alien decedent’s Philippine estate tax return covers only Philippine-situated property under NIRC Section 104, so there is no foreign-situated property in the Philippine gross estate to begin with, and therefore nothing for a foreign tax credit to offset.

What happens if the decedent paid estate tax in more than one foreign country? #

The limitation is computed twice: once per foreign country individually (each capped at that country’s proportionate share of the Philippine estate tax), and once on an overall basis combining all foreign countries together against the entire net estate. The estate’s total creditable foreign tax is the lower of the sum of the per-country limits or the combined overall limit, mirroring the same per-country-plus-overall structure used for the income tax foreign tax credit under NIRC Section 34(C).

What proof does the BIR require to support a Section 86(E) foreign tax credit claim? #

The estate should keep the foreign country’s estate or inheritance tax return, the assessment or receipt showing the tax actually paid, and a peso conversion of the foreign property’s value and the foreign tax paid using the applicable exchange rate at the relevant date. Without this documentation, the examining revenue officer can disallow the credit entirely when the estate’s BIR Form 1801 is examined.

Where is the foreign tax credit claimed on the estate tax return? #

The credit is claimed on BIR Form 1801, the Estate Tax Return, as a direct reduction of the computed Philippine estate tax due — not as a deduction from the gross estate. It is applied after the 6% rate under NIRC Section 84 has already been computed on the entire net estate, worldwide.

Summary #

NIRC Section 86(E) prevents a Filipino resident’s worldwide estate from being fully taxed twice on the same foreign property: the estate credits foreign estate tax actually paid, but only up to a proportionate limitation — the Philippine estate tax multiplied by the foreign-situated share of the entire net estate — computed per country and, where more than one country is involved, on an overall basis too. In the worked example above, ₱1,200,000 in US estate tax was capped at a ₱300,000 credit against a ₱1,800,000 Philippine estate tax bill, because the US property was only a small slice of the total ₱30,000,000 estate. This credit has no role at all for a nonresident alien decedent, whose Philippine return excludes foreign property in the first place — see Is a Nonresident Alien’s Estate Taxed in the Philippines? for that separate situs framework, and How to Compute Philippine Estate Tax for the full baseline computation this credit is applied on top of.