U.S. Exporters Leaving Tax Dollars on the Table: Forming Interest Charge Domestic International Sales Corporations Can Save U.S. Exporters a Great Deal of Taxes, but Many Qualifying Taxpayers Don't Know about Them
[ILLUSTRATION OMITTED] U.S. exporters--including, but not limited to, manufacturers--that create an IC-DISC (interest charge domestic international sales corporation) can enjoy potentially large tax savings with relatively low initial costs. Congress created the IC-DISC in a manner that allows it to exist primarily on paper, and the Treasury Department further clarifies in Regs. Sec. 1.992-1(a) that this type of entity enjoys a "relaxation of the general rules of corporate substance." By incorporating an IC-DISC, exporters can transform at least one-half of their taxable income from qualified export receipts into a qualifying dividend, which could reduce the tax bill on that portion of their income by approximately 40% (and the overall tax bill on exports by approximately 20%). EXPORTERS THAT QUALIFY AS AN IC-DISC To qualify as an IC-DISC, a company must be an eligible corporation, must meet the qualified gross receipts and the qualified export assets tests, have one class of stock, and make a timely election. The IC-DISC cannot be an S corporation, a registered investment company, an insurance company, a personal holding company, a tax-exempt corporation under Sec. 501, or a bank or trust company (Sec. 992(d)). At least 95% of the company's receipts each tax year must be qualified export receipts (Sec. 992(a)(1)(A)), which are defined under Sec. 993(a) and include: 1. Gross receipts from the sale, exchange, or othe: disposition of export property. 2. Gross receipts from the lease or rental of export property used outside the United States 3. Gross receipts for services related to any qualified sale, exchange, lease, rental, or other disposition of export property. 4. Gross receipts from the sale, exchange, or other disposition of qualified export assets (other than export property). 5. Dividends on stock of a related foreign export corporation (as defined in Sec. 993(e)). 6. Interest on any obligation that is a qualified export asset. 7. Gross receipts for engineering or architectural services for construction projects located or planned outside the United States. 8. Gross receipts for the performance of managerial services in furtherance of a DISC's production of other qualified export receipts. Thus, under this test, many types of companies can be exporters qualified to use an IC-DISC, beyond those that manufacture and directly sell to foreign entities. U.S. manufacturers that sell their products to other U.S. companies where they are used as a component of an exported good (e.g., tires for an automobile) meet the qualifications. Software developers and agricultural cooperatives can also qualify, as well as distributors of U.S.-made or U.S.-grown products. Domestic architectural or engineering services working on foreign construction projects (even those in the planning stage) meet the definition of an exporter. Companies that rent or lease export property used outside the United States and those that provide services related to the sales of export property (such as warranty claims or repairs) are also entitled to use an IC-DISC. To qualify, any export property must be made primarily of nonimported materials. The qualified export assets test (Sec. 993(b)) requires the adjusted basis of the corporation's qualified export assets at the close of the tax year to equal or exceed 95% of the sum of the adjusted basis of all of the corporation's assets. Those assets are: * Export property (defined in Sec. 993(c)). * Assets used primarily in connection with the sale, lease, rental, storage, handling, transportation, packaging, assembly, or servicing of export property, or to perform engineering or architectural services described in (7) above or managerial services in furtherance of the production of qualified export receipts described in (1), (2), (3), and (7) above. * Accounts receivable and evidences of indebtedness that arise by reason of transactions of the corporation or of another corporation that is a DISC and that is a member of a controlled group that includes a corporation described in (1), (2), (3), (4), (7), or (8) above. …