An interest-charge domestic international sales corporation (IC-DISC) is a tax-exempt, domestic corporation set up to receive commissions on a company’s export sales. This is a ‘paper’ corporation which requires separate banking, accounting, and tax filings but does not require a physical location or employees.
- IC-DISCs can provide a meaningful, long-term deferral of the tax on export profits.
- IC-DISC can provide a permanent federal income tax savings of about 5%.
- The IC-DISC provides opportunities to create management incentives.
- An IC-DISC is a U.S. corporation.
- IC-DISC benefits can be used in conjunction with the domestic production activities deduction.
- An IC-DISC can direct a steady flow of cash distributions to a specified group of shareholders.
Many of the IC-DISC structures in place today are used to either take advantage of favorable U.S. tax rates on dividend distributions or to direct a steady flow of cash distributions to a specified group of shareholders. An IC-DISC requires the formation of a US corporation with minimal capital, contractual agreements with the exporter, and submission of an initial tax election and subsequent annual returns. There is no limitation on who can own the IC-DISC.
- Permanent tax savings on export sales
- Increase liquidity for shareholders
- Create management incentive
IC-DISCs are domestic corporations.
The exporting company or its shareholders create a domestic corporation to become the IC-DISC.
- The shareholders of the corporation elect IC-DISC status.
- The export company pays a commission to the IC-DISC based on the profitability of the export sales.
- The export company deducts the commission from its ordinary income (assume maximum tax rate of 29.6%).
- Qualifying export property is manufactured, produced, grown, or extracted in the U.S. by a person other than the IC-Disc.
- The IC-DISC pays no federal income tax on the commission received.
- Individual shareholders receive a dividend at a maximum rate of 23.8%.