IC-DISC: Reducing US and Foreign Income Tax Liabilities

Posted on August 15, 2011 by

Tim Finerty

IC-DISC Example

A separate US corporation is formed that elects to be treated as an IC-DISC in accordance with the Internal Revenue Code
The US operating company pays a commission to the IC-DISC
The operating company expenses the commission paid to the IC-DISC, reducing its taxable income calculated at ordinary tax rates
By state, the IC-DISC is tax-exempt and pays no federal income tax on its commission income
The IC-DISC pays a dividend to the foreign corporate owner of the IC-DISC and the dividend may qualify for reduced treaty withholding rates depending on the content of the treaty. Caution: This does not apply to all treaties that provide for a reduced rate of withholding on dividends

Requirements of an IC-DISC

The IC-DISC must be a US corporation with one class of stock of at least $2,500 of par or stated value
The corporation must elect to be treated as an IC-DISC within 90 days of incorporation
95 percent or more of the gross receipts of the IC-DISC must be qualified export receipts
95 percent or more of the assets of the IC-DISC must be qualified export assets, which include: export property, accounts receivable, temporary investments, and loans to producers
The export property must be sold or leased for direct use, consumption, or disposition outside the US
The export goods must be manufactured, produced, grown, or extracted within the US, with no more than 50 percent of the fair market value of the export property being attributed to goods imported into the US

Conclusion

Historically, the Interest Charge – Domestic International Sales Corporation (IC-DISC) has been a tool for deferring income for US tax purposes. In recent years, the IC-DISC has become a viable planning opportunity to reduce US income tax liabilities.

Tim Finerty

Shareholder, Industrial Automation

Tim provides tax, accounting and consulting support to help industrial automation companies maximize profitability.

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