IC-DISC: Reducing US and Foreign Income Tax Liabilities
Tim Finerty
IC-DISC: Proper planning could reduce US and foreign tax income liabilities.
By implementing an IC-DISC strategy, a US subsidiary that is manufacturing or distributing US manufactured products for sale outside the US (including Canada and Mexico), can reduce its US tax burden. Proper planning is required to ensure the IC-DISC has been established correctly and to ensure the tax benefits are maximized each year.
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.