IC-DISC for Exporting Companies

If your company earns significant income from exporting U.S. goods, then you should consider forming an Interest-Charge Domestic International Sales Corporation (IC-DISC). An IC-DISC is relatively inexpensive to set up and operate. Its greatest advantage lies on tax. It can reduce your federal tax rate on a portion of net export income by up to 20 percentages.

How does it work?

A domestic C corporation must request and receive IRS approval to be treated as an IC-DISC for federal tax purpose. Moreover, it must maintain its own bank account, keep separate books and records, and file US tax returns. However, DISC needs not have an office, employees, or tangible assets, nor is it required to perform any invoicing or provide services. In essence, DISC is a paper entity and is transparent to existing customers.

Benefits

DISC receives commission payments from U.S. exporter/manufacturer. The commission payment to DISC is fully deductible for the exporter/manufacturer. DISC pays no federal income taxes. It pays dividends to its shareholders. The dividends are taxed at shareholders level at 15%. Therefore, DISC effectively converting 35% ordinary income to 15% dividend income.

Moreover, shareholders may defer up to $10,000,000 of annual income in the DISC. If DISC defers its income, there is an interest charge – hence the term “Interest-Charge DISC” – on the deferred tax liability at U.S. Treasury bill rate. This interest charge is not assessed to the DISC, but to the shareholders.

How to qualify?

To qualify for an IC-DISC, the U.S. exporter must have U.S. export property, produced or manufactured in the U.S., with 50% U.S. content that is sold primarily to outside U.S. customers. There are requirements for setting up a DISC. For example, DISC must be a C Corporation organized under the laws of a state, with only one class of stock, has a par value of at least $2,500, must meet export gross-receipts test and export-assets test, etc.

DISC can be set up in two ways, as a direct subsidiary of a U.S. Corporation (exporter/manufacturer) or as a company owned by the same shareholders of a closely-held U.S. C Corporation.

Lei Jiang LLC has helped many clients in their import/export business. Moreover, our law firm has advised our clients on related tax issues. If you want to form an IC-DISC, set up a system to comply with IRS requirements, or have other import/export issues, please contact us. We provide quality legal service with the most reasonable fees.