By Carlos A. Somoza, JD., LLM.,
If you are an exporter of U.S.-made products, you may want to consider forming an Interest Charge Domestic International Sales Corporation (IC-DISC) to save on future tax bills.
An IC-DISC is a corporation organized under U.S. law that has made an election to be taxed under a special tax regime. The corporation itself is not subject to taxation on the income it generates but rather, the earnings generated by the IC-DISC are taxed only when they are distributed to its shareholders. The shareholders will pay income tax on such distributions at qualified dividend rates, currently between 20% and 23.8% (instead of the ordinary rates between 39.6% and 43.4%). Accordingly, a qualifying exporter can reduce its effective income tax rate by nearly 20% of taxable income.
This structure can be a valuable tax incentive for manufacturers and other exporters of goods and certain services (e.g., engineering or architectural services on foreign construction projects).
In order for income to be taxed under the special regime above, the U.S. business must organize a separate corporation (an IC-DISC) that generates income related to qualified export receipts, which include gross receipts from or for:
- Selling, exchanging, or otherwise disposing of export property;
- Leasing or renting export property that the lessee uses outside of the United States;
- Supporting services related to any qualified sale, exchange, lease, rental, or other disposition of export property by the IC-DISC;
- Engineering or architectural services for construction projects outside the United States; or
- The performance of managerial services in furtherance of the production of other qualified export receipts.
The items being sold must meet the definition of “export property,” which generally includes property that is:
- Made, grown, or extracted in the United States;
- Held mainly for sale, lease, or rent in the ordinary course of a trade or business outside the United States; and
- Not more than 50% of its fair market value is attributable to articles imported into the United States.
Kaufman Rossin can help U.S.-based exporters determine if they qualify for IC-DISC benefits, assist with structuring the operations and prepare the requisite tax filings. Contact me or another member of our international tax team to learn more.
Carlos A. Somoza, J.D., LL.M., is an international tax principal in Kaufman Rossin’s Miami office. Kaufman Rossin is one of the top accounting firms in the U.S. Carlos can be reached at email@example.com