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Interest Charge-Domestic International Sales Corporations (IC-DISCs) Offer up to 20% Tax Savings on Exports

The IC-DISC has been around since 1984 and has yet to be challenged by the World Trade Organization (WTO), unlike other exporting incentives. With the current low dividend rates the IC-DISC is now more attractive tax-savings vehicle. Though several bills have been introduced in Congress to eliminate the 15% dividend rate for IC-DISC, none is presently active.

How much tax saving can an IC-DISC offer?

As of May 2008, the tax benefit can be up to a 20% (a 35% regular tax rate less the 15% qualified dividends tax rate).

What qualifies as export property?

The definition of export sales does not necessarily mean you have to directly export the product. If the product is indirectly bound for exporting, it may qualify as export property.

What are the requirements for an IC-DISC?

An IC-DISC is formed by a U.S. exporter/shareholder and will qualify as IC-DISC if:

• Shareholders consent to the election to be treated as an IC-DISC.
• 95 percent of its gross receipts are qualified export receipts, as shown in IRC Section 993(a)(1).
• 95 percent of the adjusted basis of its assets on the last day of its taxable year is qualified export assets, as shown in IRC Section 993(b).
• The IC-DISC does not have more than one class of stock, which the stock must have a par or stated value of at least $2,500 on each day of its fiscal year.
• The IC-DISC maintains its own set of books and records.
• The IC-DISC cannot be a member of a controlled group of which a Foreign Sales Corporation is member.

What are the benefits in addition to the dividend tax break of an IC-DISC?

Besides the aforementioned tax saving the following are a few other advantages of an IC-DISC:

• The U.S. exporter/taxpayer pays a tax-deductible commission.
• The IC-DISC pays no U.S. income tax on the commission income, deferring the tax and paying only an annual "interest charge" on the total deferred tax.
• The commission income is accumulated in the IC-DISC and remains untaxed until the
• IC-DISC decides to pay it to shareholders.

What are the tax-planning opportunities?

Because the IC-DISC ownership does not have to equal the ownership of the business, this can lead to some effective family estate/income tax planning opportunities.

If you have any questions, please contact Greg Mudd at 312-980-2930 or Michael Calahan at 312-980-2996 for more information.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.