IC-DISC

What is IC-DISC?

An Interest Charge Domestic International Sales Corporation (IC-DISC) is a U.S. tax incentive structure designed to promote the export of goods produced in the United States. Established under Internal Revenue Code sections 991–997, an IC-DISC allows qualifying exporters to defer or reduce U.S. income tax on a portion of their export profits. The IC-DISC itself is not subject to federal income tax on its qualifying export income. Instead, the income is taxed to the shareholders when distributed or deemed distributed, often at favorable qualified dividend rates rather than ordinary income rates, creating a significant tax benefit for eligible exporters.

How Does IC-DISC Work for Exporting Companies?

An IC-DISC operates as a separate U.S. corporation that elects IC-DISC status and enters into a commission agreement with an exporting company. The exporter pays a deductible commission to the IC-DISC based on qualifying export sales. The IC-DISC, in turn, distributes its profits to its shareholders, who are typically the owners of the exporting company. These distributions are generally taxed at the lower qualified dividend rate, rather than as ordinary income. The result is a permanent tax rate arbitrage between the deduction at the exporter’s ordinary rate and the qualified dividend rate at the shareholder level. The IC-DISC can also defer tax on a portion of its income, subject to an interest charge .

Who Qualifies for the IC-DISC Tax Incentive?

To qualify for the IC-DISC export tax incentive, a corporation must meet several requirements:

• It must be a U.S. corporation with only one class of stock and at least $2,500 of capital.
• At least 95% of its gross receipts must be “qualified export receipts,” which generally include sales, leases, or services related to goods manufactured in the U.S. and exported abroad.
• At least 95% of its assets must be “qualified export assets,” such as accounts receivable from export sales, export property, and certain temporary investments.
• The corporation must make a timely election to be treated as an IC-DISC and maintain separate books and records.
• Certain types of corporations, such as S corporations, tax-exempt organizations, and financial institutions, are not eligible.

For more on compliance and eligibility, see IRS International Tax Penalties.

Common Structures and Commission Strategies for IC-DISCs

IC-DISCs are commonly structured as either subsidiaries of the exporting company or as entities owned by the company’s shareholders. The most prevalent arrangement is a “commission DISC,” where the IC-DISC acts as a commission agent for the exporter. The exporter pays an IC-DISC commission, which is deductible for the exporter and taxable to the IC-DISC (but not at the entity level). The commission is calculated using one of several methods allowed by the Internal Revenue Code and Treasury Regulations, most notably:

• 4% of qualified export receipts plus 10% of export promotion expenses.
• 50% of the combined taxable income from export sales plus 10% of export promotion expenses.
• The actual profit on the transaction, subject to transfer pricing rules.

The method chosen can be applied on a transaction-by-transaction or product-line basis, allowing exporters to maximize the benefit. The IC-DISC commission must be supported by proper documentation and compliance with transfer pricing and related-party rules.

For more on state and local tax issues that may affect your structure, see State and Local Tax Issues: Key Challenges and Best Practices.

FAQ

What is the primary tax benefit of forming an IC-DISC?

The main tax benefit is the ability to convert a portion of export income, which would otherwise be taxed at ordinary income rates, into qualified dividends taxed at lower rates. This results in a permanent tax savings for the owners of the exporting company, as the exporter deducts the commission and the IC-DISC’s shareholders are taxed at the dividend rate on distributions.

Which companies are eligible to establish an IC-DISC?

Any U.S. corporation (other than certain ineligible entities) that exports U.S.-manufactured goods or provides qualifying export-related services can form an IC-DISC, provided it meets the 95% gross receipts and asset tests, has only one class of stock, and makes a timely election.

How is the IC-DISC commission calculated?

The IC-DISC commission can be calculated using the greater of 4% of qualified export receipts plus 10% of export promotion expenses, 50% of combined taxable income from export sales plus 10% of export promotion expenses, or the actual profit on the transaction, subject to transfer pricing rules. The method can be selected for each transaction or product line to maximize the benefit.

Are IC-DISCs still allowed under current U.S. tax law?

Yes, IC-DISCs remain a valid and effective export tax incentive under current U.S. tax law. While the rules have evolved, the structure continues to provide significant benefits for qualifying exporters. However, compliance with all requirements is essential to maintain IC-DISC status .

What are the reporting requirements for IC-DISC compliance?

IC-DISCs must file Form 1120-IC-DISC annually, maintain separate books and records, and provide Schedule K-1s to shareholders. Proper documentation of commission calculations and export transactions is required. Failure to comply can result in loss of IC-DISC status and potential penalties. For more on compliance, see What is OMIG Compliance and What Are the New Requirements.

For additional information on evolving tax rules, see Changing Rules in Taxation of Digitization of the Economy.