Interest Charge Domestic International Sales Corporations

An interest charge domestic international corporation (IC-DISC) is a domestic corporation that is designed to receive commissions on a company’s export sales.  Companies that export goods to foreign countries would greatly benefit from the tax savings of setting up an IC-DISC because IC-DISCs are generally not subject to tax.

There are two different ways to structure an IC-DISC.  One way is to set up the IC-DISC as a buy/sell entity.  This means that the IC-DISC owns the goods that it then sells outside the United States.  The second and most common way is to structure it as a commission IC-DISC.  This means that the IC-DISC sells goods outside the United States as if it were a commission agent for the distribution company.

Typically, the IC-DISC receives a commission from the exporter of goods and the commission is not taxable. The exporter, however, gets to deduct the commissions it pays the IC-DISC at ordinary income tax rates. The shareholders of an IC-DISC will pay tax on the income of the IC-DISC when they receive an actual or deemed dividend.  Taxable income attributable to the first $10,000,000 of gross receipts from the sale or exchange of qualified export asset is generally not included as a deemed distribution and will only be taxable to the shareholders when an actual dividend is received.  Taxable income attributable to any gross receipts in excess of the first $10,000,000 is taxable to the shareholders as if it has been distributed in the current year. Because of the tax benefit received, shareholders are required to pay an interest charge on deferred tax liabilities at qualified rates.

In order to make the election to be treated as an IC-DISC, a corporation must be organized in the United States and meet the following tests:

  • Have a tax year end that conforms to the tax year end of its principal shareholders
  • At least 95% of gross receipts for the tax year are qualified export receipts
  • Has qualified export assets whose adjusted basis at year-end equals at least 95% of the total basis of its assets
  • Has one class of stock and has stock outstanding with a par value of at least $2,500 on each day of the tax year
  • Keeps its own bank account and separate books and records
  • Makes a timely election to be treated as an IC-DISC
  • No more than 50% of the product’s fair market value can be from articles imported into the U.S.
While a corporation must meet these requirements to make the IC-DISC election, it does not need to have an office, employees, or tangible assets.
The tax benefits of an IC-DISC are only available for exports made after the IC-DISC election is made.   Having an IC-DISC allows you to convert ordinary income from commissions taxed at your marginal rate to a qualified dividend, giving you tax savings of up to 20%.