The “IC-DISC” is truly the last surviving export incentive for U.S. businesses. The acronym stands for the Interest Charge – Domestic International Sales Corporation. Unlike other export incentives that have been repealed due to economic sanctions by the World Trade Organization (WTO), the IC-DISC remains intact and is now more attractive than ever due to currently low dividend tax rates. The IC-DISC has been in existence since 1984 and has never been challenged by the WTO.
The IC-DISC provides U.S. exporters and their shareholders permanent tax savings. The basic operation of an IC-DISC can be demonstrated as follows:
- A US exporter (or shareholder(s)) forms an IC-DISC corporation.
- The US exporter pays a deductible commission (37% – the high individual income tax rate).
- The IC-DISC pays no U.S. income tax on the commission income.
- The commission income is accumulated and untaxed in the IC-DISC.
- The commission income is taxed when the IC-DISC decides to pay a dividend to its shareholder(s)
(23.8% – the preferred qualified dividend tax rate-of 20% plus 3.8% Net Investment Income Tax).
- The permanent tax benefit is reduction of the tax rate of approximately 13.220%
- For C-Corporation, the use of the IC-DISC generates a tax-deductible dividend of 21% (the highest C-Corp tax rate).
|“Our company is a distributor and we do not manufacture any products. We don’t qualify.”||INCORRECT – Tax benefits are also available to the distributors of U.S. made goods that are eventually consumed or used outside the U.S.|
|“We are a software company and export incentives do not apply to us”||INCORRECT – Software that is downloaded from a server in the US by a Company outside the US or software licensed for reproduction outside the U.S. qualifies.|
|“We perform our engineering services overseas and often work on merely proposed projects. We don’t qualify.”||INCORRECT – Engineering and architectural services performed inside or outside the U.S. qualify if they are in connection with an actual or proposed foreign production/construction project.|
|“We are a manufacturing company, but we do not export our products. Our customers/distributors are the ones who export. We don’t qualify.”||INCORRECT – Manufacturers who sell to U.S. companies that ultimately export the products may qualify – e.g., manufacturer of chemical products that are ultimately exported by their customer/distributor.|
|“Our products are merely a component of a larger product made outside the U.S. and sometimes that product is imported back to the U.S. We don’t qualify.”||INCORRECT – Products that are shipped outside of the U.S. that become a part of another product generally qualify even if the final product returns to the U.S.|
|“We don’t manufacture. We grow or extract our product. We don’t qualify.”||INCORRECT – Goods grown or extracted in the U.S. and exported may qualify.|
The majority of privately held U.S. companies are missing a significant income tax incentive because it’s believed they simply don’t qualify. We find that less than 10% of eligible companies that are involved with direct or indirect exports are taking advantage of the “IC-DISC” tax incentive program.