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IC-DISC

IC-DISC

IC-DISC stands for interest charge domestic international sales corporations. These have become favored as a result of the lower tax rate on dividends received from domestic corporations at the 20% capital gains rate.

Taxation of IC-DISC

Congress designed IC-DISC as a mean by which U.S exporter could borrow funds from the U.S treasury. An IC-DISC has to be a domestic corporation with a simple class of stock that has a minimum par value of $25,000.

IC-DISC is not subject to the regular U.S corporate income tax rate. IC-DISC is not a taxable entity itself.

U.S shareholders of an IS-DISC are subject to tax on both actual and deemed dividend distribution from the IC-DISC.

An IC-DISC allows a U.S shareholder to defer paying U.S tax on the income derived from up to $10 million of qualified export receipts each year.

If a U.S shareholder fails to take dividend at the favorable 20% tax rate, the U.S share holder must pay an interest charge on its IC-DISC related deferred tax liability.

A U.S shareholder must continue to pay interest on deferred IC-DISC income until that income is distributed or deemed distributed by the IC-DISC.

IC-DISC shareholders complete the interest rate on form 8404.

Tests to qualify as an IC-DISC

To qualify as an IC-DISC, the domestic corporations must pass gross receipts and export assets test.

Gross receipts test

It states that 95% of the gross receipts of the IC-DISC must constitute qualified gross receipts of the following:

  1. Gross receipts from the sale, exchange, or other disposition of export property.
  2. Gross receipts from the lease or rental export property for use outside the United States.
  • Gross receipts for services that are related in or are subsidiary to any exchange of property.
  1. Interest on any obligation that is qualified export asset.
  2. Gross receipts for engineering or architectural services for construction projects located outside of the United States.
  3. Gross receipts for the managerial services for furtherance of production or other qualified export receipts.
  • Commissions received for any of the transactions listed above.

 

Export Asset Test

It states that 95% of the assets of the corporation must be qualified export assets. Following is a list of qualified assets.

  1. Accounts receivable.
  2. Temporary investments.
  • Export property.
  1. Assets used primarily in connection with the production of qualified export receipts. Loans to producers.

 

References:

Practical Guide to US Taxation of International transactions 9th Edition

Robert J. Misey Jr.

Michael S. Schadewald

Publishers: Wolter Kluwer, CCH Incorporated.