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IC-DISCS 101: The History, Relevance, and Importance of Interest-Charge Domestic International Sales Corporations

David Roer, CPA
Published Date:
Mar 1, 2016

In a recent heated tax discussion, the topic of Interest-Charge Domestic International Sales Corporations (commonly known as an IC-DISC) was brought up. “Have you dealt with an IC-DISC before?” I asked my colleague. His spot-on reply: “No, my back muscles are fine, but thanks for asking.”

Despite it sounding like a human ailment, the IC-DISC is actually a corporate tax remedy - one that provides U.S. exporters and manufacturers large tax incentives in order to mitigate potentially significant tax burdens. With international economic growth on the rise, it’s extremely important for exporters, manufacturers, and their respective tax advisors to be privy to the IC-DISC concepts, as they can potentially act as a significant tax break.


Congress created the Domestic International Sales Corporation (DISC) in 1971 to encourage U.S. exporters to help economic growth by engaging in activities. In simple terms, a U.S. exporter was allowed to allocate a portion of its export profits to a domestic subsidiary (i.e., a DISC) to reduce its U.S. taxes.

In 1984, complaints (specifically, from European countries) began surfacing that DISCs were an illegal export subsidy. Congress was ultimately forced to enact the Foreign Sales Corporation (FSC), which allowed tax benefits to U.S. exporters so long as they established a foreign corporation that performed certain activities abroad. There was, however, a caveat: Owners of a DISC must pay interest on the deferred tax of the undistributed earnings to the U.S. Department of the Treasury. In other words, the DISC had an “interest-charge” – thus, the creation of the IC-DISC.

U.S. exporters, however, exploited this policy by performing trivial “activities” solely to qualify for the respective tax benefits under the revised DISC rules. As a result, Congress enacted yet another regime known as the Extraterritorial Income (ETI) to help curb tax abuse. Ultimately, by 2007, the ETI and FSC were repealed, but the IC-DISC remained.


As stated in IRC section 991, a DISC is not subject to U.S. corporate income tax.  Wonderful as that may be, this of course invites the question: How does one obtain DISC status?

As indicated in IRC section 992(a)(1), there are four main criteria that a corporation must meet to qualify for IC-DISC status. For the first two criteria, the corporation must pass both (1) the qualified export receipt (QER) and (2) qualified export asset (QEA) tests.

The QER test maintains that 95% of the gross receipts of the corporation must be qualified export receipts – which, as a general rule per IRC section 993(a)(1) - include (but are not limited to) receipts from the sale of export property, rental income related to export property located abroad, dividend and interest income related to foreign export corporations or assets, and services related to export sales.

Similarly, the QAR test maintains that 95% of the assets of the corporation must be qualified export assets – which, as a general rule per IRC section 993(b) - include (but, again, are not limited to) assets related to export property, accounts receivables related to DISC activity, temporary cash and investments reasonably necessary for working capital requirements, and various obligations arising in connection with producer’s loans.

The last two criteria maintain that (3) the corporation must have one class of stock, the par value of which must be at least $2,500 on each day of the taxable year, and that (4) the corporation makes an effective election for DISC status, which can be done via timely filing of Form 4876-A, “Election to Be Treated as a DISC.”


Any type of entity or individual can own an IC-DISC. More commonly, however, a flow-through entity (an LLC, Partnership, or S-Corporation) holds the ownership interest in the IC-DISC, which is a C Corporation. Therefore, the flow-through would be as follows: INDIVIDUAL owns OPERATING CO (LLC, Partnership, S-Corp), which owns IC-DISC (C Corporation).

An IC-DISC is typically structured in one of two ways: (1) as a buy/sell IC-DISC, which is one that takes title to the goods that it sells outside of the United States, or (2) as a commission IC-DISC, which is treated as it if were a commission agent who sells products outside of the United States.


Let’s say our IC-DISC qualifies under the aforementioned criteria and we’ve properly structured it within our organization as a commission IC-DISC. Now what?

First, the exporting company (e.g., the LLC or S-Corporation) will pay a commission to the IC-DISC (e.g., the wholly owned C Corporation) based on foreign sales of products manufactured or produced within the United States. (We’ll revisit this later.) This commission will be a deduction from ordinary business income by the exporting company and will act as commission receipts received by the IC-DISC. The key takeaway is that this deduction is effectively one utilized at ordinary tax rates.

From a knee-jerk perspective, we’ve essentially done a one-for-one swap: We moved income to a separate entity, thereby picking up a deduction on Exporting Corporation A, and income on Subsidiary B, the IC-DISC.

But, wait - let us not forget beloved IRC section 991, which states that DISCS are not subject to U.S. corporate tax! Therefore, the IC-DISC receives and reports the commission income tax-free, while the exporting corporation receives a deduction at ordinary rates, at a maximum rate of 39.6%. Which leaves us with the age-old tax strategy question: What’s the catch?

Per IRC section 995(b), a shareholder of an IC-DISC will treat any distributions as taxable dividend income at the favorable qualified dividend tax rate (maximum rate of 23.8% comprised of qualified dividend rates and the net investment income tax). This is the perfect tax arbitrage: The export company receives a deduction at the ordinary tax rate and the identical amount is paid out as a dividend, flowing through to the owners at qualified dividend rates. As far as “catches” go, this one’s not too bad!

It is important to remember, however, that if the IC-DISC chooses to not pay dividends to its shareholders, an interest charge - remember, we are talking about interest charged DISCS after all - will apply to the deferred tax, usually based on Treasury Bill Rates, which are currently extremely low.

Furthermore, any taxable income of the IC-DISC attributable to qualified export receipts that exceed $10 million will be deemed distributed and, as such, subject to dividend income tax rates.


IRC section 994(a)(2) states that the amount of commission available to be paid from the exporting company to the IC-DISC is either 50% of the export net income or 4% of export gross receipts (limited to net income).

Let’s say, for example, Exporting Widget Company (EWC), an S-Corporation, set up a commission based IC-DISC. At the tax year ending Dec. 31, 2015, EWC had gross domestic receipts of $30 million and gross international receipts of $20 million. Furthermore, EWC had net taxable income of $5 million domestically and $2.65 million internationally.

In order to calculate the commission, we can use either of the methods indicated above:

  1. 50% of the export net income, which equates to $1.325 million (i.e., 50% X $2.65 million), or
  2. 4% of the export gross receipts, which equates to $800,000 (i.e., 4% X $20 million)

If EWC decides to use the higher figure, the S-Corporation would claim a commission expense deduction of $1,325,000, while the IC-DISC would report the same amount as tax-free commission income. Assuming EWC’s member is in the highest tax bracket of 39.6%, there would be an ordinary tax liability reduction of $524,700.

Let’s further assume that the IC-DISC pays the full commission out to its shareholder: The $1,325,000 would be reported as dividend income to the individual at the highest rate of 23.8%, equating to a tax liability of $315,350.

The actual tax benefit received, which is the difference between the ordinary deduction by the shareholder and the IC-DISC qualified dividend tax liability, would be $209,350 - not too bad!

The IC-DISC concept is one that, depending on the facts and circumstances, should be utilized by exporting manufacturers that fit the necessary criteria. It’s a way to secure a 15.8% direct tax benefit by merely setting up a separate corporation and adhering to the necessary rules and restrictions. While the aforementioned discussion hits the highlights, the remaining IRC rules and regulations are more complex - this is tax after all!

As tax advisors, it’s critical that we constantly exceed client expectations by being tax-creative within the confines of the Code. It’s up to us as tax professionals to proactively analyze facts and circumstances of specific clients to see if often underutilized strategies, like IC-DISCs, might work. By failing to take proactive measures such as these, we run the risk of losing potential tax dollar savings for our clients, which in turn could cause some serious headaches . . . or, as my colleague would say, some serious back pain.

Roer_pictureDavid Roer, CPA, is currently working as a Tax Manager with Raich Ende Malter & Co., LLP in their New York City office. Mr. Roer, who has eight years of tax experience, specializes in high net worth individuals, as well as closely-held corporations, S-Corporations, and small businesses. He received a B.A. in Business and Accounting from Yeshiva University’s Sy Syms School of Business and is currently enrolled towards receiving a Masters in Taxation with Golden Gate University. Mr. Roer can be contacted at or (212) 944- 4433.