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F238.SBE
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1996-08-23
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67 lines
@053 CHAP 8
┌──────────────────────────────────────────────┐
│ FOREIGN SALES CORPORATIONS (FSC'S) │
└──────────────────────────────────────────────┘
The Foreign Sales Corporation (FSC) entity that has been
permitted as a result of the Tax Reform Act of 1984 is
somewhat similar to a DISC, but may be too great of an
administrative burden for it to be worthwhile for a small
business to set up. Unlike a DISC, an FSC cannot be a mere
dummy or paper corporation set up in the U.S. Instead, it
must meet all of the following requirements:
. It must be a foreign corporation, incorporated
in a foreign country that, in general, has
arrangements to swap tax information with the
IRS, or in a U.S. possession;
. There can be no more than 25 shareholders in
an FSC;
. An FSC cannot issue preferred stock;
. It must maintain a foreign office, at which
there is a permanent set of tax records,
including invoices of sales;
. The FSC's board of directors must include at
least one person who is not a resident of the
United States (although the non-resident can be
a U.S. citizen); and
. An FSC cannot be part of a controlled group of
corporations that also includes a DISC. That
is, you can set up either an FSC or a DISC, but
you can't have both.
Large FSCs are also subject to additional stringent
requirements such as being managed outside the U.S. and
satisfying various tests with respect to carrying on
economic activities outside the United States.
Fortunately, these foreign management and "foreign
economic process" requirements do not apply to small
FSCs, which are FSCs with $5 million or less in foreign
trade gross receipts per year.
The amount of export income that can be shifted to an FSC
is usually limited to 1.83% of gross foreign trading receipts
(versus 4% for a DISC) or 23% of the combined profit of the
U.S. parent company and the FSC on an export sale (versus
50% for a DISC), whichever is greater. However, the profit
under the gross receipts method is limited to twice the
amount of the combined profit on the sale.
Once the FSC's tentative taxable income for the year has
been determined under the above rule, 15/23 of such income
is treated as exempt, and is not taxable even if distributed
to the parent U.S. corporation. Tax must be paid by the FSC
on the remaining 8/23 of its income. Thus, to the extent
export profits can be shifted to an FSC, the tax rate on on
such income will only be about 1/3 (8/23) of the normal
effective corporate tax rate, a major saving.