Few people know of a tax rule that could be saving their manufacturing or distribution company millions of dollars each year. Despite it being the oldest tax benefit available for exporters, many companies are missing out.
The use of a Domestic International Sales Corporations, or DISC, has the potential to reduce tax rates on exports between 50 and 100 percent, meaning huge savings for companies and their shareholders.
How? A DISC avoids C corporation tax on export profits. It’s also a tax-exempt entity, and any dividend paid to a shareholder is taxed at only 15 percent, compared to the typical rate of 35 percent.
What is a DISC?
A DISC is an entity that has little or no business activities, yet receives tax benefits that allow companies in certain industries to re-categorize some of their ordinary income into qualified dividend income within the DISC on qualifying export property.
Overall, the benefits of using a DISC exist around the percent of tax paid by shareholders on their dividends. For example, a company with a net export profit of $1 million can save $100,000 in federal income tax per year, just by setting up a DISC. Moreover, state income taxes can be saved by using the DISC structure. The savings is unlimited: the more a business exports, the more the potential savings.
How it works
A DISC acts as a separate legal entity from its parent company that doesn’t pay tax on commission income. Therefore, a U.S. company can pay a “commission” to the DISC based on its profits from the sale of qualifying export products (explained below). This commission is deductible by the parent company. In return, the DISC pays a dividend to its shareholders, who are generally the owners of the company making the product. The dividend is treated as a qualifying dividend under the law and is taxed at 15 percent.
There are, however, certain requirements that must be met before a company can qualify to use a DISC. These include being a U.S. manufacturer or distributor that exports U.S. manufactured goods, or architectural and engineering firms that oversee non-U.S. construction projects.
Qualifying Export Property
Export property must be:
-Manufactured, produced, grown or extracted in the U.S., but not by the DISC
-Used, consumed or disposed of outside the U.S.
-No more than 50 percent of the value related to imported components
However, they cannot fall into any of the categories below:
-Property leased or rented to related person
-Income from intangibles
-Certain oil, gas, coal and uranium products
-Unprocessed softwood timber
-Export controlled products
-Products in short supply
Robert Verzi is a tax partner at Habif, Arogeti & Wynne LLP, a yearly advertiser with GlobalAtlanta. He has 27 years of experience in foreign tax credit management, structuring foreign and domestic operations, international mergers and acquisitions and export tax incentives. He also has extensive experience working with foreign-owned businesses in the U.S.
To learn more about how using a DISC can save you or your company money, contact Mr. Verzi at Robert.verzi@hawcpa.com or call him at 404-898-8486.
Visit www.hawcpa.com for more information.
