A Domestic International Sales Corporation (DISC) is often set up, even by a small business, to minimize international tax. As San Francisco’s top international tax CPA firm, we at Safe Harbor LLP advise many clients on international tax issues. Here is a little information we found on the IC-DISC that is worth a read, plus some links to more information. (But please contact us at 415-742-4249 if you have any questions about DISC and/or IC-DISC issues. We’re here to help!).

IC-DISC: Should You Consider a Domestic International Sales Corporation?

IC-DISC (Domestic International Sales Corporation)The interest charge–domestic international sales corporation (IC-DISC) provides closely held companies with an opportunity to reduce or defer foreign income taxes on exports of U.S.-produced goods without establishing a physical presence abroad.

An IC-DISC is a tax-exempt “paper” corporation set up to receive tax-deductible commissions on export sales. The maximum commission is the greater of 4% of gross receipts from sales of qualified export property or 50% of net income on those sales. If certain requirements are met, commission payments to an IC-DISC allow an exporter to convert ordinary income (currently taxable at rates as high as 35%) into qualified dividend income (currently taxed at 15%).

As of this writing, the favorable tax rate for qualified dividends is set to expire at the end of 2010. Unless Congress extends the 15% rate, dividends will be taxed as ordinary income. (Check with your tax advisor for the latest information.)

Even without the benefit of lower tax rates, however, an IC-DISC offers another significant tax advantage: It allows the exporter to defer tax on up to $10 million in commissions held by the IC-DISC (that is, not distributed to the exporter) in exchange for modest interest payments to the IRS.

Useful Links on IC-DISC