Foreign Sales Corporations ("FSCs"):
What is a FSC? Is it a tax shelter? Will the IRS audit us if we form one? Why do we have to use a Caribbean Island or an Island in the Pacific? Why do we need to have a FSC Management Company? How is the Department of Commerce involved?
The FSC program was originally sponsored by the Department of Commerce (DOC) as an export incentive program to increase exports by U.S. manufacturers. Since the DOC did not have the necessary budget to fund an incentive program, they sought alternative financing.
Efforts were undertaken by the U.S. Government creating the FSC Tax Reform Act of 1984. The law creating the FSC is found within the Internal Revenue Service ("IRS") laws and established two classifications of FSCs. There is a large FSC for those companies in export sales with gross activity exceeding $5,000,000 and a small FSC for companies that have export sales under $5,000,000. There is also a hybrid FSC that has been created by the industry within permissible guidelines under the law to benefit even smaller companies engaged in export sales. This hybrid FSC is known as a Shared FSC.
FSCs exist to provide benefits to U.S. Companies engaged in exporting. There are companies that may not benefit because of the volume of their overseas business or the type of product being exported, such as the service industry. It would be difficult for an engineering or architectural firm to qualify under the FSC criteria. A U.S. company exporting manufactured products or other types of products that are produced or grown in the United States, however, may want to consider the establishment of an FSC.
It is possible to generate FSC benefits through the use of an IRA. IRA owned FSCs were first structured in 1991. The passage of the 1997 Tax Act greatly expanded the potential for alternative FSC structures, through the introduction of two new types of IRAs, Roth and Educational.
If your company is engaged in exporting, the U.S. Government-sanctioned program for Foreign Sales Corporations may benefit you by reducing tax liability. The cost of administration of the FSC, when established through the several FSC advisory groups in one of the qualifying countries, is relatively small compared to the ultimate tax savings. A simple benefit analysis can determine whether the volume of export sales of a particular company can justify the creation of an FSC. Contact us for assistance in conducting you own tailored benefit analysis.
Portions of this text are reprinted with permission from Troutman Sanders. Taken from the Review in the Fall 1994 International Business and the Law.
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