THE IC-DISC (Interest-Charge Domestic International Sales Corporation)


Tax incentives to exports have been a feature of the Internal Revenue Code for decades.  But considered by U.S. trading partners to be export subsidies, these incentives came into conflict with international free trade agreements.[i]  So the tax incentives have morphed over the years to win WTO approval. The Interest-Charge DISC is the present surviving incarnation of the IRC tax incentive to exports.

The Intended Benefit

An IC-DISC [or DISC] is a C corporation not subject to federal income tax[ii]. It is permitted to accumulate $10M of qualified export income [QEI] a year without corporate or shareholder taxation (and subjection to neither the accumulated earnings tax nor the personal holding company tax on undistributed earnings).  The cost for this benefit is a non-deductible interest charge at the T-bill rate[iii] on the undistributed QEI. Since it’s nondeductible, the interest charge amounts to a very low rate of tax.

Moreover, any commission paid by the entity producing product to be exported by or through the DISC is entitled to a deduction for qualifying export expenses [QEE] paid to the DISC, including commissions.  Thus, the producer affiliate gets a deduction for a payment not taxed to the DISC itself or, until distributed, to its shareholders.

An Added Benefit

An unintended, but sanctioned, added benefit is the present low tax on individual taxpayers for qualifying dividends at the capital gains rate [presently 20% in most situations].

Thus, the producing affiliate deducts commissions or other QEE paid to the DISC, which pays no tax on these items other than the interest charge[iv]; and, when distributed, individuals who are shareholders of the DISC pay tax on dividends at capital gain rates.  In effect, the producer affiliate gets to deduct dividends paid to DISC shareholders, who pay tax only at the capital gain rate. That’s a lot of tax benefits stacked into a single set-up. [v]

Loans to Producer Affiliate

DISCs which accumulate QEI can lend some or all of the QEI back to the producer affiliate as internal source of funding. Interest on the loans qualifies as QEI, subject to the same deferral and low tax on distribution as other QEI.

Relaxed Corporate Formalities

For federal income tax purposes, a DISC is not subject to the normal requirements that substantiate corporate existence. It must be properly set up, have a separate bank account and books, and account properly for each transaction. It will have contracts with its producer affiliate and possibly third parties, and it likely will have receivables (for commissions and loans to the producer affiliate).  But it need have no employees or substantive operations to be recognized as a corporation for federal income tax purposes.  Thus, the DISC can have minimal corporate substance and still deliver the intended tax benefits. Even commissions and other intercompany pricing are subject to special DISC safe harbors, and can be deferred to see which will maximize tax benefits. Of course, a DISC participates in the world of commerce, and may require greater substance for nontax purposes.

Who Should Consider Establishing a DISC?

A DISC must be properly set up and documented, but these transaction costs are a small price to pay for delivering potentially huge tax benefits for exporters.  Particularly for as long as dividends to individuals are subject to reduced — capital gains – rates, almost any entity with even a few hundred thousand dollars of annual exports should at least consider setting up a DISC.


Michael J DeLaurentis

January, 2014

[i] / The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO).

[ii] / States may tax DISC income.

[iii] / The average yield on 52-week Treasury bills auctioned during the 12 months ending September 30 of each year.

[iv] / The interest charge is imposed on the shareholders, which accounts for its nondeductibility.

[v]/ The new Medicare net investment income tax is not addressed in this summary. A producer affiliate may also take advantage of the deduction for domestic production activities.



The description above is a general summary, and should not be considered tax advice for any particular situation. For an analysis to a specific situation, contact a member of the firm.

US Treasury Department Circular 230 Disclosure. Any federal tax advice contained in this communication or subsequent communications is not intended to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any arrangement to avoid taxes.


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