The Basic Requirements for Having and Operating a Foreign Sales Corporation
| Publication year | 1985 |
| Pages | 1613 |
1985, September, Pg. 1613. The Basic Requirements for Having and Operating a Foreign Sales Corporation
This article begins with the premise that the decision has been made to establish a Foreign Sales Corporation ("FSC") in order to obtain the tax benefits it offers in export transactions. The article then sets out the minimum requirements, as contained in the applicable Internal Revenue Code ("Code") sections and in recently issued Temporary Regulations, for insuring that the new corporation will, in fact, deliver the intended tax benefits.
FSCs had their origin in the demise of Domestic International Sales Corporations ("DISCs"), which were domestic corporations that operated to provide an indefinite deferral of a portion of U.S. tax on their export profits. However, from the beginning of their troubled existence, DISCs had been criticized by certain signatories of the General Agreement on Tariffs and Trade ("GATT") as involving illegal export subsidies.
Congress responded to the criticism with a new provision in the Tax Reform Act of 1984, creating FSCs.(fn1) In providing for FSCs, the tax deferral benefits from operating existing DISCs were eliminated by operation of law on December 31, 1984. FSCs now offer a permanent exemption on a portion of their income and could begin operating as of January 1, 1985.
With a view toward satisfying GATT, an FSC must meet certain general corporate requirements, as well as a number of foreign substance requirements, that distinguish it from and make it more "real" than a DISC. These foreign substance requirements can be placed into three general categories: foreign presence, foreign management and foreign economic processes.
The five general corporate requirements for an FSC are as follows:(fn2)
1) It may have no more than twenty-five shareholders at any time during the year;
2) It may not have any preferred stock outstanding at any time during the year;
3) It may not be a member at any time during the taxable year, of any controlled group of corporations of which a DISC is a member;
4) It must have the same tax year as its principal shareholder; and
With respect to the twenty-five shareholders requirement, the Temporary Regulations provide rather detailed rules for counting jointly held stock, qualifying shares of board members, corporate shareholders, estates, trusts and partnerships.(fn3) Concerning the no preferred stock requirement,(fn4) an FSC can have more than one class of common stock, provided the rights of a class of stock do not result in federal income tax avoidance.(fn5) The last three requirements are relatively straightforward. An election to be treated as an FSC may be made within ninety5) It must make an election to be treated as an FSC.
days after the beginning of its taxable year, and such an election relates back to the beginning of the taxable year. The FSC election is made on Form 8279.
There are four foreign presence requirements for an FSC. First the FSC must be incorporated in a foreign country that has been certified by the U.S. Treasury as having a satisfactory exchange of information program with the U.S., meets the standards of the 1983 Caribbean Basin Economic Recovery Act or is in a U.S. possession other than Puerto Rico.(fn6) In a November 16, 1984, release, the Treasury Department certified twenty-three countries for FSC purposes.(fn7)
In addition to those countries formally certified by the Treasury Department, a number of other countries have signed exchange of information agreements with the U.S. under the Caribbean Basin Initiative(fn8) which automatically qualifies them as FSC incorporation sites. U.S. possessions that can serve as FSC incorporation sites are Guam, American Samoa, the Commonwealth of the Northern Mariana Islands and the U.S. Virgin Islands.(fn9)
As a practical matter, in choosing a country in which to incorporate an FSC, it is necessary to consider the rate of local taxation of the FSC, the existence of available personnel on site who could be used in FSC operations and the relevance of the FSC's related supplier to the marketing and export sales. A number of countries and U.S. possessions have enacted special FSC legislation or have taxing regimes that eliminate or greatly reduce local taxation of the FSC.(fn10)
The second foreign presence requirement is that, during the taxable year, the FSC must maintain an...
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