Foreign Sales Corporations (FSCs) can reduce income tax on export-related income by up to 15%, with a reduction of up to 30% in corporate taxes. FSCs must meet certain requirements, including maintaining a head office in a qualifying foreign country and having at least one director who is not a permanent resident of the parent manufacturer’s home country. Qualifying export activities include solicitation, negotiation, and contracting, with a specified percentage of transaction costs being foreign direct costs.
Administrative pricing rules are used to determine the revenue of a Foreign Sales Corporation (FSC). This type of corporation is created to reduce income tax on export-related income. Categories of business export activities that qualify for income tax exemption include solicitation, negotiation, and contracting.
A reduction of up to 15 percent in income tax is possible, as well as a reduction of up to 30 percent in corporate taxes depending on administrative pricing rules. When a company sells products or services in a country outside of its original origin, it is considered an exporter. The taxable income generated by those sales is adjusted if the export transactions are conducted by a foreign sales corporation.
A manufacturer may set up an FSC directly or use an export intermediary. Sometimes an FSC is made up of export trading companies, which are groups that specialize in the sale and transfer of foreign goods. FSCs act on their own behalf with direct ties to a parent company or may function independently as a commissioned agent for an outside corporation.
To meet the FSC formation requirements, the incorporated entity must maintain its head office in a qualifying foreign country. It must have at least one director who is not a permanent resident of the parent manufacturer’s home country, has no more than 25 shareholders, issues only common shares, and maintains a separate set of accounting records at its head office.
Additional FSC requirements under the pricing rules administrative structure include maintaining a primary bank account that is located outside of the parent manufacturer’s country of origin. All meetings of shareholders and directors must be held outside the country of origin. Any stock dividends, legal fees, and salaries must be paid from a foreign bank account.
Under the administrative pricing rules, export activities must meet certain requirements to qualify for income tax exemption. Although the activities are performed in the foreign country to which the goods are exported, only one activity must be performed to qualify for the exemption. Any solicitation other than advertising is one of the qualifying categories of export activity. The request may include press releases in one of the local newspapers or direct sales.
Other categories of export activities that meet the tax exemption qualification are negotiation and contracting. In addition to engaging in certain business activities, a specified percentage of transaction costs must be foreign direct costs. As part of the administrative pricing rules, foreign direct costs are considered 50 percent or more of the total direct costs associated with five qualifying export activities or 85 percent of the total direct costs incurred by two qualifying export activities. export, such as delivery and transportation.
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