Practical Considerations for Establishing and Operating an FSC

The Tax Reform Act of 1984 created the foreign sales corporation (FSC), the new income tax incentive to encourage exports of products made in the US. The FSC is examined in terms of: 1. foreign incorporation, 2. capitalization of the FSC, 3. maintenance of a foreign office, 4. FSC election and other definitional requirements, 5. qualifying export transactions, 6. foreign management requirements, 7. foreign economic process requirements, including the sales participation test and the direct cost test that involves advertising and sales promotion, processing customer orders and arranging delivery, transportation, determination, and transmittal of a statement of account or final invoice and receipt of payment, and assumption of credit risk, 8. transfer pricing between the FSC and its related supplier, involving marginal pricing/costing and limitations applicable to the gross receipts method, 9. US tax benefits, 10. use of a small FSC or interest charge domestic international sales corporation (DISC), 11. the fate of the DISC, and 12. state tax reaction.