What Is a Foreign Sales Corporation?

A foreign sales corporation (FSC) is a defunct provision in the U.S. federal income tax code which allowed for a reduction in taxes on income derived from sales of exported goods. The code required the use of a subsidiary entity in a foreign country which existed for the purposes of selling the exported goods.

Understanding Foreign Sales Corporation (FSC)

A foreign sales corporation (FSC) would be set up by a U.S. exporter to avail itself of certain exemptions from U.S. federal and income taxes. An FSC had to meet a number of requirements, principally that the overseas subsidiary of the U.S. company had to maintain its offices and books in a country that had an exchange of information agreement with the U.S.; at least one director of the company had to reside in the country the subsidiary was established in; and it had to derive revenue from the sale of U.S. exports in that country. It also had to file as an FSC with the Internal Revenue Service (IRS). FSCs could be set up by manufacturers, export intermediaries, or groups of exporters.

The formation of an FSC provided an exporter with a method of shifting what would otherwise be taxable export profit to the FSC, where only a portion of the FSC's profit was taxed (as certain income of the FSC would be tax-exempt according to the tax code provisions). This would then effectively reduce the exporter's overall tax rate since the exporter was the shareholder of the FSC. The tax exemption could be as high as 15% to 30% of the gross revenue from exports.

History of Foreign Sales Corporations

The FSC, established in 1984, was one in a series of measures designed to support U.S. exporters. It followed on from domestic international sales corporations (DISCS) and was succeeded by the Extraterritorial Income Exclusion Act (ETI) in 2000. All of these were successively challenged in—and found non-compliant by—the General Agreement on Tariffs and Trade (GATT) and its successor the World Trade Organization (WTO) as constituting prohibited export subsidies.

The U.S. had argued that these measures served to level the playing field with countries such as those in Europe which made border tax adjustments by removing value added tax (VAT) from goods prices before they are exported because the U.S. does not have a measurable indirect tax such as VAT. It had argued that reducing the effect of corporate income taxes would achieve the same effect.