Many of today’s U.S. medical device companies are taking their product development pipeline overseas. Some significant factors contributing to this was recently documented in a study by Northwestern University and include:
49% The Unpredictability of the FDA’s 510(k) Requirements
22% Cost of U.S. clinical trials
9% Quicker process
5% Easier process
Achieving regulatory approval for your device overseas is a significant accomplishment. Choosing an advantageous tax structure such as an Interest Charge Domestic International Sales Corporation (IC-DISC) to export your medical device can potentially turn an ordinary corporate tax rate of 35% to a dividend tax rate of 15%.
An IC-DISC is a domestic corporation that has elected to be an IC-DISC and its election is still in effect. The IC-DISC election is made by filing Form 4876-A, Election To Be Treated as an Interest Charge DISC.
WHAT IS AN IC-DISC?
An IC-DISC is a domestic corporation that has elected to be an IC-DISC and its election is still in effect. The IC-DISC election is made by filing Form 4876-A, Election To Be Treated as an Interest Charge DISC.
Generally, an IC-DISC is not taxed on its income. Shareholders of an IC-DISC are taxed on its income when the income is actually (or deemed) distributed. In addition, section 995(f) imposes an interest charge on shareholders for their share of DISC-related deferred tax liability.
To be an IC-DISC, a corporation must be organized under the laws of a state or the District of Columbia and meet the following tests (not all inclusive):
- At least 95% of its gross receipts during the tax year are qualified export receipt (Regulations section 1.993-1).
- At the end of the tax year, the adjusted basis of its qualified export assets is at least 95% of the sum of the adjusted basis of all of its assets (Regulations section 1.993-2).
- It has only one class of stock, and its outstanding stock has a par or stated value of at least $2,500 on each day of the tax year (or, for a new corporation, on the last day to elect IC-DISC status for the year and on each later day).
The above qualification requirements, if not met, may be considered to have been met if certain minimum distributions are made to the shareholder. Regulations section 1.992-3 explains how to figure the distribution.
TAX BENEFITS OF AN IC-DISC
A corporation that is a DISC for a taxable year is not subject for such year to the corporate income tax which is subject to a maximum rate for 2010 of 38%. Shareholders of an IC-DISC are taxed on its income when the income is actually distributed (or deemed distributed). These distributions are taxed as dividends which are subject to a tax rate of 15%. IC-DISC taxable income which qualifies for deferral and not deemed to be distributed to shareholders is subject to an interest charge taxable to shareholders using a compounded annual rate of interest equivalent to the average investment yield of U.S. Treasury bills with 52-week maturities.
The potential tax savings could provide companies with new product launches improved working capital and liquidity.
FORM OF THE TRANSACTION
Distributions (or deemed distributions) are taxed to the shareholder at the capital gains rate of 15% as of 2010.
Commissions paid based on the greater than (>) of:
- 50% of export net income, or
- 4% of export gross receipts
Commissions paid are fully deductible by “Exporter.”
Receipt of commission income by the IC-DISC is not taxable.
The potential tax savings could provide companies with new product launches, improved working capital and liquidity.
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