Foreign sales corporation (FSC)

Definition

A foreign sales corporation (FSC) is a type of entity that was created by the United States government to provide tax benefits to U.S. companies engaged in exporting goods and services. 

What is a foreign sales corporation (FSC)?

FSCs are eligible for special tax treatment under the U.S. Internal Revenue Code. Income earned by a foreign sales corporation from qualifying export sales may be subject to reduced tax rates or eligible for deferral of taxes, providing potential tax savings for the exporting company.

To qualify for FSC status, a corporation must meet certain criteria established by the IRS. This typically includes getting a significant portion of its income from qualified export sales, maintaining appropriate documentation and records, and complying with other regulatory requirements.

FSCs are intended to promote U.S. exports by providing tax advantages to companies engaged in international trade. By lowering the effective tax rate on export income, FSCs aim to make U.S. products more competitive in global markets and encourage companies to expand their export activities.

The rules and regulations governing foreign sales corporations are outlined in the U.S. Internal Revenue Code. These provisions define the eligibility criteria, tax treatment, reporting requirements, and other aspects of FSC operations.

Example of a foreign sales corporation

ABC Inc. is a U.S.-based manufacturing company that produces high-quality electronics. To boost its export sales and remain competitive in international markets, ABC sets up a subsidiary called XYZ International, which qualifies as a foreign sales corporation. 

XYZ International facilitates the export of ABC’s products to various countries around the world. As an FSC, XYZ International benefits from tax incentives provided by the U.S. government. This allows ABC Inc. to lower its overall tax liability and reinvest more profits into its export operations, helping to expand its global market presence and drive growth.