[Title 26 CFR 1.921-2]
[Code of Federal Regulations (annual edition) - April 1, 2002 Edition]
[Title 26 - INTERNAL REVENUE]
[Chapter I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY]
[Subchapter A - INCOME TAX (CONTINUED)]
[Part 1 - INCOME TAXES]
[Sec. 1.921-2 - Foreign Sales Corporation--general rules.]
[From the U.S. Government Printing Office]


26INTERNAL REVENUE102002-04-012002-04-01false1.921-2Sec. 1.921-2INTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.921-2  Foreign Sales Corporation--general rules.

    (a) Definition of a FSC and the Effect of a FSC Election.
    Q-1. What is the definition of a Foreign Sales Corporation 
(hereinafter referred to as a ``FSC'' (All references to FSCs include 
small FSCs unless indicated otherwise))?
    A-1. As defined in section 922(a), an FSC must satisfy the following 
eight requirements.
    (i) The FSC must be a corporation organized or created under the 
laws of a foreign country that meets the requirements of section 
927(e)(3) (a ``qualifying foreign country'') or a U.S. possession other 
than Puerto Rico (an ``eligible possession''). See Q&As 3, 4, and 5 of 
Sec. 1.922-1.
    (ii) A FSC may not have more than 25 shareholders at any time during 
the taxable year. See Q&A 6 of Sec. 1.922-1.
    (iii) A FSC may not have any preferred stock outstanding during the 
taxable year. See Q&As 7 and 8 of Sec. 1.922-1.
    (iv) A FSC must maintain an office outside of the United States in a 
qualifying foreign country or an eligible

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possession and maintain a set of permanent books of account (including 
invoices or summaries of invoices) at such office. See Q&As 9, 10, 11, 
12, 13, 14, and 15 of Sec. 1.922-1.
    (v) A FSC must maintain within the United States the records 
required under section 6001. See Q&A 16 of Sec. 1.922-1.
    (vi) The FSC must have a board of directors which includes at least 
one individual who is not a resident of the United States at all times 
during the taxable year. See Q&As 17, 18, 19, 20, and 21 of Sec. 1.922-
1.
    (vii) A FSC may not be a member, at any time during the taxable 
year, of any controlled group of corporations of which an interest 
charge DISC is a member. See Q&A 2 of this section and Q&A 13, of 
Sec. 1.921-1T(b)(13).
    (viii) A FSC must have made an election under section 927(f)(1) 
which is in effect for the taxable year. See Q&A 1 of Sec. 1.921-
1T(b)(1) and Sec. 1.927(f)-1.

In addition, under section 441(h), the taxable year of a FSC must 
conform to the taxable year of its principal shareholder. See Q&A 4 of 
Sec. 1.921-1T(b)(4).

    Q-2. Does the reference to a DISC under section 922(a)(1)(F) which 
provides that a FSC cannot be a member, at any time during the taxable 
year, of any controlled group of corporations of which a DISC is a 
member refer solely to an interest charge DISC?
    A-2. Yes.
    (b) Small FSC.
    Q-3. What is a small FSC?
    A-3. A small FSC is a Foreign Sales Corporation which meets the 
requirements of section 922(a)(1) enumerated in Q&A 1 of this section as 
well as the requirements of section 922(b). Section 922(b) requires that 
a small FSC make a separate election to be treated as a small FSC. See 
Q&A 1 of Sec. 1.921-1T(b) and Sec. 1.927(f)-1. In addition, section 
922(b) requires that the small FSC not be a member, at any time during 
the taxable year, of a controlled group of corporations which includes a 
FSC unless such FSC is a small FSC.
    Q-4. What is the effect of an election as a small FSC?
    A-4. Under section 924(b)(2), a small FSC need not meet the foreign 
management and economic processes tests of section 924(b)(1) in order to 
have foreign trading gross receipts. However, in determining the exempt 
foreign trade income of a small FSC, any foreign trading gross receipts 
for the taxable year in excess of $5 million are not taken into account. 
If the foreign trading gross receipts of a small FSC for the taxable 
year exceed the $5 million limitation, the FSC may select the gross 
receipts to which the limitation is allocated. In order to use the 
administrative pricing rules under section 925(a), a small FSC must 
satisfy the activities test under section 925(c). In addition, under 
section 441(h), the taxable year of a small FSC must conform to the 
taxable year of its principal shareholder (defined in Q&A 4 of 
Sec. 1.921-1T(b)(4) as the shareholder with the highest percentage of 
its voting power).
    Q-5. What is the effect on a small FSC (or FSC) (``target'') if it 
is acquired, directly or indirectly, by a corporation if that acquiring 
corporation (``acquiring''), or a member of the acquiring corporation's 
controlled group, is a FSC (or small FSC)?
    A-5. Unless the corporations in the controlled group elect to 
terminate the FSC (or small (FSC) election of the acquiring corporation, 
the target's small FSC's (or FSC's) taxable year and election will 
terminate as of the day preceding the date the target small FSC and 
acquiring FSC became members of the same controlled group. The target 
small FSC will receive FSC benefits for the period prior to termination, 
but the $5 million small FSC limitation will be reduced to the amount 
which bears the same ratio to the $5 million as the number of days in 
the short year created by the termination bears to 365. The due date of 
the income tax return for the short taxable year created by this 
provision will be the date prescribed by section 6072(b), including 
extensions, starting with the last day of the short taxable year. If the 
short taxable year created by this provision ends prior to March 3, 
1987, the filing date of the tax return for the short taxable year will 
be automatically extended until the earlier of May 18, 1987 or the date 
under section 6072 (b) assuming a short taxable year had not been 
created by these regulations.
    (c) Comparison of FSC to DISC.

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    Q-6. How does a FSC differ from a DISC?
    A-6. A DISC is a domestic corporation which is not itself taxable 
while a FSC must be created or organized under the laws of a 
jurisdiction which is outside of the United States (including certain 
U.S. possessions) and may be taxable on its income except for its exempt 
foreign trade income. The DISC provisions enable a shareholder to obtain 
a partial deferral of tax on income from export sales and certain 
services, if 95 percent of its receipts and assets are export related. 
The FSC provisions contain no assets test, but a portion of income for 
export sales and certain services is exempt from U.S. taxes if the FSC 
satisfies certain foreign presence, foreign management, and foreign 
economic processes tests.

    (d) Organization of a FSC.

    Q-7. Under the laws of what countries may a FSC be organized?
    A-7. A FSC may not be created or organized under the laws of the 
United States, a state, or other political subdivision. However, a FSC 
may be created or organized under the laws of a possession of the United 
States, including Guam. American Samoa, the Commonwealth of the Northern 
Mariana Islands and the Virgin Islands of the United States, but not 
Puerto Rico. These eligible possessions are located outside the U.S. 
customs territory. In addition, a FSC may incorporate under the laws of 
a foreign country that is a party to--
    (i) An exchange of information agreement that meets the standards of 
the Caribbean Basin Economic Recovery Act of 1983 (Code section 
274(h)(6)(C)), or
    (ii) A bilateral income tax treaty with the United States if the 
Secretary certifies that the exchange of information program under the 
treaty carries out the purpose of the exchange of information 
requirements of the FSC legislation as set forth in section 927(e)(3), 
if the company is covered under the exchange of information program 
under subdivision (i) or (ii). The Secretary may terminate the 
certification. Any termination by the Secretary will be effective six 
months after the date of the publication of the notice of such 
termination in the Federal Register.
    (e) Foreign Trade Income.

    Q-8. How is foreign trade income defined?

    A-8. Foreign trade income, defined in section 923(b), is gross 
income of an FSC attributable to foreign trading gross receipts. It 
includes both the profits earned by the FSC itself from exports and 
commissions earned by the FSC from products and services exported by 
others.

    (f) Investment Income and Carrying Charges.

    Q-9. What do the terms ``investment income'' and ``carrying 
charges'' mean?
    A-9.
    (i) Investment income means:
    (A) Dividends,
    (B) Interest,
    (C) Royalties,
    (D) Annuities,
    (E) Rents (other than rents from the lease or rental of export 
property for use by the lessee outside of the United States);
    (F) Gains from the sale of stock or securities,
    (G) Gains from future transactions in any commodity on, or subject 
to the rules of, a board of trade or commodity exchange (other than 
gains which arise out of a bona fide hedging transaction reasonably 
necessary to conduct the business of the FSC in the manner in which such 
business is customarily conducted by others),
    (H) Amounts includable in computing the taxable income of the 
corporation under part I of subchapter J, and
    (I) Gains from the sale or other disposition of any interest in an 
estate or trust.
    (ii) Carrying charges means:
    (A) Charges that are imposed by a FSC or a related supplier and that 
are identified as carrying charges, (``stated carrying charges'') and
    (B)(1) Charges that are considered to be included in the price of 
the property or services sold by an FSC or a related supplier, as 
provided under Q&As 1 and 2 of Sec. 1.927(d)-1, and
    (2) Any other unstated interest.
    Q-10. How are investment income and carrying charges treated?
    A-10. Investment income and carrying charges are not foreign trading 
gross receipts. Investment income and

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carrying charges are includable in the taxable income of an FSC, except 
in the case of a commission FSC where carrying charges are treated as 
income of the related supplier, and are treated as income effectively 
connected with a trade or business conducted through a permanent 
establishment within the United States. The source of investment income 
and carrying charges is determined under sections 861, 862, and 863 of 
the Code.
    (g) Small Businesses.
    Q-11. What options are available to small businesses engaged in 
exporting?
    A-11. A small business may elect to be treated as either a small FSC 
or an interest charge DISC. See Q&As 3 & 4 of Sec. 1.921-2 relating to a 
small FSC. Rules with respect to interest charge DISCs are the subject 
of another regulations project.

[T.D. 8127, 52 FR 6469, Mar. 3, 1987]