The FSC (unless it is a small FSC) must have at least one director who is not a U.S. resident, must keep one set of its books of account (including copies or summaries of invoices) at its main offshore office, cannot have more than 25 shareholders, cannot have any preferred stock, and must file an election to become an FSC with the IRS. Also, a group may not own both an FSC and an interest charge DISC.
The portion of the FSC gross income from exporting that is exempt from U.S. corporate taxation is 30 percent for a corporate-held FSC if it buys from independent suppliers or contracts with related suppliers at an “arm’s-length” price – a price equivalent to that which would have been paid by an unrelated purchaser to an unrelated seller. An FSC supplied by a related entity may also qualify to use the special administrative pricing rules to compute its tax exemption. Although an FSC does not have to use the two special administrative pricing rules, these rules may provide additional tax savings for certain FSCs.
Small FSCs and interest charge DISCs are designed to give export incentives to smaller businesses. The tax benefits of a small FSC or an interest charge DISC are limited by ceilings on the amount of gross income that is elegible for the benefits.
The small FSC is generally the same as an FSC, except that a small FSC must file an election with the IRS designating itself as a small FSC – which means it does not have to meet foreign management or foreign economic process requirements. A small FSC tax exemption is limited to the income generated by $5 million or less in gross export revenues.
An exporter can still set up a DISC in the form of an interest charge DISC to defer the imposition of taxes for up to $10 million in export sales. A corporate shareholder of an interest charge DISC may defer the imposition of taxes on approximately 94 percent of its income up to the $10 million ceiling if the income is reinvested by the DISC in qualified export assets. An individual who is the sole shareholder of an interest charge DISC can defer 100 percent of the DISC income up to the $10 million ceiling. An interest charge DISC must meet the following requirements: the taxpayer must make a new election; the tax year of the new DISC must match the tax year of its majority stockholder; and the DISC shareholders must pay interest annually at U.S. Treasury bill rates on their proportionate share of the accumulated taxes deferred.
A shared FSC is an FSC that is shared by 25 or fewer unrelated exporter-shareholders to reduce the costs while obtaining the full tax benefit of an FSC. Each exporter-shareholder owns a separate class of stock and each runs its own business as usual. Typically, exporters pay a commission on export sales to the FSC, which distributes the commission back to the exporter.
States, regional authorities, trade associations, or private businesses can sponsor a shared FSC for their state’s companies, their association’s members, or their business clients or customers, or for U.S. companies in general. A shared FSC is a means of sharing the cost of the FSC. However, the benefits and proprietary information are not shared. The sponsor and the other exporter-shareholders do not participate in the exporter’s profits, do not participate in the exporter’s tax benefits, and are not a risk for another exporter’s debts.
For more information about FSCs, U.S. companies may contact the the Office of the Associate Chief Counsel for International Commerce, U.S. Internal Revenue Service 202-622-3810; the Office of the Chief Counsel for International Commerce, U.S. Department of Commerce 202-482-0937; or a local office of the IRS.
Intellectual Property Considerations
Intellectual property refers to a broad collection of rights relating to such matters as works of authorship, which are protected under copyright law; inventions, which are protected under patent law; marks, which are protected by trademark law; as well as designs and trade secrets. No international treaty completely defines these types of intellectual property, and the laws of the various countries differ from each other in significant respects. National intellectual property laws create, confirm, or regulate a property right without which others could use or copy a trade secret, an expression, a design, or a product or its mark and packaging.
The rights granted by a U.S. patent, trademark registration, copyright, or mask work (semiconductor chip) registration extend only through the United States and its territories and possessions. They confer no protection in a foreign country. There is no such thing as an international patent, trademark, or copyright. To secure rights in any country, you must apply for a patent or register a mask work or trademark in that country. Copyright protection depends on national laws, but registration is typically not required. There is no real “short cut” to worldwide protection of intellectual property. However, some advantages and minimum standards for the protection and enforcement of intellectual property exist under treaties or other international agreements.
International Agreements: The oldest treaty relating to patents, trademarks, and unfair competition is the Paris Convention for the Protection of Industrial Property. The United States and over 130 other countries are parties of this treaty. The Paris Convention sets minimum standards of protection and provides two important benefits: the right of national treatment and the right of priority.
Overgeneralizing, “national treatment” means that a Paris Convention country will not discriminate against foreigners in granting patent or trademark protection. Rights may be greater or less than those provided under U.S. law but the rights given will be the same as that country provides to its own citizens.
An invention may become public and therefore unpatentable in many countries, when a patent is issued or an application is laid open to inspection in any country. In addition, a delay in filing a patent or trademark application leaves open the possibility that those rights will be lost because of intervening acts such as sale of the invention or registration of the trademark by another. The Paris Convention’s “right of priority” provides a solution to this problem by giving an inventor an alternative to filing applications in many countries simultaneously. It allows the applicant one year from the date of the first application filed in a Paris Convention country (six months for a design or trademark) in which to file in other countries. Publication or sale of an invention after first filing will therefore not jeopardize patentability in countries which grant a right of priority to U.S. applicants. Not all countries adhere to the Paris Convention but these benefits may be available under another treaty or bilateral agreement. These substantive obligations have been incorporated into the World Trade Organization (WTO) Agreement on Trade Related Aspects of Intellectual Property (TRIPs), by reference for adherence by WTO members.
The United States is also a party to the Patent Cooperation Treaty (PCT), which provides procedures for filing patent applications in its member countries. The PCT allows an applicant to file one “international application” designating member countries in which a patent is sought, with the same effect as filing national applications in each of those countries. The applicant may then later proceed with the filing of separate “national” applications in those countries.
The United States’ international copyright regulations are governed principally by the Berne Convention for the Protection of Literary and Artistic Works (”Berne”), to which more than 120 other nations adhere. The United States is also a member of the Universal Copyright Convention (UCC) and has special bilateral relations with a number of foreign countries. Under the Berne Convention, works created by a national of a Berne Union country, or works first or simultaneously published in a Berne country are automatically eligible for protection in every other country of the Berne Union, without registration or compliance with any other formality of law. This is true of works first published in the United States on or after March 1, 1989 the date on which the United States acceded to the Berne Convention. Works first published before March 1989 were protected in many countries by virtue of the United States’ membership in the UCC, if published with the formalities specified in that convention. Older works may also be protected as a consequence of simultaneous publication in a Berne country, or by virtue of bilateral obligations. In any event, the requirements and protection available vary from country to country, and should be investigated before first publication anywhere.
North American Free Trade Agreement and Agreement on Trade-related Aspects of Intellectual Property: Both the North American Free Trade Agreement(NAFTA) and the Agreement on Trade-related Aspects of Intellectual Property (TRIPs) (which is under the auspices of the World Trade Organization) establish minimum standards for the protection and enforcement of intellectual property. Neither of these agreements bestow rights upon U.S. intellectual property owners. Rather, both agreements ensure that a member state that is party to one or both of these agreements provides a certain level of protection to those individuals or companies protected under that member state’s laws.
Patents: U.S. patent law differs from the laws of most other countries in several important aspects. The U.S. patent law grants a patent to the first inventor even if another person independently makes the invention and files an application first. Most other countries award the patent to the inventor who first files a patent application. The United States also provides a one-year “grace period” that does not preclude an inventor from obtaining protection after an act such as publishing, offering for sale, or using the invention which would make the invention public. Many countries, including most European countries, lack such a grace period to allow an inventor to so disclose the invention prior to filing a patent application. In countries with an “absolute novelty” rule, a patent application must be filed before making the invention public anywhere. Hence, even the publication of an invention in a U.S. patent grant is a disclosure that can defeat the right to obtain foreign patents, unless the applicant is entitled to claim the “right of priority” under the Paris Convention, as described.
Unlike the United States, many countries require that an invention be “worked” locally to retain the benefit of the patent. “Working” may require commercial-scale manufacture within the country, or may be met by importation of goods covered by the patent, depending on a particular country’s law. The Paris Convention permits penalties for nonworking, which may include a compulsory license at a reasonable royalty followed by possible forfeiture of the patent for continuing to fail to work an invention.
For an invention made in the United States, U.S. law prohibits filing abroad without a foreign filing license from the Patent and Trademark Office unless six months have elapsed since filing a U.S. application. This prohibition protects against transfer of information which might damage the national security. The penalties for filing abroad without following these requirements range from loss of U.S. patent rights to possible imprisonment if classified information is released. In addition, other export control laws require that a license be obtained prior to the export of certain technologies, even if no patent application is filed, or bar their export altogether.
Trademarks: A trademark is a word, symbol, or device which identifies and distinguishes the source of sponsorship of goods and may serve as an index of quality. Service marks perform the same function for businesses dealing in services rather than goods. For example, an airplane manufacturer might register its service mark. In the United States, rights to trademarks, service marks, and other marks such collective marks are acquired through use or prior foreign registration. However, in most countries, trademark rights are acquired only through registration, and many countries require local use of the registered mark to maintain the registration. Whether a given mark can be registered in a particular country will depend on the law of that country. For example,