Extra-Territorial Income Exclusion Act
The FSC Repeal and Extraterritorial Income Exclusion Act of 2000 effectively 'repatriated' the FSC tax break.

Remedial US Legislation
Repealing the export subsidy legislation was a difficult process in the Congress.

Foreign Sales Corporations

Under legislation dating from 1984, which was eventually declared unacceptable by the World Trade Organization after a complaint from the European Union, the US Internal Revenue Code authorized the establishment of foreign sales corporations (FSCs), being corporate entities in foreign jurisdictions through which US manufacturing companies could channel exports. 15% of the revenue concerned was exempted from corporation tax, meaning that companies kept more of their revenue.  

The TRA of 1984 replaced DISCs with FSC provisions to counter arguments from major trading partners that the DISC provisions constituted an illegal export subsidy under the General Agreement on Tariffs and Trade.

A FSC was a corporation which met all of the following tests:

• It must be a corporation created or organized under the laws of a qualifying foreign country or a US possession. A qualifying foreign country is a foreign country that meets the exchange of information requirements of the law. A US possession is defined in the law to include Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, and the US Virgin Islands, but not Puerto Rico.
• It must have no more than 25 shareholders at any time during the tax year.
• It must not have preferred stock outstanding at any time during the tax year.
• During the tax year, it must maintain an office in a qualifying foreign country or a U..possession and maintain a set of permanent books of account at that office. Also, it must maintain at a location in the United States the books and records required to sufficiently establish the amount of gross income, deductions, credits, or other matters required to be reported on its tax return.
• At all times during the tax year, it must have at least one director who is not a resident of the United States.
• It must not be a member, at any time during the tax year, of a controlled group of which a DISC is a member.
• The FSC tax year must conform to the tax year of the principal shareholder who, at the beginning of the FSC's tax year, has the highest percentage of voting power.
• It must have elected to be a FSC or a small FSC by filing Form 8279, Election To Be Treated as a FSC or as a Small FSC, at any time during the 90-day period immediately preceding the beginning of the taxable year or during the first 90 days of its taxable year if the FSC is a new corporation.

Foreign trading gross receipts (FTGR) were gross receipts of a FSC that had met certain foreign management and foreign economic process requirements. These receipts must be from the sale, lease, or rental of export property for use outside the United States or for an engineering or architectural services for a construction project located outside the United States. An FSC (other than a small FSC) was treated as having FTGR for the tax year only if the management of the FSC took place outside the United States. These management activities included:

• Meetings of the board of directors and shareholders.
• Disbursement of cash dividends, outside legal and accounting fees, salaries of officers, and salaries or fees of directors out of the principal bank account.
• Maintaining the principal bank account at all times during the tax year.

There were some other production and content requirements; however the FSC is by now largely of historical interest only, since the regime was abolished in response to EU and WTO pressure in 2000.

A very high proportion of qualifying companies made use of the FSC legislation, typically through tax-exempt companies in the US Virgin Islands, the Bahamas, Barbados and Bermuda.

After the World Trade Organization (WTO) finally ruled in early 2000 that the FSC constituted an illegal trading subsidy, the US passed replacement legislation called The Extra-Territorial Income Exclusion Act.

This in turn was ruled illegitimate by the WTO, and after much to-ing and fro-ing, including the imposition of permitted tariffs by the EU during 2004 on many US imports, US President George W Bush finally signed a law in late 2004 which repealed the FSC-ETI legislation in favour of broader tax reliefs.

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Extra-Territorial Income Exclusion Act
The FSC Repeal and Extraterritorial Income Exclusion Act of 2000 effectively 'repatriated' the FSC tax break.

Remedial US Legislation
Repealing the export subsidy legislation was a difficult process in the Congress.