International Partner, John Samtoy

June 18, 2026

Originally published February 2023, updated June 2026 to reflect the impact of the One Big Beautiful Bill Act (OBBBA).

Many U.S. companies that sell goods or services to overseas customers are eligible for export tax incentives that could reduce their tax bill.

The first is the Interest-Charge Domestic International Sales Corporation (IC-DISC), and the second is the Foreign-Derived Deduction Eligible Income (FDDEI). The latter was previously referred to as Foreign-Derived Intangible Income (FDII), renamed and rebuilt by OBBBA. The rates moved and the computation changed slightly but the deduction remains.

IC-DISC

• Untouched by OBBBA. It converts what would otherwise be ordinary income (or double-taxed income in a C-corporation) into a qualified dividend taxed at preferential rates, and offers a deferral opportunity. The tax savings can reach 13.2%, or up to $13,200 per $100,000 of qualified net export income.

FDDEI (formerly FDII)

• OBBBA cut the §250 deduction from 37.5% to 33.34%, setting a permanent 14% effective rate (a savings of $7,000 per $100,000 of FDDEI versus the 21% corporate rate). The slightly higher rate is offset by a much broader base, explained below.

These regimes offer significant tax benefits that can lead to substantial savings for the businesses and their owners. The use of these regimes is encouraged by the US and is part of our tax code, and it is important for businesses and their owners to take advantage of them when applicable.

While the advantage of these tax incentives might be most easily recognized in the manufacturing and distribution industry, the opportunity for savings extends to a wider range of industries, including:

• Media & Entertainment: exporting or licensing films, television shows or other entertainment products overseas
• Technology: selling software or hardware abroad, or providing technology services to foreign customers, which fits FDDEI well
• Agriculture: exporting U.S.-grown products, where the IC-DISC can both defer income and convert ordinary income to qualified dividends for the owners
• Healthcare: exporting medical devices or pharmaceuticals, or delivering services from the US to patients and clients abroad
• Service industries: consulting, engineering and similar firms serving foreign clients may qualify for FDDEI on that service income

There are a few things to consider, when it comes to deciding whether an IC-DISC or FDII approach is best for your company.

IC-DISC

An IC-DISC reduces the tax on a company’s qualified export receipts. Those are receipts from selling qualified export property, meaning goods manufactured, produced, grown, or extracted in the U.S. and then sold for use, consumption, or disposition outside the country. It also lets a company defer some income. OBBBA left the IC-DISC rules under §991 through §997 alone.

The IC-DISC setup can take two general forms:

• Buy-sell IC-DISC: the IC-DISC buys the export product from the manufacturer and resells it to the foreign customer, earning the spread.
• Commission IC-DISC: the exporter sells directly to the foreign customer and pays the IC-DISC a commission. The commission is an ordinary deduction for the exporter, while the IC-DISC income is ultimately taxed to its shareholders at the lower qualified-dividend rate.

With a commission IC-DISC, the second entity can be a paper company by design, with no employees and no operations with the incentive in place to encourage domestic production and exports. Its commission is the greater of three statutory amounts:

• 4% of gross receipts on qualified export receipts;
• 50% of combined taxable income of the IC-DISC and the related exporter on qualified export receipts; or
• Fair market value pricing under the §482 method based on arm’s-length transfer-pricing principles (rarely used and wouldn’t be applicable to a company without substance)

How OBBBA affects the IC-DISC

The IC-DISC benefit comes from the gap between ordinary rates and the qualified-dividend rate, and OBBBA held both ends of that gap in place. It kept the TCJA individual brackets permanent, so the top ordinary rate stays at 37%, and it kept the 20% top rate on qualified dividends plus the 3.8% net investment income tax for a 23.8% rate on qualified dividend income.

FDDEI (formerly FDII)

Introduced by the Tax Cuts and Jobs Act, the FDII deduction rewarded C-corporations for serving foreign markets from a U.S. base. OBBBA keeps that goal but rebuilds the mechanics, and, echoing the GILTI-to-NCTI rename, it renames the income Foreign-Derived Deduction Eligible Income (FDDEI). Most of the changes apply to tax years beginning after December 31, 2025.

Previously that the deduction was set to shrink after 2025, falling to 21.875% and pushing the effective rate to about 16.4%. That did not happen. OBBBA set the deduction at 33.34% on a permanent basis and fixed the effective rate at 14%.

OBBBA changes four things:

• Lower, permanent rate. The §250 deduction drops from 37.5% to 33.34%, which lifts the effective rate from 13.125% to 14%. The trade is certainty, since the rate is locked rather than climbing to 16.4%.
• No more QBAI haircut. FDDEI drops the deemed 10% return on tangible assets (QBAI) that used to reduce eligible income. Capital-intensive exporters that the old QBAI rule pushed out, such as manufacturers and refiners, can now qualify for a real FDDEI deduction.
• Interest and R&E no longer allocated. Starting with tax years that begin after 2025, interest expense and research and experimentation costs no longer get allocated and apportioned against eligible income. That helps leveraged and R&E-heavy taxpayers.
• Intangible-property gains excluded. Income or gain from selling IP no longer counts as FDDEI. This applies to transfers after June 16, 2025, so exporting patents, copyrights, and proprietary know-how loses the preferential treatment.

The per-dollar rate benefit does fall, from $7,875 to $7,000 per $100,000. But dropping the QBAI reduction and the interest and R&E allocation usually widens the income that qualifies, so the total deduction can come out larger than it did under FDII.

Which option is better for you?

Most exporters should look at both regimes, not just one. They are not mutually exclusive. A pass-through can run an IC-DISC while a C-corporation in the same group claims FDDEI. A C-Corporation can also claim FDDEI and take an IC-DISC commission. The income that is eligible differs as well because the FDDEI deduction does not require domestic production. Which one fits comes down to the facts.

	IC-DISC	FDDEI
Eligible taxpayers	Any exporter; applies to pass-throughs (S-corps, LLCs, partnerships) and C-corporations.	C-corporations
Core benefit	Converts ordinary income to qualified dividends.	Deduction yielding a 14% effective rate on qualifying foreign-derived income
Headline savings	Up to $13,200 per $100k of qualified net export income in a pass through structure.	About $7,000 per $100k of FDDEI
Production requirement	Yes. Goods must be U.S. manufactured, produced, grown, or extracted,	No U.S. production requirement; covers qualifying goods and services
Setup & upkeep	Separate corporation required; own books and a separate tax return on Form 1120-IC-DISC	No new entity; computed on the corporate return (Form 8993)
OBBBA impact	No direct change; indirect effects from changes to taxable income (bonus depreciation for example)	Renamed; lower permanent rate but a broader base, often a net positive

The IC-DISC usually gives the bigger benefit per dollar, but it needs a separate corporation, ongoing upkeep, and U.S.-produced goods. FDDEI needs no new entity and no domestic production, and after OBBBA it reaches more income than it used to, including the capital-intensive and R&E-heavy businesses the old FDII rules left out.

C-corporations can also take advantage of the IC-DISC rules and the FDDEI rules. In a corporate structure the IC-DISC benefit is a direct 21% deduction of the commission amount with the shareholders recognizing a qualified dividend through the IC-DISC that they would have if the income was fully distributed anyway. The IC-DISC commission will reduce the foreign derived deduction eligible income so there isn’t a full double benefit but the total deduction may be maximized and there may be some income at the corporate level that is eligible for the FDDEI deduction but not for the IC-DISC commission deduction because of the domestic production requirement.

If you export goods or services, or you are weighing the tax of doing so, this is a good time to revisit your structure. Please do not hesitate to contact us if you have any questions.

John Samtoy is a Partner in the Irvine, CA office of HCVT. John specializes in international tax consulting and compliance services and serves high net worth individuals, closely held businesses, and private equity clients across a variety of industries. John has experience serving multinational clients immigrating to and doing business in the U.S. as well as U.S. clients working and establishing operations overseas.