Yes, exports of software can qualify for IC-DISC (Interest Charge Domestic International Sales Corporation) treatment, but only under certain conditions. The eligibility largely depends on whether the software qualifies as “qualified export property” and is part of a sale to foreign customers or used outside the U.S.
Key Conditions for Software to Qualify for IC-DISC Treatment:
Tangible Personal Property:
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- The software must be considered tangible personal property. For tax purposes, the IRS considers software that is physically delivered (e.g., via a disk, USB drive, or other physical media) to be tangible. However, software that is only provided through a download (without a physical medium) may not qualify as tangible property.
Sale for Use Outside the U.S.:
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- The software must be sold to a foreign buyer or used outside of the U.S. For instance, if a U.S. company sells software to a foreign company or individual for use outside the U.S., the sale would qualify for IC-DISC treatment.
Licensing of Software:
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- Software licenses can also qualify for IC-DISC treatment if the license is granted to a foreign entity or individual to use the software outside the U.S.
Export Activities:
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- The export activity must meet the definition under the IC-DISC rules, which include sales of property or services for use outside the U.S. This could include providing a foreign customer with a license to use the software abroad.
IRS Rulings on Software and IC-DISC:
The IRS has provided guidance on software in the context of IC-DISC in various Private Letter Rulings (PLRs), which generally support the position that tangible software (i.e., software delivered on physical media) can qualify for the export benefit. Intangible software (i.e., software delivered via download) may face more complex rules and may not qualify unless additional criteria are met. In these situations it is best to have your situation reviewed by a tax advisor knowledgeable in this area.
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