What Are the FDII Documentation Requirements?

The Foreign-Derived Intangible Income (FDII) deduction offers a tax benefit to U.S. C-corporations that export goods and services. Enacted under Internal Revenue Code Section 250, the deduction amount is scheduled to change. For tax years beginning before January 1, 2026, the deduction is 37.5% against qualifying income, lowering the effective tax rate on that income to 13.125%.

For taxable years beginning after December 31, 2025, the deduction will decrease to 21.875%, raising the effective tax rate to 16.406%. While calculating the deduction is complex, successfully claiming it hinges on meeting detailed documentation requirements. The Internal Revenue Service (IRS) requires corporations to maintain sufficient proof that income was derived from foreign sources. This article focuses on the documentation needed to substantiate claims for sales of property and provisions of services.

General Substantiation Standards

All FDII claims are governed by the record-keeping duties under Internal Revenue Code Section 6001, which requires taxpayers to maintain records sufficient to establish any deduction claimed on a return. For FDII purposes, this translates into a “reasonable belief” standard, where the corporation must possess credible information at the time of filing its tax return that its income qualifies. The regulations focus on the quality of information rather than prescribing specific document types.

This standard requires maintaining records for all transactions intended to qualify for the deduction. Such records include legally binding contracts, commercial invoices that detail the transaction, and proof of payment. A key element is establishing the “foreign person” status of the customer, which means proving the recipient is not a U.S. citizen, resident alien, or a domestic entity like a U.S. partnership or corporation.

All documentation must be in existence by the FDII filing date, which is the due date of the tax return, including extensions. If the IRS requests this substantiation, the taxpayer has 30 days to provide it. An exception exists for taxpayers with aggregate gross receipts under $25 million in the prior year, as they are not subject to the most specific substantiation rules.

Documentation for Sales of Property

To claim the FDII deduction for property sales, a corporation must document that the property was sold for “foreign use,” meaning it was ultimately used, consumed, or disposed of outside the United States. The substantiation rules vary depending on whether the sale is to an end user, an intermediary, or a related party.

For direct sales to a foreign end user, documentation must create a clear trail showing the goods left the U.S. and were delivered to a foreign location. The regulations provide a helpful safe harbor known as the shipping address presumption. If property is delivered by a carrier to a shipping address outside the U.S., it is presumed to be for foreign use, allowing a seller to rely on standard shipping documents as proof. Key documents include:

• A bill of lading, airway bill, or certificate of carrier
• Customs documentation, such as a Shipper’s Export Declaration
• Transportation and export records proving international shipment
• The final invoice showing a foreign delivery address

When property is sold to an intermediary, such as a foreign distributor, the seller must substantiate that the property is intended for foreign end users. This can be accomplished by obtaining a written statement from the intermediary confirming the property will be sold to customers outside the U.S. Other forms of proof include purchase orders that specify a foreign destination or contractual clauses that limit resale to foreign markets.

Sales to a foreign related party, such as a foreign subsidiary, are subject to a higher level of scrutiny. The transaction qualifies only if the related party either resells the property to an unrelated foreign person for foreign use or uses it in providing services or creating another product for an unrelated foreign party. The documentation must be robust enough to prove this subsequent foreign transaction, for instance by tracking the property through the related party’s inventory system to its final sale.

Documentation for Services Provided

Substantiating an FDII claim for services requires documenting that the service was provided to a person or business located outside the United States. The type of evidence needed varies depending on the recipient, as detailed in Treasury Regulation §1.250(b)-5.

When providing services to a business recipient, the documentation must prove the location of the specific business operations that benefit from the service. The recipient’s place of incorporation is not the determining factor; what matters is where the benefit is realized. Strong evidence includes contracts that name a foreign office as the beneficiary, correspondence with personnel at a foreign business location, and public information like corporate website listings that confirm a foreign operational address.

For services provided directly to individual consumers, the focus shifts to the consumer’s physical location when they receive the service. The most common evidence is the consumer’s billing address. If the billing address is outside the U.S., it creates a presumption that the service was provided to someone located abroad, though this does not apply if the provider knows the information is incorrect.

In the context of electronically supplied services, the location of the consumer’s device is the relevant point of analysis. IP address data can serve as a reliable indicator of a foreign location. If the device location cannot be determined after reasonable efforts, the regulations permit reliance on the consumer’s foreign billing address as a proxy for their location.

Leveraging Regulatory Presumptions

The Treasury regulations for FDII provide several presumptions that act as documentation safe harbors. When the specific conditions of a presumption are met, a taxpayer can satisfy a requirement without needing to gather more extensive documentation, which can streamline the substantiation process.

As mentioned in the previous sections, key presumptions include the shipping address for property sales and the billing address for services. These allow a seller to rely on standard documents as sufficient proof of “foreign use” or a customer’s foreign location. However, these presumptions do not apply if the seller knows or has reason to know the underlying information is incorrect.

Another presumption relates to determining the status of a business entity. A taxpayer can often rely on the public records of a business to determine its status as a foreign person. If an entity’s formation documents or other public filings show that it was organized under the laws of a foreign jurisdiction, this information can be used to substantiate its foreign status without requesting specific legal attestations from the customer.