Link to Home page
Link to About Export Assist
Link to Export Assist Advantage
Link to Credit and Finance Services
Link to Export Tax Benefits
Link to Education and Training
Link to Export Information Resources

As a guideline, the export economic activities include, but are not limited to, activities that satisfy one or more activities of the sales activity test and two or more activities of the foreign direct cost tests. These tests were originally used to define foreign economic processing (FEP) and then after its repeal, were applied to the Extraterritorial Income Exclusion (ETI). In keeping with the definition already approved by the IRS, we are using these tests to define export economic activities.

There are special requirements regarding the export economic activities pertaining to military sales, so please contact Export Assist or your tax advisor for more information.


Solicitation | Negotiation | Making of Contract

Any communication, by any method, at any time during a 12-month period immediately preceding the execution of a contract or purchase order that is made to a specific, targeted customer or potential customer that brings attention to the product or service covered by the transaction. However, a sale need not occur to satisfy the test. [Regs. 1.924(d)-1c(2)]

Situs: Outside the U.S. customs zone from where the sales material is sent.

Example: Mailing a brochure or a new price list to customers who represent 50% of last year's FTGR every 12 months is a popular way to meet this test. If an exporter uses wholesalers or a distributor and, hence, has very few customers in number, it may send to all of them. This is the test usually chosen to meet the sales activities category.

Caution: You cannot send the same material for both solicitation and advertising (see direct cost tests).

If your company produces many products and you group by product, this test must be done for each product line.

Any communication by the exporter to a customer or potential customer concerning the terms of the transaction. Those terms could be both terms of payment regarding method (i.e., Letters of Credit, cash in advance, open account credit terms) and terms of sale (i.e., price, quantity, delivery method, and incoterms). [Reg. 1.924(d)-1(c)(3)]

Situs: Outside the U.S. customs zone.

Example: This could be the actual negotiation of the terms of a contract by a sales representative calling on clients overseas. More typically, it could be a letter sent from outside the U.S. to a client regarding the terms of a contract.

Making of Contract
Any activity that completes the sale or order, including making and/or accepting an order, written confirmation of the order by the exporter or an acceptance of an unsolicited bid or order, and written confirmation of contract term (i.e., terms of sale, terms of payment). [Reg. 1.924(d)-1(c)(4)]

Situs: Outside the U.S. customs zone.

Example: Written acceptance of an unsolicited bid or order will be considered "making the contract". Written confirmation by the exporter or its agent (i.e., Export Assist, Inc.) that confirms variable contract terms also constitutes "making the contract". An example of how this test might be met is by having copies of renewal contracts sent to the exporter’s office outside the U.S. from where the contracts are mailed to the customers for signature, returned to the foreign office where they are signed by a representative of the exporter and then copies are sent to the customer, the parent company, and a copy is kept in the exporter’s office.



Advertising and Sales Promotion | Processing Orders and Arranging Delivery | Transportation | Determination and Transmittal and Receipt of Payment | Assumption of Credit Risk

Advertising and Sales Promotion

The announcement or description of the export property or services in some medium of mass communication in order to induce multiple customers or potential customers to buy or rent the property or services from the exporter or its related supplier. The communication piece must describe one or more specific products and/or services. Image building communications such as “have a nice day” are to be excluded, as are U.S. targets. [Reg. 1.924(e)-1(a)(1)]

Situs: To where the material is sent.

Placing an advertisement in a trade journal or newspaper that has at least 85% non-U.S. readership. Sending brochures or other materials to customers outside the U.S. (Although the Regulations state that the situs is "to" where the material is sent, some tax advisors are more comfortable having the material mailed from outside the U.S.)

Caution: You cannot send the same material for both solicitation and advertising. The material must be generically different.

Costs: The costs of advertising are the costs of running the advertisement in a newspaper, magazine, or trade journal. If sales material is transmitted to customers or potential customers directly, the cost is the cost of displaying, distributing, printing and sending these materials. Any costs relating to the preparation of the ad or the sales material (i.e., artist, advertising agency) are not counted.

In instances where goods are sold through a distributor, if the exporter pays at least 20% of the distributor's advertising costs (directly or indirectly), the costs count as direct costs of advertising. The costs are considered foreign direct costs as long as the activity is directed to customers outside the U.S.

Sales Promotion
An appeal made in person to an export customer or to a potential export customer for the sale or rental of qualifying export property or services made in the context of a trade show or customer meeting. Customer meeting is defined as a periodic meeting at which ten or more customers (from different companies) or potential customers are reasonably expected to attend. [Reg. 1.924(e)-1(a)(2)]

Situs: Where the trade show or customer meeting is held.

Example: Sponsoring a booth at a trade show outside the U.S. for the purpose of promoting export sales of your product.

Caution: If you have costs that would fall into the sales promotion category, they must be included under the costs recorded for this entire test, as it is a dual category test. Be aware that trade shows held in the U.S. for foreign customers will count as a domestic direct cost.

Costs: The direct costs of sales promotion would be the rent for space and other specific charges at the trade show and the cost of travel and lodging for those directly involved in the selling effort at the show, but not salaries or other compensation. If printed materials are distributed that are used for other promotional efforts, the cost of these materials is not included.

If a customer meeting is held, the costs can include travel and lodging for both company sales people and the customers attending the meeting. Also, if material has been especially produced for such a meeting, the cost of printing can be included in the direct costs.

Processing Customer Orders and Arranging for Delivery

Processing Customer Orders
Notifying the related supplier of the order and of the requirements for delivery. [Reg. 1.924(c)-1(b)(1)] This activity, along with arranging for delivery, must be performed with respect to customers representing 20% or more of the FTGR of all transactions within the grouping. [Reg. 1.924(e)-1(b)]

Situs: From where the communication is initiated outside the U.S

Costs: The costs include payment to personnel located outside the U.S. who perform the work and the cost of communication: mail, telegraph, overnight service, telephone, e-mail, facsimile or in person.

Arranging for Delivery
Taking the necessary steps to have the export property delivered to the customer in accordance with the requirements of the order. This could include communication with the carrier or freight forwarder who will provide the transportation of the goods. It can also include notifying the customer of the time and place of delivery. [Reg. 1.924(e)-1(b)(2)]

Situs: From where the arranging takes place outside the U.S

Example: Since this category (which includes both parts) involves both acknowledging the order and taking the necessary steps to have the order delivered from outside the U.S., it is the least used of the direct cost tests. The information about the order and delivery would have to be transmitted outside the U.S. and then transmitted back to the related supplier, the carrier, and the customer.

Costs: The costs include payment made to personnel outside the U.S. who perform the work and the cost of communication: mail, telegraph, overnight service, telephone, e-mail, facsimile or in person.

Moving or shipping the export property during the period when the exporter owns or is responsible for the property. In the case of a commission, it is when the related supplier owns or is responsible for the property, but after the commission relationship begins, for purposes of transportation. [Reg. 1.924(e)-1(c)(1)]

Note: The wording in the sales/commission agreement between the exporter and the parent/related supplier should define when the commission agreement with the exporter begins such as "…U.S. customs zone" or "…hands of an international carrier".

Situs: Transportation of goods from the point where they leave the U.S. customs zone until they are delivered to customers in a foreign country.

Example: This might be met by one shipment a year if during the normal course of business all other shipments are paid for by your clients. This one shipment would have to be sent: FOB. destination, CIF. or CPT. It cannot be sent FOB. shipping point or CFR to meet this requirement.

Caution: Please note that shipping FOB destination may create foreign source income on that shipment which may not be desirable. In making shipments that go partially by land across the U.S., the U.S. part may be counted as a domestic cost. This can be avoided by handing the shipment over to an international freight forwarder at the shipping point. In this way, the entire cost can be counted as a foreign cost.

Costs: The costs for transportation are those costs incurred when shipping goods. This might include freight charges, fees charged by a freight forwarder, freight insurance premiums, or the cost of preparing documents. All of these costs must be for transportation outside the U.S.

Determination and Transmittal of Invoice or Statement of Account and/or Receipt of Payment

Determination and Transmittal of Invoice or Statement of Account
The assembly of the final invoice or statement of account and the forwarding of that document to the customer. [Reg. 1.924(e)-1(d)(1)]

Note: If the exporter elects to group by product in this category, a special rule applies. If the test is performed with respect to customers representing 50% of the FTGR for either the current or previous year, all domestic costs are disregarded and the exporter is considered to have no domestic costs in this category.

Situs: Location is outside the U.S. where the invoice or statement of account is both assembled and forwarded.

Example: Statements are sent to the management firm to fold, place in envelopes, address envelopes, and mail from outside the U.S.

Costs: The costs here can include the costs of office supplies and equipment, payment made to personnel, and the mailing and delivery charges, if it can be established that these costs were directly related to the assembly and transmittal of the invoice or statement.

Receipt of Payment
The crediting to the exporter’s bank account of an amount that is not less than 1.83% of the gross receipts associated with the transaction within 35 calendar days from the receipt of good funds.

Situs: At the exporter’s bank account maintained in an approved jurisdiction outside the U.S.

Example: The parent company receives payment in its regular U.S. bank account. Within 35 days of receipt, percentages (at least 1.83%) of these payments are wired to the exporter’s bank account in a qualifying jurisdiction. The funds are then wired back to the U.S. bank account.

Costs: The costs include the expenses of maintaining the foreign bank account where payment is sent, the cost of converting funds into U.S. currency, and the bank charges for the transfer of funds in and out of this bank account. The location of the costs would be the foreign bank in which the activity occurs.

Assumption of Credit Risk
Assuming the economic risk of non-payment with respect to an export transaction. This risk can also be included in a commission contract. This economic risk is defined by the terms of payment and credit enhancement negotiated and/or selected by the exporter on each export transaction. [Reg. 1.924(e)-1(c)(1)]

"Inactive" or Assumption Loss Method: This method requires that the exporter specifically assume the risk of loss due to a bad debt and that there is a loss during a three-year period. If there is no loss during the three years, this test can be used for the first two years of the three-year period, but not for the third year. (This assumption of loss by the exporter should be specifically mentioned in the agreement between the parent/related supplier and the exporter.)

Note: A bad debt is an amount that is not collectible or an amount taken into consideration in the determination of additions to bad debt reserves. [Reg. 1.924(e) 1(e)(2)]

"Active" or Insurance Expense Method: This includes the following activities: selling by Letters of Credit, factoring receivables, insuring against loss, and investigating the credit of customers or potential customers. One must obtain Letters of Credit for customers that represent at least 20% of the FTGR from sales run through the export company; 20% of the face amount of the receivables must be factored; 20% of the face amount of the receivables must be insured; or 20% (in dollar volume) of new or potential customers must be investigated.

Situs: The location is where the customer, whose payment is at risk, is located. However, the investigation of credit must clearly have taken place outside the U.S. to qualify.

Costs: For the four tests in the insurance-expense category, the direct costs are the fees for the Letters of Credit; the cost of factoring trade receivables; the cost of obtaining the insurance (all of which might be incurred in the U.S.); and the cost of the credit investigation.

Although the Foreign Economic Processes tests, both sales activities and direct cost, are to be done on a transaction-by-transaction basis, the grouping of transactions is allowed. There are four ways transactions can be grouped to accomplish these tests. They are:

  • Product: The product (or product line) is usually based on a two digit SIC (Standard Industry Classification) code or could be a product line that is recognized in a particular industry. Most companies use the SIC code. It is possible for a company to group by product for some sales and to use the transaction-by-transaction method for other sales.

    When the company uses the product grouping for any of the sales activities tests, they must perform activities outside the U.S. with respect to current or potential customers which represent 20% of the foreign trading gross receipts (FTGR) for the current year or 50% of the FTGR for the previous year (even if there are no sales in the current year to last year's customers.) [Regs. 1.924(d)-1(5)(1)(A)]

    The product grouping is easily done by companies who have very few and/or related products. In most cases, they can meet the economic process test for one transaction or the minimum set out in the federal regulations and thereby meet this requirement for all of the transactions within the year.
  • Customer: The customer grouping would include all of the transactions with one particular customer during a tax year. If your company sells to only two or three major distributors but has a very large selection of different products, this might be a good grouping for you. In this case, the FEP tests would have to be done for each customer, but not for each product.
  • Contract: The contract grouping would include all of the transactions that took place under a single contract during the tax year. One contract might be to supply certain equipment and some ancillary services. All of these sales could be grouped by contract for the year, so one shipment under the contract could be used to meet the transportation requirement.

    There is a special rule for grouping by contract which allows all the transactions for the first and the last year to be grouped, respectively, with the year following and the year preceding. This would allow, for instance, the cost of transportation in the first year to also be used in the second year of the contract in which there were no costs in transportation. In addition, the sales activities test needs to be satisfied only in the first year of the contract if the contract is between unrelated parties. For related parties, the sales activities test must be satisfied each year.
  • Product or Product Line within a Customer or Contract Group: This is self explanatory by the title. It is rarely seen, but is an option.

It is important to note that a different grouping can be used for different tests. For example, the solicitation test (sales activity test) might be grouped by customer and advertising (direct cost test) might be by product. The choice of grouping can also be changed and an amended return filed before the statute of limitations runs out.

Call 1-800-894-8366 to discuss your needs or
e-mail us your questions
  Contact Us | Site Map | About Export Assist | Export Assist Advantage
Credit & Finance Services | Export Tax Benefits | Education & Training
Resources | Coins | Copyright | Credits