Corporate inversion

Tax inversion, or corporate inversion, is the practice of relocating a corporation's legal domicile to a lower-tax nation, or tax haven, usually while retaining its material operations in its higher-tax country of origin.

The first inversion in the United States took place in 1982, but the practice became common only in the late 1990s, with U.S. corporations seeking to relocate to tax havens such as Bermuda. More recently, because of changes in U.S. law, a second wave of corporate inversions took place by way of merger with companies in lower-tax foreign countries such as Ireland. The issue drew public attention in 2014 when Pfizer proposed to invert to the UK through a takeover of AstraZeneca.

Tax inversions are a form of tax avoidance, whereby corporations and individuals arrange their affairs to legally reduce their tax obligations. Unlike the law of most other developed nations, the U.S. Internal Revenue Code imposes income tax on the profits of American corporations' foreign subsidiaries. This creates a strong incentive for American companies with large overseas markets to seek to recharacterize themselves as a foreign corporation.

Inversion transactions usually involve the transfer of stock of a corporation by one or more shareholders to a wholly or partly owned subsidiary of that corporation in exchange for newly issued shares of the subsidiary's stock. Internal Revenue Code § 7874 (Rules relating to expatriated entities and their foreign parents) contains the tax rules related to inversions.

Although inverting companies are colloquially said to "change" their domicile to a foreign country, technically inversion usually involves creating a new parent company that sits "on top" of the corporate structure and is incorporated in the desired foreign jurisdiction. The legacy U.S. corporation retains its domicile and becomes a mere subsidiary. Since the profits of subsidiaries of U.S. corporations are typically subject to tax, a U.S. company that establishes a new foreign parent typically seeks to shift as much of its profits as possible out from under the legacy U.S. corporation, so that profits can be delivered directly to the ultimate foreign parent company without passing through a U.S. entity.

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