At its most basic level, corporate inversions are transactions in which a U.S. company changes its ownership structure so it now has a foreign parent. There are various ways in which this can be achieved. For more information on the types of inversions and potential tax savings, see CRS Report R43568, Corporate Expatriation, Inversions, and Mergers: Tax Issues , by [author name scrubbed] and [author name scrubbed]. In the American Jobs Creation Act of 2004, Congress added Section 7874 to the Internal Revenue Code (IRC). In addition to limiting the tax benefits for the inverted company, Congress has also imposed an excise tax on certain corporate insiders who benefit from an inversion and limited the ability of inverted companies to be federal contractors (see Questions 13 and 14). In light of Section 7874, what is the current controversy about inversions? While Section 7874 shut down those types of inversions, recent media reports have brought attention to U.S. companies using inversions to relocate to Europe and Canada. Some argue that this treatment is appropriate because these inversions can be genuine cross-border mergers that are not solely motivated by tax reasons, but others disagree and see them as evidence that Section 7874 did not go far enough. In 2015, the Internal Revenue Service (IRS) finalized regulations that primarily address the threshold for determining whether a company has "substantial business activities" in its home country when compared to its total business activities. Has legislation affecting inversions been introduced in the 114th Congress? For example, multiple bills have been introduced to (1) decrease Section 7874's 80% ownership threshold to 50% so that, if after the acquisition, at least 50% of the foreign parent's stock is held by former shareholders of the U.S. company, the foreign parent would be treated as a domestic corporation for U.S. tax purposes and subject to tax on its worldwide income; and (2) set a minimum floor of 25% for the "substantial business activity" standard in Section 7874 (the IRS would be authorized to increase the percentage). IRS's Authority to Regulate Corporate Inversions

		9. As of the date of this report, there are no court decisions interpreting the scope of these authorities. How does Section 7874 interact with U.S. income tax treaties? Are there other tax consequences for corporate inversions? For more information, see CRS Report R43780, Contracting with Inverted Domestic Corporations: Answers to Frequently Asked Questions , by [author name scrubbed] and [author name scrubbed].
In general, corporate inversions are transactions in which a U.S. corporation "inverts" its ownership structure so that it now has a foreign parent. There are various ways in which this can be achieved. Corporate inversions have been controversial because it appears, in at least some cases, the primary motivation is the reduction of U.S. income tax liability.
In 2004, Congress added Section 7874 to the Internal Revenue Code (IRC), which significantly limits the tax benefits associated with corporate inversions. While Section 7874 appeared to slow the rate of inversions in the years immediately after its enactment, there have been reports of numerous high-profile inversions (or plans to invert) in recent years. In light of these reports, some have questioned whether Section 7874 should be amended to further limit the ability of inverted corporations to reduce their U.S. tax liability. Others, meanwhile, have argued that these recent inversions are fundamentally different than those that led Congress to enact Section 7874 because the recent inversions are more likely to have legitimate, non-tax business reasons associated with them. As such, some argue that Section 7874 has effectively shut down the types of inversions motivated solely by tax reasons and that to amend the law would risk affecting legitimate, cross-border mergers.
This report answers frequently asked legal questions about corporate inversions. It answers questions relating to the scope and operation of Section 7874, including how key statutory terms have been interpreted by the Internal Revenue Service (IRS). It discusses important Department of Treasury regulations that were finalized in 2015 and 2016, and answers questions about the IRS's authority to issue these regulations. Other questions that are answered relate to legislation introduced in the 114th Congress, the interaction of Section 7874 with tax treaties, and the imposition of an excise tax on corporate insiders who benefit from an inversion.
This report only examines the federal tax consequences of corporate inversions. For a discussion of the federal contracting implications, see CRS Report R43780, Contracting with Inverted Domestic Corporations: Answers to Frequently Asked Questions, by [author name scrubbed] and [author name scrubbed]. For a discussion of the policy issues surrounding inversions, see CRS Report R43568, Corporate Expatriation, Inversions, and Mergers: Tax Issues, by [author name scrubbed] and [author name scrubbed].