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. Corporate inversions can result in U.S. tax savings, in part because the United States taxes domestic corporations on their worldwide income, while foreign companies are generally subject to tax only on their U.S. source income. Tax savings may also be achieved through such means as "earnings stripping," which involves reducing income in the U.S. firm by borrowing from the U.S. company and increasing interest deductions. 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). Section 7874 imposes negative tax consequences on an inverted company, by reducing or, in some cases, eliminating the tax benefits described above. The section generally applies to companies that inverted after March 3, 2004 (the date the bill was introduced). The specifics of Section 7874 are discussed in Questions 4-8. 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). When Congress added Section 7874 in 2004, the concern was with U.S. companies establishing a shell company in a no- or low-tax jurisdiction like Bermuda and then restructuring so that the foreign shell became the parent of the U.S. company. The company typically had no business operations in the foreign country, and it appeared likely these transactions were done solely to avoid or defer U.S. taxes. 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. Unlike the earlier inversions that generally involved countries in which the company had no presence other than the shell parent entity, these new inversions often involve countries in which the company has some type of legitimate business presence after the inversion. These recent inversions generally are not covered by Section 7874, either because the company has substantial business activity in the foreign country after the inversion or because the statute's ownership thresholds are not met (see Questions 4 and 6). 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. Section 7874 provides negative tax consequences for the U.S. subsidiaries (and their related persons, as defined in Question 5) of inverted corporations if three criteria are met: a foreign corporation completes after March 4, 2003, the direct or indirect acquisition of "substantially all" of the properties held by a U.S. corporation; after the acquisition, the new foreign parent and its expanded affiliated group do not have "substantial business activities" in its home country when compared to its total business activities; and after the acquisition, at least 60% or 80% of the foreign parent's stock is held by former shareholders of the U.S. company. The section creates two different taxing regimes for the inverted corporation depending on whether the 60% or 80% threshold is met. If at least 60% of the foreign parent's stock is held by former shareholders of the U.S. company, then the U.S. subsidiary (and related persons) is limited in its ability to claim credits and deductions against certain income when calculating its U.S. income taxes. If the 80% threshold is met, then the foreign parent is treated as a domestic corporation for U.S. tax purposes and subject to tax on its worldwide income. The unfavorable tax treatment provided under Section 7874 applies to the U.S. subsidiary of the inverted corporation and any related persons to that U.S. subsidiary. Table 1 summarizes the relationships that are treated as "related" for purposes of Section 7874. One requirement in order for Section 7874 to be triggered is that, after the acquisition, the new foreign parent and its expanded affiliated group do not have "substantial business activities" in its home country when compared to its total business activities. The term "substantial business activities" is not defined by statute. 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. The final regulations define "substantial business activities" to mean that the entire company must meet all three of these criteria: the number of employees (and compensation) in the foreign country must be at least 25% of the total worldwide number of employees (and compensation) on the applicable date; the value of assets in the foreign country must be at least 25% of the total value of all worldwide assets on the applicable date; and the income derived in the foreign country must be at least 25% of the total worldwide income during the testing period. This is the third time the IRS has defined "substantial business activities." Initially, the IRS promulgated temporary regulations in 2006 under which the determination of whether a company had "substantial business activities" in the foreign country was made by either (1) looking at the facts and circumstances of each case, considering such things as the local employee headcount and payroll, property, and sales; its historical presence and management activities in the foreign country; and the strategic importance of the business activities in that country; or (2) satisfying a safe harbor if at least 10% of the company's employees, assets, and sales were in the foreign country. In 2009, after concerns that businesses were taking advantage of the safe harbor, the IRS issued new proposed regulations that got rid of the safe harbor, while keeping the facts and circumstances test. In 2012, the IRS redid the proposed regulations to replace the facts and circumstances test with the bright line 25% threshold, explaining its belief that this "will provide more certainty in applying section 7874 to particular transactions" and "will improve the administrability of this provision." The final regulations maintain this 25% threshold. In April 2016, the IRS issued temporary regulations under Section 7874 that are intended to make it more difficult for companies to invert. Some of the regulations address issues identified in previous IRS guidance that was released in 2014 and 2015. Some of the key provisions in the April 2016 regulations address potential ways that companies might try to avoid Section 7874's ownership threshold. For example, when computing the ownership threshold, the temporary regulations disregard any stock issued by a foreign corporation in prior acquisitions of U.S. corporations occurring during the three-year period before the inversion. These previous acquisitions are disregarded regardless of whether they were part of a plan to avoid Section 7874. The IRS has explained that this regulation is intended to address foreign companies who were acquiring multiple U.S. companies during a short period of time, which allowed the foreign company to keep increasing its value and thus avoid the ownership threshold that triggers Section 7874 treatment when it subsequently acquired the inverted company. Another example is that the regulations impose an "anti-slimming" rule that disregards certain extraordinary distributions made by the U.S. company within the three-year period prior to the inversion, and thus prevents the U.S. company from avoiding the ownership threshold by paying out large dividends prior to the inversion in order to reduce its size. The 2016 regulations also address other statutes, besides Section 7874, that can be implicated by corporate inversions. Among other things, the regulations: Limit the tax benefits from using "hopscotch loans." Under current law, U.S. companies are generally not taxed on the profits of their controlled foreign corporations (CFCs) until such profits are paid to the U.S. company as a dividend. IRC Section 956 prevents companies from trying to avoid this repatriation of earnings by means of the CFC investing in certain U.S. property, such as by making a loan to the U.S. parent or subsidiary: in such circumstances, the section provides that the U.S. parent will be treated as if it got a dividend from the CFC. Inverted companies may try to get around this rule through the means of the CFC making a loan to the new foreign parent (rather than to the U.S. parent or subsidiary), which would not be treated as "U.S. property" and thus would not be a taxable dividend. The regulations provide that these "hopscotch loans" will be treated as U.S. property and therefore taxable as dividends. Limit use of the "decontrolling" strategy. Some inverted companies may have the foreign parent buy stock to take control of the CFC from the former U.S. parent, which would give the foreign parent access to the CFC's deferred earnings without paying U.S. tax. The regulations remove the tax benefits that arise from this strategy by providing that the foreign parent will be treated as owning stock in the former U.S. parent, rather than the CFC. Limit the use of "spinversions"—where a company transfers assets to a newly formed foreign corporation and then spins off that corporation to its public shareholders—by treating the spun-off foreign corporation as a domestic corporation. In the 114 th Congress, legislation has been introduced that would amend Section 7874 or otherwise affect inverted corporations.