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Inversion regs clarify when a corporation has substantial business activities in a foreign country and describe the calculation of inversion gain. These concepts are pivotal in determining whether an inversion has occurred and, if so, the amount of inversion gain.
Reg. section 1.7874-3 defines substantial business activities and reg. section 1.7874-11 provides the calculation of inversion gain. Reg. section 1.7874-12 provides 20 definitions that apply to the inversion regs and regs under sections 367, 956, and 7701.
A tax inversion is a restructuring that replaces a U.S. parent company with a foreign parent so that the original parent becomes a subsidiary, and the tax residence of the target business changes to a foreign country while ownership of the target remains generally the same.
The inversion rules in section 7874 and the relevant regs are intended to discourage inversions by…