Corporate Inversion

AAA

DEFINITION of 'Corporate Inversion'

Re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.

INVESTOPEDIA EXPLAINS 'Corporate Inversion'

Corporate inversion is one of the many strategies companies employ to reduce their tax burden. One way that a company can re-incorporate abroad is by having a foreign company buy its current operations. Assets are then owned by the foreign company, and the old incorporation is dissolved.

For example, take a manufacturing company that incorporated itself in the United States in the 1950s. For years the majority of its revenue came from U.S. sales, but recently the percentage of sales coming from abroad has grown. Income from abroad is taxed in the United States, and U.S. tax credits do not cover all taxes that the company has to pay abroad. As the percentage of sales coming from foreign operations grows relative to domestic operations, the company will find itself paying more U.S. taxes because of where it incorporated. If it incorporates abroad, it can bypass having to pay higher U.S. taxes on income that is not generated in the United States. This is a corporate inversion.

Corporate inversion is not considered tax evasion as long as it doesn’t involve misrepresenting information on a tax return or undertaking illegal activities to hide profits. 

RELATED TERMS
  1. Capital Flight

    A large-scale exodus of financial assets and capital from a nation ...
  2. Tax Avoidance

    The use of legal methods to modify an individual's financial ...
  3. Incorporation

    The process of legally declaring a corporate entity as separate ...
  4. Corporate Tax

    A levy placed on the profit of a firm, with different rates used ...
  5. Foreign Direct Investment - FDI

    An investment made by a company or entity based in one country, ...
  6. Globalization

    The tendency of investment funds and businesses to move beyond ...
Related Articles
  1. Insurance

    Investing Beyond Your Borders

    Investing abroad poses risks, but can also help you diversify. Discover ways to invest in foreign stocks.
  2. Fundamental Analysis

    How Globalization Affects Developed Countries

    The increase in communications technology has companies competing in a global market.
  3. Taxes

    How Large Corporations Get Around Paying Taxes

    With the high tax rate of 35% imposed on large corporations in America, these companies still end up paying way below this rate.
  4. Economics

    Globalization: Progress Or Profiteering?

    Proponents of globalization argue that it helps the economies of developing nations and makes goods cheaper, while critics say that globalization reduces domestic jobs and exploits foreign workers. ...
  5. Personal Finance

    Pros And Cons Of Offshore Investing

    Tax loopholes are shrinking, but there are still plenty of viable prospects. Get the big picture.
  6. Taxes

    The Impact Of U.S. Corporate Taxation On Investment Decisions And CFC Transfer Pricing

    To avoid taxation, businesses do careful tax planning, taking into consideration more than one country's taxation system.
  7. Taxes

    Tax Avoidance Or Illegal Evasion?

    Find out how to avoid the most common tax filing mistakes and audit triggers, so you can deduct with a clear conscience.
  8. Taxes

    Taking A Look At Tax Havens

    These tax-free zones might sound appealing, but the consequences often aren't.
  9. Investing

    What is the purpose of a "repatriated tax break", and why is it so controversial?

    In 2004, Congress passed the American Jobs Creation Act to create new jobs in an effort to boost the economy. One of the results of the act was the implementation of a repatriated tax break, ...
  10. Investing

    Why would a multinational corporation conduct a vertical foreign direct investment?

    In many cases, multinational corporations conduct horizontal foreign direct investment (FDI) activities in order to expand their operations into another market. For example, an American retailer ...

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center