---
kind: "section"
citation: "26 U.S.C. § 7874"
title: "26"
title_heading: "Internal Revenue Code"
number: "7874"
heading: "Rules relating to expatriated entities and their foreign parents"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/26/7874"
units:
  - "Subtitle F — Procedure and Administration"
  - "Chapter 80 — General Rules"
  - "Subchapter C — Provisions Affecting More Than One Subtitle"
---

# §7874. Rules relating to expatriated entities and their foreign parents

- (a) **Tax on inversion gain of expatriated entities—**
  - (1) **In general—** The taxable income of an expatriated entity for any [taxable year](/usc/26/7701.md?p=a-23) which [includes](/usc/26/7701.md?p=c) any portion of the applicable period shall in no event be less than the inversion gain of the entity for the [taxable year](/usc/26/7701.md?p=a-23).
  - (2) **Expatriated entity—** For purposes of this subsection—
    - (A) **In general—** The term “expatriated entity” means—
      - (i) the [domestic](/usc/26/7701.md?p=a-4) [corporation](/usc/26/7701.md?p=a-3) or [partnership](/usc/26/7701.md?p=a-2) referred to in [subparagraph (B)(i)](#a-2-B-i) with respect to which a [foreign](/usc/26/7701.md?p=a-5) [corporation](/usc/26/7701.md?p=a-3) is a surrogate [foreign](/usc/26/7701.md?p=a-5) [corporation](/usc/26/7701.md?p=a-3), and
      - (ii) any [United States person](/usc/26/7701.md?p=a-30) who is [related](/usc/26/7701.md?p=a-51-I-vi) (within the meaning of section [267(b)](/usc/26/267.md?p=b) or [707(b)(1)](/usc/26/707.md?p=b-1)) to a [domestic](/usc/26/7701.md?p=a-4) [corporation](/usc/26/7701.md?p=a-3) or [partnership](/usc/26/7701.md?p=a-2) described in [clause (i)](#a-2-A-i).
    - (B) **Surrogate foreign corporation—** A [foreign](/usc/26/7701.md?p=a-5) [corporation](/usc/26/7701.md?p=a-3) shall be treated as a surrogate [foreign](/usc/26/7701.md?p=a-5) [corporation](/usc/26/7701.md?p=a-3) if, pursuant to a plan (or a series of [related](/usc/26/7701.md?p=a-51-I-vi) [transactions](/usc/26/7701.md?p=o-5-D))—
      - (i) the entity completes after March 4, 2003, the direct or indirect acquisition of substantially all of the properties held directly or [indirectly](/usc/26/101.md?p=a-3-B) by a [domestic](/usc/26/7701.md?p=a-4) [corporation](/usc/26/7701.md?p=a-3) or substantially all of the properties constituting a [trade or business](/usc/26/7701.md?p=a-26) of a [domestic](/usc/26/7701.md?p=a-4) [partnership](/usc/26/7701.md?p=a-2),
      - (ii) after the acquisition at least 60 percent of the [stock](/usc/26/7701.md?p=a-7) (by vote or value) of the entity is held—
        - (I) in the case of an acquisition with respect to a [domestic](/usc/26/7701.md?p=a-4) [corporation](/usc/26/7701.md?p=a-3), by former [shareholders](/usc/26/7701.md?p=a-8) of the [domestic](/usc/26/7701.md?p=a-4) [corporation](/usc/26/7701.md?p=a-3) by reason of holding [stock](/usc/26/7701.md?p=a-7) in the [domestic](/usc/26/7701.md?p=a-4) [corporation](/usc/26/7701.md?p=a-3), or
        - (II) in the case of an acquisition with respect to a [domestic](/usc/26/7701.md?p=a-4) [partnership](/usc/26/7701.md?p=a-2), by former [partners](/usc/26/7701.md?p=a-2) of the [domestic](/usc/26/7701.md?p=a-4) [partnership](/usc/26/7701.md?p=a-2) by reason of holding a capital or profits interest in the [domestic](/usc/26/7701.md?p=a-4) [partnership](/usc/26/7701.md?p=a-2), and
      - (iii) after the acquisition the expanded affiliated group which [includes](/usc/26/7701.md?p=c) the entity does not have substantial business activities in the [foreign](/usc/26/7701.md?p=a-5) country in which, or under the law of which, the entity is created or organized, when compared to the total business activities of such expanded affiliated group.

      An entity otherwise described in [clause (i)](#a-2-B-i) with respect to any [domestic](/usc/26/7701.md?p=a-4) [corporation](/usc/26/7701.md?p=a-3) or [partnership](/usc/26/7701.md?p=a-2) [trade or business](/usc/26/7701.md?p=a-26) shall be treated as not so described if, on or before March 4, 2003, such entity acquired directly or [indirectly](/usc/26/101.md?p=a-3-B) more than half of the properties held directly or [indirectly](/usc/26/101.md?p=a-3-B) by such [corporation](/usc/26/7701.md?p=a-3) or more than half of the properties constituting such [partnership](/usc/26/7701.md?p=a-2) [trade or business](/usc/26/7701.md?p=a-26), as the case may be.

  - (3) **Coordination with subsection (b)—** A [corporation](/usc/26/7701.md?p=a-3) which is treated as a [domestic](/usc/26/7701.md?p=a-4) [corporation](/usc/26/7701.md?p=a-3) under [subsection (b)](#b) shall not be treated as a surrogate [foreign](/usc/26/7701.md?p=a-5) [corporation](/usc/26/7701.md?p=a-3) for purposes of [paragraph (2)(A)](#a-2-A).
- (b) **Inverted corporations treated as domestic corporations—** Notwithstanding [section 7701(a)(4)](/usc/26/7701.md?p=a-4), a [foreign](/usc/26/7701.md?p=a-5) [corporation](/usc/26/7701.md?p=a-3) shall be treated for purposes of this title as a [domestic](/usc/26/7701.md?p=a-4) [corporation](/usc/26/7701.md?p=a-3) if such [corporation](/usc/26/7701.md?p=a-3) would be a surrogate [foreign](/usc/26/7701.md?p=a-5) [corporation](/usc/26/7701.md?p=a-3) if [subsection (a)(2)](#a-2) were applied by substituting “80 percent” for “60 percent”.
- (c) **Definitions and special rules—**
  - (1) **Expanded affiliated group—** The term “expanded affiliated group” means an affiliated group as defined in [section 1504(a)](/usc/26/1504.md?p=a) but without regard to [section 1504(b)(3)](/usc/26/1504.md?p=b-3), except that [section 1504(a)](/usc/26/1504.md?p=a) shall be applied by substituting “more than 50 percent” for “at least 80 percent” each place it appears.
  - (2) **Certain stock disregarded—** There shall not be taken into account in determining ownership under [subsection (a)(2)(B)(ii)](#a-2-B-ii)—
    - (A) [stock](/usc/26/7701.md?p=a-7) held by [members](/usc/26/7701.md?p=j-4) of the expanded affiliated group which [includes](/usc/26/7701.md?p=c) the [foreign](/usc/26/7701.md?p=a-5) [corporation](/usc/26/7701.md?p=a-3), or
    - (B) [stock](/usc/26/7701.md?p=a-7) of such [foreign](/usc/26/7701.md?p=a-5) [corporation](/usc/26/7701.md?p=a-3) which is sold in a public offering [related](/usc/26/7701.md?p=a-51-I-vi) to the acquisition described in [subsection (a)(2)(B)(i)](#a-2-B-i).
  - (3) **Plan deemed in certain cases—** If a [foreign](/usc/26/7701.md?p=a-5) [corporation](/usc/26/7701.md?p=a-3) acquires directly or [indirectly](/usc/26/101.md?p=a-3-B) substantially all of the properties of a [domestic](/usc/26/7701.md?p=a-4) [corporation](/usc/26/7701.md?p=a-3) or [partnership](/usc/26/7701.md?p=a-2) during the 4-year period beginning on the date which is 2 years before the ownership requirements of [subsection (a)(2)(B)(ii)](#a-2-B-ii) are met, such actions shall be treated as pursuant to a plan.
  - (4) **Certain transfers disregarded—** The transfer of properties or liabilities ([including](/usc/26/7701.md?p=c) by contribution or distribution) shall be disregarded if such transfers are part of a plan a principal purpose of which is to avoid the purposes of this section.
  - (5) **Special rule for related partnerships—** For purposes of applying [subsection (a)(2)(B)(ii)](#a-2-B-ii) to the acquisition of a [trade or business](/usc/26/7701.md?p=a-26) of a [domestic](/usc/26/7701.md?p=a-4) [partnership](/usc/26/7701.md?p=a-2), except as provided in regulations, all [partnerships](/usc/26/7701.md?p=a-2) which are under common [control](/usc/26/7701.md?p=a-51-G) (within the meaning of [section 482](/usc/26/482.md)) shall be treated as 1 [partnership](/usc/26/7701.md?p=a-2).
  - (6) **Regulations—** The [Secretary](/usc/26/7701.md?p=a-11-B) shall prescribe such regulations as may be appropriate to determine whether a [corporation](/usc/26/7701.md?p=a-3) is a surrogate [foreign](/usc/26/7701.md?p=a-5) [corporation](/usc/26/7701.md?p=a-3), [including](/usc/26/7701.md?p=c) regulations—
    - (A) to treat warrants, options, [contracts](/usc/26/101.md?p=f-3-A) to acquire [stock](/usc/26/7701.md?p=a-7), convertible debt interests, and other similar interests as [stock](/usc/26/7701.md?p=a-7), and
    - (B) to treat [stock](/usc/26/7701.md?p=a-7) as not [stock](/usc/26/7701.md?p=a-7).
- (d) **Other definitions—** For purposes of this section—
  - (1) **Applicable period—** The term “applicable period” means the period—
    - (A) beginning on the first date properties are acquired as part of the acquisition described in [subsection (a)(2)(B)(i)](#a-2-B-i), and
    - (B) ending on the date which is 10 years after the last date properties are acquired as part of such acquisition.
  - (2) **Inversion gain—** The term “inversion gain” means the income or gain recognized by reason of the transfer during the applicable period of [stock](/usc/26/7701.md?p=a-7) or other properties by an expatriated entity, and any income received or accrued during the applicable period by reason of a license of any property by an expatriated entity—
    - (A) as part of the acquisition described in [subsection (a)(2)(B)(i)](#a-2-B-i), or
    - (B) after such acquisition if the transfer or license is to a [foreign](/usc/26/7701.md?p=a-5) [related](/usc/26/7701.md?p=a-51-I-vi) [person](/usc/26/7701.md?p=a-1).

    [Subparagraph (B)](#d-2-B) shall not apply to property described in [section 1221(a)(1)](/usc/26/1221.md?p=a-1) in the hands of the expatriated entity.

  - (3) **Foreign related person—** The term “[foreign](/usc/26/7701.md?p=a-5) [related](/usc/26/7701.md?p=a-51-I-vi) [person](/usc/26/7701.md?p=a-1)” means, with respect to any expatriated entity, a [foreign](/usc/26/7701.md?p=a-5) [person](/usc/26/7701.md?p=a-1) which—
    - (A) is [related](/usc/26/7701.md?p=a-51-I-vi) (within the meaning of section [267(b)](/usc/26/267.md?p=b) or [707(b)(1)](/usc/26/707.md?p=b-1)) to such entity, or
    - (B) is under the same common [control](/usc/26/7701.md?p=a-51-G) (within the meaning of [section 482](/usc/26/482.md)) as such entity.
- (e) **Special rules—**
  - (1) **Credits not allowed against tax on inversion gain—** Credits (other than the credit allowed by [section 901](/usc/26/901.md)) shall be allowed against the tax imposed by this chapter on an expatriated entity for any [taxable year](/usc/26/7701.md?p=a-23) described in [subsection (a)](#a) only to the extent such tax exceeds the product of—
    - (A) the amount of the inversion gain for the [taxable year](/usc/26/7701.md?p=a-23), and
    - (B) the highest rate of tax specified in [section 11(b)](/usc/26/11.md?p=b).

    For purposes of determining the credit allowed by [section 901](/usc/26/901.md), inversion gain shall be treated as from sources within the [United States](/usc/26/7701.md?p=a-9).

  - (2) **Special rules for partnerships—** In the case of an expatriated entity which is a [partnership](/usc/26/7701.md?p=a-2)—
    - (A) [subsection (a)(1)](#a-1) shall apply at the [partner](/usc/26/7701.md?p=a-2) rather than the [partnership](/usc/26/7701.md?p=a-2) level,
    - (B) the inversion gain of any [partner](/usc/26/7701.md?p=a-2) for any [taxable year](/usc/26/7701.md?p=a-23) shall be equal to the sum of—
      - (i) the [partner](/usc/26/7701.md?p=a-2)’s distributive share of inversion gain of the [partnership](/usc/26/7701.md?p=a-2) for such [taxable year](/usc/26/7701.md?p=a-23), plus
      - (ii) gain recognized for the [taxable year](/usc/26/7701.md?p=a-23) by the [partner](/usc/26/7701.md?p=a-2) by reason of the transfer during the applicable period of any [partnership](/usc/26/7701.md?p=a-2) interest of the [partner](/usc/26/7701.md?p=a-2) in such [partnership](/usc/26/7701.md?p=a-2) to the surrogate [foreign](/usc/26/7701.md?p=a-5) [corporation](/usc/26/7701.md?p=a-3), and
    - (C) the highest rate of tax specified in the rate schedule applicable to the [partner](/usc/26/7701.md?p=a-2) under this chapter shall be substituted for the rate of tax referred to in [paragraph (1)](#e-1).
  - (3) **Coordination with section 172 and minimum tax—** Rules similar to the rules of paragraphs [(3)](/usc/26/860E.md?p=a-3) and [(4)](/usc/26/860E.md?p=a-4) of section 860E(a) shall apply for purposes of [subsection (a)](#a).
  - (4) **Statute of limitations—**
    - (A) **In general—** The statutory period for the assessment of any [deficiency](/usc/26/6211.md?p=a) attributable to the inversion gain of any [taxpayer](/usc/26/7701.md?p=a-14) for any pre-inversion year shall not expire before the expiration of 3 years from the date the [Secretary](/usc/26/7701.md?p=a-11-B) is notified by the [taxpayer](/usc/26/7701.md?p=a-14) (in such manner as the [Secretary](/usc/26/7701.md?p=a-11-B) may prescribe) of the acquisition described in [subsection (a)(2)(B)(i)](#a-2-B-i) to which such gain relates and such [deficiency](/usc/26/6211.md?p=a) may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.
    - (B) **Pre-inversion year—** For purposes of [subparagraph (A)](#e-4-A), the term “pre-inversion year” means any [taxable year](/usc/26/7701.md?p=a-23) if—
      - (i) any portion of the applicable period is included in such [taxable year](/usc/26/7701.md?p=a-23), and
      - (ii) such year ends before the [taxable year](/usc/26/7701.md?p=a-23) in which the acquisition described in [subsection (a)(2)(B)(i)](#a-2-B-i) is completed.
- (f) **Special rule for treaties—** Nothing in section [894](/usc/26/894.md) or [7852(d)](/usc/26/7852.md?p=d) or in any other provision of law shall be construed as permitting an exemption, by reason of any treaty obligation of the [United States](/usc/26/7701.md?p=a-9) heretofore or hereafter entered into, from the provisions of this section.
- (g) **Regulations—** The [Secretary](/usc/26/7701.md?p=a-11-B) shall provide such regulations as are necessary to carry out this section, [including](/usc/26/7701.md?p=c) regulations providing for such adjustments to the application of this section as are necessary to prevent the avoidance of the purposes of this section, [including](/usc/26/7701.md?p=c) the avoidance of such purposes through—
  - (1) the use of [related](/usc/26/7701.md?p=a-51-I-vi) [persons](/usc/26/7701.md?p=a-1), pass-through or other noncorporate entities, or other intermediaries, or
  - (2) [transactions](/usc/26/7701.md?p=o-5-D) designed to have [persons](/usc/26/7701.md?p=a-1) cease to be (or not become) [members](/usc/26/7701.md?p=j-4) of expanded affiliated groups or [related](/usc/26/7701.md?p=a-51-I-vi) [persons](/usc/26/7701.md?p=a-1).

## Source credit

(Added Pub. L. 108–357, title VIII, § 801(a), Oct. 22, 2004, 118 Stat. 1562; amended Pub. L. 109–135, title IV, § 403(u), Dec. 21, 2005, 119 Stat. 2628; Pub. L. 115–97, title I, § 13001(b)(1)(C), Dec. 22, 2017, 131 Stat. 2096.)

## Notes

### Editorial Notes

### Amendments

2017—Subsec. (e)(1)(B). Pub. L. 115–97 substituted “section 11(b)” for “section 11(b)(1)”.

2005—Subsec. (a)(3). Pub. L. 109–135 reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “Paragraph (1) shall not apply to any entity which is treated as a domestic corporation under subsection (b).”

### Statutory Notes and Related Subsidiaries

### Effective Date of 2017 Amendment

Amendment by Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 13001(c)(1) of Pub. L. 115–97, set out as a note under section 11 of this title.

### Effective Date of 2005 Amendment

Amendment by Pub. L. 109–135 effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 403(nn) of Pub. L. 109–135, set out as a note under section 26 of this title.

### Effective Date

Pub. L. 108–357, title VIII, § 801(c), Oct. 22, 2004, 118 Stat. 1566, provided that: “The amendments made by this section [enacting this section] shall apply to taxable years ending after March 4, 2003.”