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In the context of taxation, this term denotes a change in the location of corporation's legal domicile from the United States to a country (e.g. Ireland) that taxes only income earned in that country and has a lower corporate tax rate than that of the US.

Most countries tax corporate income only from domestic sources and do not tax the worldwide income of companies. However, US-based companies must pay US tax on all earnings inside and outside the US. Moreover, the US has a higher corporate tax rate than many other countries do. To discourage US companies from making inversions, the American Jobs Creation Act of 2004 added Section 7874 and Section 4985 to the Internal Revenue Code. Similar proposals have been introduced in Congress since then.

The related excise tax imposed by Section 4985 affects senior executives and directors with stock compensation in an "expatriated corporation" and in any predecessor or successor corporation. The excise tax is 15% of stock-based compensation held during a one-year period consisting of six months before the inversion until six months after it. Both income-tax treatment and excise-tax treatment apply to various types of equity award. The tax treatments differ by award because the excise tax applies only to equity that has not yet been subject to another tax. For example, unexercised nonqualified stock options will be subject to the excise tax when an inversion occurs. Excise tax will not be applied, however, to equity compensation that was previously recognized in taxable income (e.g. options already exercised, RSUs previously vested and settled), though the shares will be subject to capital gains tax.

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