The term describes a corporate restructuring where a United States-based company becomes a subsidiary of a newly formed foreign entity, typically located in a jurisdiction with a lower tax rate. This is often achieved through a merger or acquisition, with the original U.S. company effectively becoming owned by a foreign parent. For example, a manufacturing firm headquartered in the United States might merge with a smaller company incorporated in, say, Ireland, and then reorganize so that the Irish entity becomes the parent company of the entire operation, including the original U.S. business.
The primary motivation behind such reorganizations is typically to reduce the overall corporate tax burden. By shifting the nominal headquarters to a lower-tax jurisdiction, the company can potentially avoid or defer U.S. taxes on foreign-sourced income. Historically, these transactions have drawn scrutiny from policymakers and regulators due to concerns about erosion of the U.S. tax base and potential unfair competitive advantages gained over companies that remain fully subject to U.S. tax laws.
