A system and method are provided for inlining across protection domain boundaries with a system virtual machine. A protection domain comprises a unique combination of a privilege level and a memory address space. The system virtual machine interprets or dynamically compiles not only application code executing under guest operating systems, but also the guest operating systems. For a program call that crosses a protection domain boundary, the virtual machine assembles an intermediate representation (IR) graph that spans the boundary. Region nodes corresponding to code on both sides of the call are enhanced with information identifying the applicable protection domains. The IR is optimized and used to generate instructions in a native ISA (Instruction Set Architecture) of the virtual machine. Individual instructions reveal the protection domain in which they are to operate, and instructions corresponding to different domains may be interleaved.