What is thin capitalization? | 外資系企業の税務・経理代行サポート| 国際税務に強い森永会計事務所

Thin Capitalization

Thin capitalization taxation is a system in order to prevent domestic corporations from tax avoidance acts such as by doing excessive borrowing from foreign controlling shareholders.

As a general rule, to obtain funding from foreign shareholders, domestic corporations can take two methods; getting an investment and borrowing.

If a company selects to get an investment, deduction in taxable income will not be granted on dividends on the investment, but in the case of borrowing, deduction is allowed as interest payables.

By abusing the difference in this tax system, the company can intentionally reduce tax burden by doing excessive borrowing.

In order to prevent such acts, if any of the following is more than three times, the deduction on interest payables corresponding to the amount exceeding the triple of the equity interest in the foreign controlling shareholders is not allowed.

 the ratio of the average debt balances to foreign controlling shareholder / equity interest on domestic companies held by foreign controlling shareholders

the ratio of the average debt balances of total interest-bearing debt of the domestic corporations / capital

More details, please contact Morinaga international tax accounting firm!