Thin Capitalization Rule ▸ Conditions ⚫ The debt-to-equity ratio cannot exceed a limit • Financial institution: 5:1 Other industries: 2:1 ▸ Effects Portion of interest expense above the stipulated ratio will be disallowed ▸ Exceptions If there is sufficient evidence (e.g. a thin capitalization special issue file) to show that the financing arrangement is at arm's length, these interests may still be fully deductible even if the ratios are exceeded. 48
Thin Capitalization Rule ▸ Conditions ⚫ The debt-to-equity ratio cannot exceed a limit • Financial institution: 5:1 Other industries: 2:1 ▸ Effects Portion of interest expense above the stipulated ratio will be disallowed ▸ Exceptions If there is sufficient evidence (e.g. a thin capitalization special issue file) to show that the financing arrangement is at arm's length, these interests may still be fully deductible even if the ratios are exceeded. 48
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Question
What is thin capitalization rules?
Transcribed Image Text:Thin Capitalization Rule
▸ Conditions
⚫ The debt-to-equity ratio cannot exceed a limit
•
Financial institution: 5:1
Other industries: 2:1
▸ Effects
Portion of interest expense above the stipulated ratio will be
disallowed
▸ Exceptions
If there is sufficient evidence (e.g. a thin capitalization special issue
file) to show that the financing arrangement is at arm's length, these
interests may still be fully deductible even if the ratios are exceeded.
48
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