Thin capitalisation
Thin capitalisation is a strategy where a multinational funds a subsidiary mostly with internal debt rather than equity, so that large interest payments strip taxable profit out of the operating country and into a related lender in a lower-tax jurisdiction. Interest is generally tax-deductible; dividends are not. By loading a subsidiary with related-party debt, a group converts what would have been taxable profit into deductible interest. Most countries now cap deductible interest at a share of earnings: the UK's Corporate Interest Restriction limits net interest deductions for large groups to 30% of EBITDA, with a £2m de-minimis, from April 2017. The OECD's BEPS Action 4 standardised this approach across the Inclusive Framework.
ByLoopholeKiln EditorialPublished
Figures current as of·Corrections
← Tax-avoidance glossary: 31 terms in plain English
Example: a US group's UK subsidiary borrows £500m from the parent at a high internal rate; the resulting £50m annual interest charge wipes out most of the UK taxable profit.
Why it matters to a small business: you borrow at genuine arm's-length from a bank. You cannot manufacture a loan from yourself to strip your own profit, and the interest-limitation rules that police this are aimed at large groups, not you.