فبراير 18, 2024
Thin capitalization is a tax term that refers to a situation in which a company has a high level of debt and relatively low equity. The concept aims to portray a company with a financial structure heavily skewed towards debt financing instead of equity financing.
A high gearing ratio can create problems for:
Even where countries’ corporate laws permit companies to be thinly capitalized, revenue authorities in those countries will often limit the amount that a company can claim as a tax deduction on interest, particularly when it receives loans at non-commercial rates (e.g. from connected parties).
For That tax authorities limit the applicability of thin capitalization rules to corporate groups to avoid BEPS “Base Erosion and Profit Shifting” to other jurisdictions.
The Egyptian thin capitalization rule provided by the Egyptian Income Tax Law #91 Y 2005 and updates #30 Y 2023, As Interest expenses are deductible for Net income tax calculation purposes after offsetting any tax-exempt interest income, using the rate of debt-to-equity 4:1 and this rate will gradually change to reach 2:1 as follows:
As per Egyptian tax legislation, the deduction of interest payments by Egyptian companies on loans and advances is prohibited if the total amount of such loans and advances exceeds four times the average equity, as determined from financial statements prepared in accordance with Egyptian accounting standards. Put simply, any interest payments exceeding this threshold cannot be claimed as deductions.
The scope of “debt” encompasses loans, advances, bonds, and any other form of debt financing, regardless of whether they involve fixed or variable interest rates. Debit interest refers to all payments made by a taxpayer in exchange for obtaining loans, advances, bonds, or bills.
Collaborating with a reputable tax partner, such as Andersen Egypt, which boasts a team of tax experts, is crucial for avoiding erroneous or poorly planned practices that could adversely affect overall business performance.
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