Thin Capitalization In Egypt: Tax Deduction Boundaries

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:

• creditors, which bear the solvency risk of the company.
• Tax Authorities, which are concerned about excessive interest claims.

Tax issues

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).