Thin capitalization

Thin capitalization refers to a financial structure where a company is funded mainly through debt rather than equity. This often involves borrowing large amounts of money from shareholders or related entities, which can lead to low equity levels. While this can provide tax benefits due to interest deductions, it also increases financial risk. Tax authorities in many countries monitor thin capitalization to prevent profit shifting and tax avoidance, as companies with excessive debt might pay lower taxes. Regulating this practice ensures that businesses remain financially stable and contribute fair amounts to the tax system.