Is thin capitalisation about the interest rate or the amount of debt?
The amount, and specifically the proportion of the company's funding provided by related-party debt measured against its equity. A rate that would satisfy any arm's-length enquiry does not help, because the test is the capital structure rather than the price. This catches groups who have been careful about pricing and assumed that was the whole exercise. Two questions decide the outcome: what counts as related-party debt in the relevant country, and how that country measures equity. Neither is answered from the financial statements without adjustment, and both belong in a funding decision rather than in a filing.
Does a loan from my parent company count for thin capitalisation?
Almost certainly, and the measure usually reaches further than the obvious shareholder loan. Debt owed to other group companies, to persons connected with the shareholders, and in some cases third-party debt standing behind credit support from the group can all fall within it. The definition is a question of each country's own statute and it is wider than the accounting category of related-party balances. List every interest-bearing liability the company has, then ask of each one who ultimately stands behind it. That list, not the notes to the accounts, is the starting point for the ratio.
What happens to interest I cannot deduct under thin capitalisation?
It is disallowed, and in some systems the disallowed portion is also treated as a distribution, which brings withholding into a computation that began as a deduction question. Whether the denied amount is lost for good or survives into a later year depends on which country's rule applies, and that is worth establishing at the outset: a structure-based cap and an earnings-based cap behave quite differently in a weak year. Plan on the basis that the amount is lost until the governing text says otherwise, and check the withholding consequence at the same time rather than after an assessment.
Can a bank loan be caught if my parent supports it?
It can. Several systems look behind the lender where a parent support undertaking, a pledge of group assets or other credit support behind the loan means the money was only ever advanced on the group's strength. The label on the facility is not the test. When a company is funded this way, the file should record what support exists, in what form, and whether the relevant country treats supported third-party debt as related-party debt for the ratio. Companies are often surprised here, because the facility is genuinely with a bank and the accounts describe it that way.
Do accumulated losses reduce equity for the thin capitalisation test?
In systems that measure equity from contributed capital and retained earnings, yes: an accumulated deficit shrinks the equity side of the ratio. A company can therefore breach a ratio it has always satisfied without borrowing another unit of currency, simply by having a poor year. This is one of the common ways a structure that was sound at funding stops being sound later. The practical response is to compute the ratio on the same basis as the tax rule at each year end, using the tax measure of equity rather than the balance sheet total, and to know in advance how much room is left.
When during the year is the debt to equity ratio measured?
This is decided by the governing rule, and the answer changes the planning entirely. Some systems test the debt at intervals through the year and take an average, some test the highest amount outstanding, and some test a single date. Where an average or a high-water measure applies, repaying a loan shortly before the year end does very little, which is contrary to most people's instinct. Establish the measurement basis before arranging any repayment, and keep the working for each period rather than one computation at the year end, because a later enquiry will ask about the periods.
Is GILTI computed at the CFC level or the shareholder level?
Both, in sequence. Tested income, tested loss and the qualifying asset base are measured company by company. They are then aggregated at the US shareholder, which is where the netting of losses across companies happens and where the inclusion, the deduction and the credit are determined. That order matters in practice: a loss in one foreign subsidiary can reduce the inclusion caused by another, but only for a shareholder who owns both. See the GILTI inclusion and Form 8992.
How does cross-border tax planning work?
It starts with facts rather than structures: which countries have a claim on you, what each one taxes, and where the two overlap. From there the decisions are about order and timing — which country taxes first, where relief is claimed, and whether a filing or a certificate has to be in place before money moves rather than after. Most of the value is in the sequencing, because relief claimed late is usually relief recovered slowly. See international tax planning.
