Domestic thin-capitalization rules apply when the loans from connected/ controlled entities exceed 1.5 times the amount of equity capital of the company. In such a scenario, interest paid on these loans is not deductible to the extent interest exceeds the sum of:
- the interest received during the same period from connected/ controlled entities; and
- 15% of the company’s EBITDA (previously 25%).
For the thin-capitalization purposes, two entities are deemed to be connected if:
- One entity directly or indirectly holds a majority in the capital of the other entity, or otherwise effectively controls the decision-making process in that entity; or
- A third entity directly or indirectly holds the majority in the capital of both entities, or otherwise effectively controls the decision-making process in both entities.