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13.2. Thin-capitalization and other Restrictions to Interest Deduction

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.