Thin Capitalization
Short definition
Thin capitalisation is the slice of related-party debt that exceeds a statutory debt-to-equity (or similar) cap. Interest on the excess is not deductible; the shield is cut and the slice may be treated as a hidden distribution.
Detailed explanation
The cap and the definition are jurisdictional; there is no universal multiple. Bank debt is often treated differently; intra-group and guaranteed structures trigger the cap.
An earnings-stripping cap can sit beside it. If WACC and target leverage ignore the cap, after-tax Kd is optimistic.
Why it matters for the CFO
Intra-group FX debt can look cheap and then lose its shield under thin-cap; all-in then approaches the cost of equity.
How to read it
The cap is a tax D/E, not the accounting D/E. Guarantees and back-to-back can change related-party status.
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What to learn next
Definitions are educational. They are not investment, credit or tax advice.