An essential concept in accounting and finance that pertains to providing capital for a company, managing its capital structure, converting reserves into capital, and accounting for capital expenditures.
Thin capitalization refers to an arrangement where a company is financed through a high level of debt compared to equity, typically involving intercompany loans within a multinational entity. This is often structured to gain tax advantages by exploiting interest payment deductions.
A thin corporation primarily uses loans from shareholders for its capital rather than equity investments to enjoy tax advantages. This can lead to tax challenges if debt-to-stock ratios surpass acceptable industry standards.
