In Pakistan thin capital rules are there , the ratio is 3:1 foreign debt to foreign equity. On foreign debt which is greater than 3 times foreign equity any interest expense which is taxed at reduced rate is disallowed.
these rules r to stop them doing tax evasion. Because normally they would be evading tax by financing their company through more debt (allows for you to get interest expense deductions, thereby decreasing your income tax liability - vs share capital dividends, which don't allow you to get tax deductions). Whereas thin capitalisation rules operate to make sure that some of those interest expenses are re-characterised so that they are not deductible
In Pakistan thin capital rules are there , the ratio is 3:1 foreign debt to foreign equity. On foreign debt which is greater than 3 times foreign equity any interest expense which is taxed at reduced rate is disallowed.
However I didn't get the idea how come it's used as tax avasion tool?
these rules r to stop them doing tax evasion. Because normally they would be evading tax by financing their company through more debt (allows for you to get interest expense deductions, thereby decreasing your income tax liability - vs share capital dividends, which don't allow you to get tax deductions). Whereas thin capitalisation rules operate to make sure that some of those interest expenses are re-characterised so that they are not deductible
Tnc sir