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Thin Capitalization
China's State Administration of Taxation and Ministry of Finance recently issued a circular establishing that interest expenses paid by a company to an individual shareholder, or other affiliated individual, are subject to the nation's thin capitalization rules. [Notice on Corporate Income Tax Deduction of Loan Interest Expenses Paid to Natural Persons, Guoshuihan [2009] No. 777, State Administration of Taxation, 12/31/09]
Steven Tseng of KPMG in Shanghai said Circular No. (2009) 777, issued Dec. 31, closes an apparent loophole in China's transfer pricing and thin capitalization rules that allows companies to avoid thin capitalization restrictions by using debt provided by affiliated individuals rather than by related-party companies.
Tseng said such arrangements in China are not uncommon in small-to-medium size corporations.
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