Intra-group Financing and Thin Capitalization Rules

Intra-group Financing and thin Capitalization Rules

Intra-group Financing and Thin Capitalization Rules

1)   Introduction

Intra-group financing, a way of financing associated entities through debt and “thin capitalization”, refers to the financing of a company through a relatively high-level debt. As this impacts the profits and the taxability of a company, “thin capitalization rules” are often introduced to limit the deductibility of interest paid on corporate debts.


2)   BEPS Action Plan 4


                        i.     Objective

  • Prevent excessive interest deduction.
  • Introduction of interest deduction limitation rules. 

                      ii.     Interest deduction Rule


a.    Fixed Ratio

  • Fixed % of Earning before interest, tax, depreciation and amortization (EBITDA)

b.    Group Ratio

  • Deduction of more interest expense depending on the relative net interest/ EBITDA ratio of the worldwide group.

3)   Thin Capitalization in GCC Countries

a.    KSA

  • Interest payment to affiliates - Allowable, if at ALP and interest deductibility formula is met. 

b.    UAE

  • Net Interest Expenditure ≤ 30% of EBITDA
  • Interest on loan obtained from a Related party (“RP”) to be at ALP. 

c.    Oman

  • Debt-to-equity - 2:1
  • Interest on excess debt disallowed. 

d.    Kuwait

  • Executive Rule No. 38 governs tax treatment of interest with DIT discretion for case-specific tax determinations.

e.    Bahrain

  • No specific legislation regarding thin capitalization. 

f.     Qatar

  • Loan = Arm’s Length
  • Interest ≤ 3 times of Equity

4)   Safe Harbour Insights

                            i.        Intra-Group Financing

  • Establish acceptable interest rates and terms.
  • Reducing the risk of transfer pricing disputes.
  • Reduced documentation requirements.

                          ii.        Thin capitalization

  • Specifies acceptable debt-to-equity ratios.
  • MNEs can minimize the potential for disputes with tax authorities over the deductibility of interest expenses.

5)   Key Takeaways

  • Strengthens the ALP by matching interest rates with unrelated entities, fostering fairness and transparent financial dealings

  • BEPS Action 4: Limits on interest deductions counter tax erosion, favoring genuine economic activities.

  • Prudent Simplification: Safe harbor provisions simplify compliance, yet careful application is crucial to avoid oversimplification risks.

Contact Us

Markus Susilo
Markus Susilo
Partner- Payroll and Indirect Tax
Alessandro Valente
Alessandro Valente
Director - International Tax Service & Transfer Pricing