Thin capitalisation and related party loans (Part II) | Bangkok Post: business

LEADING THE WAY

In our last column on Aug 21, we noted a proposal by the Thai Revenue Department to develop "thin capitalisation" rules. The aim would be to encourage companies to fund more investment from equity instead of borrowing, by limiting the tax deductibility of loan interest, among other features.

However, as we pointed out, Thai authorities appear to be basing their plan on a belief that thin-cap rules should apply to all forms of debt including third-party loans when in fact they generally apply only to related-party financial transactions within a group.

All developed countries that have adopted thin-cap rules apply them only to shareholder (or related-party) debt. They are never applied to third-party debt. The reason is that third-party debt, by its nature, will seldom be excessive. A lender such as a bank, in order to limit its risk, will ensure the borrower is able to both service the debt and to repay. In effect, the lender "polices" the borrower.