When Is a Company Thinly Capitalised?

A company is said to be thinly capitalised when the level of its debt is much greater than its equity capital, i.e. its gearing, or leverage, is very high. An entity's debt-to-equity funding is sometimes expressed as a ratio.

What is a thinly capitalized company?

A company is typically financed (or capitalized) through a mixture of debt and equity. ―Thin capitalisation‖ refers to the situation in which a company is financed through a relatively high level of debt compared to equity. Thinly capitalized companies are sometimes referred to as ―highly leveraged‖ or ―highly geared‖.

What is a thin company?

Thin corporation is a corporation with large debts to its shareholders and very little equity. In such a situation, the Internal Revenue Service (IRS) may reclassify the debt as equity investment, which means payments to shareholders do not include tax-deductible interest but are dividend payments.