What is meant by the term "thin capitalization?"

Question

Quizplus · Accepted Answer

Thin capitalization refers to a situation in which a company or entity minimizes the amount of equity capital used to fund foreign operations and instead relies heavily on debt financing. This can potentially lead to an unfavorable tax situation in which interest payments on the debt are deductible, reducing the tax liability, but equity returns are not. As a result, some countries have implemented thin capitalization rules to prevent abuse of this tax loophole.

What Is Meant by the Term "Thin Capitalization