Jurisdiction(s):
United Kingdom

Related legal acts

Key definition

Thin capitalisation definition

What does Thin capitalisation mean? Thin capitalisation describes a company funded mainly by debt rather than equity, i.e. a high debt-to-equity ratio (high leverage/gearing), often via shareholder or intra-group loans. A company is thinly capitalised when debt significantly exceeds equity. The expression is descriptive rather than a defined legal term, but it has significant tax and financing implications. In the UK (England & Wales, Scotland and Northern Ireland), thin capitalisation issues are addressed mainly through transfer pricing rules (requiring arm’s length debt capacity and pricing) and the Corporate Interest Restriction, which can cap deductions for interest. HMRC may adjust or deny deductions,...

EU fundamental freedoms and UK thin capitalisation and transfer pricing: from Lankhorst-Hohorst to the Thin Cap GLO and the post-2004 regime's compatibility with EU law

Published by a LexisNexis Tax expert

Practice notes

ARCHIVED: This Practice Note is archived and is not being actively maintained any longer.

thin capitalisation and transfer pricing closely overlap yet are nonetheless distinct concepts in practice. Some regard thin capitalisation rules as a specific manifestation of wider transfer pricing rules in effect. EU law is relevant to thin capitalisation and transfer pricing as such because, while direct taxation falls wholly outside the EU’s competence, national measures must still observe the general principles of EU law and the treaty then in legal force (currently the Treaty of the Functioning of the European Union) (the Treaty). The principal Treaty provisions pertinent to thin capitalisation and transfer pricing are those addressing non-discrimination in relation to the fundamental freedoms.

Potentially applicable freedoms are:

freedom of establishment
free movement of capital, and
free movements of goods and services

What are transfer pricing and thin capitalisation?...

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Kelly Stricklin-Coutinho

Kelly specialises in International Tax Planning, Direct Tax, Tax litigation and enquiries, EU Law, Remedies in Tax Disputes and Commercial Litigation. ...

Web page updated on 21/05/2026

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