Thin Capitalization Rule and Earnings Stripping Rule

The two rules are similar and are both trying to restrict interest expenses paid to its parent/affiliate companies. But they are a little bit different in their target. Here are the rules:

Thin Capitalization Rule

The interest paid to its affiliated company overseas that owns more than 50% of its shares is allowed to be deductible only up to the amount corresponding to its loan triple of its equity. For example, if its capital is 10M Japanese Yen and retained earnings are 3M. The interest expenses are only allowed only for its loan up to 39M(13M * 3) yen. If the total loan is 50 million yen, the interest on the remaining 11 million yen loan (50M – 39M) will not be deductible.

Earnings Stripping Rule

You can deduct interest expenses paid to overseas affiliated company from taxable income only at maximum 50% of its taxable income. The exception is that the rule is not application if the total interest is less than 10 million yen.