Applying Articles 9 and 24 of the OECD Model to Thin Capitalization Rules

Thin capitalization occurs when an entity is financed using a relatively high amount of debt compared with equity. This is also referred to as being highly geared or highly leveraged. It is concerning because maintaining an optimal balance of debt and equity in a company’s capital structure is critical if the entity wishes to provide a strong return on capital to its shareholders.

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