The Perfection Of China’s Thin Capitalization Tax System

on January 1,2008 China implemented the new "Enterprise Income Tax Law", The new tax law unified the domestic and foreign tax standards and specificities the standards of domestic and foreign pre-tax deduction, reduced the tax rate applicable to both domestic and foreign enterprises, which embodies the principle of tax reform as "simplified taxation system, broader tax, lower tax rates and stricter tax collection ",adapt to the new requirements of the new stage of the socialist market economy.On the positive side, the new law can adjust the direction of business investment; speed up industrial restructuring, and to promote our role in promoting industrial restructuring. However, the new tax law in the adjustment of tax incentives to enterprises would result in negative impact on the performance of tax incentives for businesses that enjoy the tax reduction will certainly inspire their tendency to tax avoidance. Emerging techniques such as transfer pricing, tax avoidance, capital dilution, etc. will be a large number of applications, which will definitely increase the difficulty and cost of tax collection.Thin capitalization, also known as the capital of concealment, hiding, or benefit from taking equity extraction, is the capital structure arrangement in an enterprise where the proportion of debt capital is greater than the proportion of equity share capital. Corporate capital is made from the equity capital and debt capital, the former refers to the owner of the invested capital, including capital and capital surplus, surplus reserves; the latter refers to the business obtained capital at all levels of the capital markets, like banking or related enterprises. The proportion of equity capital and debt capital, to a certain extent, reflects the pros and cons of capital structure, if the proportion is suitable, appropriate amount of debt capital would guarantee the required market risk capital requirements and be able to obtain positive financial effect; If the proportion is in disorders, then it will have the usual sense of the Thin capitalization. This paper will be based on the new tax law (including the relevant administrative rules and regulations), through cases to reveal the choice of the company’s capital structure and corporate tax avoidance by way of thin capitalization and how companies in the context of tax law in order to achieve reasonable arrangements for the capital structure and other legal issues of tax savings. Different from the previous focus on the multinationals, this paper mainly focused on domestic enterprises. This is the new trend in thin capitalization, worth concern.The main objective of this paper is to provide a real way with operational to prevent the thin capitalization. Therefore, after introduce the company’s capital structure theory and the relevant provisions of tax law, this paper mainly focused on cases, attempts an analysis of typical cases to illustrate how companies within the framework of the tax laws and regulations, reasonable their tax planning to achieve the purpose of tax saving. On this basis, further through case studies to reveal how to achieve the legislative purpose of thin capitalization regime, how the implementation of related responsibilities can be implemented and looking further to establish some ideas of china’s Anti-Thin capitalization.