The Research On Tax Law’s Regulation Of Thin Capitalization

The definition of thin capitalization is that it is a behavior which aims at tax avoidance by changing the capital structure of the corporation which leads to creditor’s investment is much higher than shareholder’s investment without good reason. The aim is to take advantage of the interest and dividends of differential treatments in tax laws to increase the pre-tax expense. At present, thin capitalization has become a wide-using approach of tax avoidance used by corporations. Thin capitalization does great damage to taxing power and economic order of country, corporation’s competition rights, creditor’s right and so on. Our tax laws have begun to regulate thin capitalization. Because the thin capitalization has the feature of concealing, which is difficult to define, there is a conflict between the laws and the regulations are not perfect, so the outcome to restrict the thin capitalization is not obvious.The first part of this paper mainly describes the background and significance of this study, examines the performance of thin capitalization in our economic, points out the dangers of thin capitalization. The second part analyzes the occurrence mechanism of thin capitalization, such as different definitions of capital, capital structure theory, economic reason of thin capitalization. Then, from the nature of the thin capitalization, we define the thin capitalization as a illegal behavior to tax avoidance, different from the tax evasion which has serious illegality and the tax saving behavior which is legal. the thin capitalization is different between capital flight. Finally, through the principle of analysis and examples to illustrate how companies evade the tax obligations with thin capitalization. The third part is introducing the regulation methods of thin capitalization and analyzing our existing thin capitalization legislation. The fourth part is the innovation of this paper, we analyze tax law’s regulation of the thin capitalization from a perspective of the basic principles of tax, a view of Economics of Law and theory of value. At last part, we point out the weakness of our existing thin capitalization legislation, such as the thin capitalization rules are too scattered in our laws, there are law conflicts about the "affiliated party", regulations of excess interest are unreasonable. For the above defects, legislative proposals and new measure and methods have been put forward, such as to develop systems of legal regulation of thin capitalization, to improve the standard of a affiliated party, to subdivide the safe harbor standard of different industries, to define the excess interest as dividends, indicating the illegal nature of thin capitalization to avoid tax, to provide administrative sanctions of it and so on.