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Thin capitalization
Thin capitalization is the situation which exists if the capital injected into a company by way of shares is low in relation to the capital injected by way of shareholder loans.
It is often more tax efficient for a company to be financed by debt rather than equity, because payments of interest are deductible in calculating the company's taxable profits, while payments of dividends are not deductible.
As a result, subsidiaries are often capitalized by a combination of shares and shareholder loans.
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