Thin capitalisation

Thin capitalisation refers to a company financed predominantly by debt rather than equity — where the debt-to-equity ratio exceeds fiscally acceptable limits, triggering partial non-deductibility of interest charges. In Switzerland, the SFTA publishes "safe harbour" debt-to-asset ratios for different asset categories — exceeding these ratios causes excess debt to be requalified as "hidden equity" with non-deductible interest. In France, thin capitalisation rules (CGI art. 212) limit related-party interest deductibility based on net interest/EBITDA thresholds and arm's length conditions. Managing thin capitalisation is critical in LBO and holding structures.

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Example: a Swiss holding acquires a company for CHF 20.0 million, financed with CHF 16.0 million of intragroup debt. SFTA safe harbour for participations: 6x equity leverage = maximum CHF 12.0 million debt on CHF 2.0 million equity. The CHF 4.0 million excess debt generates non-deductible interest: CHF 4.0M × 5% × 14% = CHF 28,000 annual tax leakage — correctable by a CHF 667,000 additional equity contribution to reach the safe harbour boundary.

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Hectelion analyses thin capitalisation risk in Swiss and French LBO and holding structures, structuring debt levels within fiscally defensible boundaries.