The Efficacy of Thin Capitalization Rules and Their Barriers: An Analysis from the UK and German Perspective

Abstract

Regulating thin capitalization is a good example of the general problem that even if legislators try to close loopholes through anti-avoidance rules, tax avoidance is the symptom of underlying problems in the tax system. The concept of thin capitalization as a tax avoidance scheme is relatively easy to understand, but a sophisticated solution to control this problem, which meets the requirements of legal framework barriers (EC and constitutional law) and implements a well-targeted scope of application, is very difficult to find. Therefore, this article analyses the efficacy and legal conformity of the current thin capitalization rules in the UK and in Germany. The German thin capitalization regime in particular is far-off being a well-targeted anti-avoidance rule. Finally, this article suggests an approach combining a standard-based and a rule-based regime for regulating thin capitalization.