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What is the “thin capitalization” ratio in Portugal?

Corporate Tax thin capitalization
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Alexandre Andrade
A company may obtain funds to develop its business by debt (third parties) or by equity (shareholders). The loans are usually onerous, i.e. are subject to interest payments (known as loan remunerations).

A company is said to be "thinly capitalised" when it has a high proportion of debt capital in relation to equity capital.

According to the Article 67° of the Portuguese Corporate Income Tax Code, when the indebtedness of a taxpayer to a person not resident in Portuguese territory with it has special relations is excessive the interest incurred on the part considered excessive shall not be deductible for purposes of determining the taxable profit.

Debt is regarded as excessive if on any date during the accounting period it is more than twice the net equity of the taxpayer-borrower.

Those provisions do not apply if, although the ratio established (more than twice the net equity of the taxpayer-borrower) is exceeded, the taxpayer demonstrates, taking into account the type of activity, the sector which includes the size and other relevant criteria, and taking into account the risk profile of an operation that requires no involvement of the entities with which it has special relations, which could have obtained the same level of indebtedness and in conditions similar to an independent entity.
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