Thin capitalisation rules for loans received

Earlier, within our #TaxTuesday series, we considered transfer pricing rules for purpose-specific loans; however, it is also important to remember the thin capitalisation rules, which likewise govern the treatment of loan interest in expenses deductible for tax purposes.

Which organisations must perform a thin capitalisation calculation?

Belarusian organisations that have indebtedness in the form of borrowed funds under credit facilities and loans owed to:

• founders/shareholders who, as at 31 December, directly or indirectly hold at least 20% of the shares (interests) in the organisation, and their interdependent (related) persons;
• interdependent (related) persons of the founder.

The list of expenses that are restricted under the thin capitalisation rules is exhaustive and, in addition to loan interest, includes fines and expenses for management, consulting, marketing and other services.

When do the thin capitalisation rules apply?

If, as at 31 December, the amount of controlled indebtedness of a Belarusian organisation exceeds its equity by three times or more (for producers of excisable goods — by more than one time).

Important to remember

An excess of controlled indebtedness (in our case, the amount of the loan) over equity by three times or more permits only part of the loan interest to be deducted as an expense; and if equity is negative or zero, the entire amount of interest is non-deductible for tax purposes.

How does this work in practice?

Example:

• A company with equity of 20,000 BYN received a loan from a founder in the amount of 100,000 BYN at 5% per annum. As at 31 December, 5,000 BYN of interest has accrued.
• Capitalisation coefficient:
• K = (amount of indebtedness / equity) / 3, i.e. K = (100,000 / 20,000) / 3 = 1.67.
• Maximum expenses allowable for tax deduction:
• PZ = amount of loan interest / capitalisation coefficient = 5,000 / 1.67 = 2,994 BYN.

As a consequence, interest of 2,006 BYN is not deductible for tax purposes.

Authors: Katsiaryna Sushko, Ihar Razduyeu.