Earnings stripping

Earnings stripping is a tax avoidance practice whereby a company reduces its taxable income in a high-tax jurisdiction by making excessive interest or similar deductible payments to related entities situated in low-tax or tax-exempt jurisdictions. This strategy effectively shifts profits to locations with lower tax rates, thereby minimizing the overall tax burden of the corporate group. Many tax authorities impose thin capitalization or anti-abuse rules to restrict such practices and protect domestic tax bases.

Example: A multinational enterprise may engage in earnings stripping by financing its high-tax country operations with loans from a subsidiary in a low-tax jurisdiction, thus deducting large interest payments to reduce local taxable profits.