IT IS common in many industries such as the oil and gas industry or industries that require government licensing where there are strict ownership requirements before companies can bid for government contracts to have nominee shareholder director arrangements without the necessary disclosure of the beneficial owners. Usually, the undisclosed beneficial owner will have side agreements with the nominee shareholder on the arrangement which will contain covenants for the beneficial owner with the necessary protection in case there is a fallout in the future, and provisions to acquire the shares back.
Maintaining such arrangements without disclosing the beneficial owner is clearly a contravention of the company law which was amended in 2024 to mandatorily disclose the beneficial owners of the shares in the company. This will also in contravention of the various licensing requirements.
Taxation of nominee shareholder directors
In taxation, income from illegal transactions is still taxable. Taxation is entirely independent of the provisions of other legislations. Generally, the nominee shareholder directors will be receiving income that will comprise of director fees, meeting attendance allowances, dividends and other benefits and perquisites.
Normally such shareholder directors will have to file an income tax return and disclose all these incomes except dividend income which is exempt. However, from 2025, dividends received by individual shareholders exceeding RM100,000 will be subject to a 2% tax and this will be payable upon filing their tax returns.
If the undisclosed shareholder directors retain all the income, including the dividend income, and pay the taxes accordingly, there will be no issue with the Inland Revenue Board (IRB) as whatever income that has to be taxed has been taxed accordingly.
Where is the risk?
In many cases, there is a possibility that the undisclosed nominee shareholders receive the dividend income and pass it on to the beneficial owners of the shares. The question arises here is whether such income that is passed on to the beneficial owners is taxable.
At the first leg of the money transfer from the company to the nominee shareholder director as dividends will be tax exempt except for dividends in excess of RM100,000. At this stage, the nominee shareholder would have to declare the dividend received and the pay the tax. It is likely here that the nominee arrangement could surface in the event the nominee directors financial affairs are examined by IRB. The problem will arise when the nominee directors may not have the necessary capital to support the funding of the shares. If it surfaces, the nominee arrangement has to be disclosed to IRB and as long as the 2% tax is paid, the nominee shareholder will not be in contravention of the Income Tax Act.
In practice, the nominee shareholder directors will usually transfer the dividends to the beneficial owners. The big question here is whether the transfer of the dividends to the beneficial shareholders and directors is a gift or is it income that will be taxable in the hands of the recipient, who is the beneficial owners. Since the dividends will be regularly transferred from the nominees to the beneficial owners, the question of taxation arises.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
