it is There are common in many industries such as oil and gas industries or industries that require government licensing, where there are strict ownership requirements for companies, bidding for government contracts, which can arrange for the designated shareholder director without the necessary disclosure of the beneficial owners. Typically, undeclared beneficial owners will have side agreements on this arrangement with the nominated shareholder, which will include coverage for the beneficial owner with necessary security in future, and provisions to get back the shares.
Maintaining such arrangements without disclosing the beneficial owner is clearly a violation of the company’s law that was revised in 2024 to essentially disclose the beneficial owners of shares in the company. It will also be in violation of various licensing requirements.
Taxation of nominated shareholder directors
In taxation, income from illegal transactions is still taxable. Taxation is completely independent of the provisions of other legislations. Generally, the candidate shareholder directors will receive income which will include the director fees, attending attendance allowances, dividends and other benefits and followers.
Generally, such shareholder directors will have to file income tax returns and disclose all these incomes, which are exempted except dividend income. However, from 2025, the dividends received by more than RM100,000 individual shareholders will be subject to 2% tax and it will be payable on filing their tax returns.
If undeclared shareholders maintain all income, including dividend income, and pay taxes accordingly, there will be no issue with the inland revenue (IRB) as the tax has been levied according to whatever income is to be taxed.
Where is the risk?
In many cases, it is likely that undisclosed candidates shareholders get dividend income and pass it to the beneficial owners of shares. The question here is whether an income that is given to the beneficial owners is taxable.
The shareholder director nominated to the company will be given tax exemption in addition to more than RM100,000 dividends in the first phase of money transfer. At this stage, the designated shareholder will have to pay the dividends and tax received. Here it is likely that the nominee may arrange in a position when the financial matters of the candidates of the candidate are investigated by the IRB. The problem will arise when the nominee may not have the necessary capital to support the funding of shares. If it is on the surfaces, the enrolled system will have to be disclosed to IRB and as long as 2% tax is paid, the nominee shares will not be in violation of the Income Tax Act.
In practice, enrolled shareholder directors will usually transfer dividends to profitable owners. The big question here is whether the transfer of dividend to beneficial shareholders and directors is a gift or it is income that will be taxable in the hands of the recipient, who are beneficial owners. Since the dividend will be regularly transferred from the nominees to the beneficiaries, the question of taxation arises.
The article has been contributed by SM Thannemalai (www.thannees.com), Managing Director of Thanis Tax Consulting Services SDN BHD.
