Advantages of Nominee Shareholders
The holding of shares by nominee rather than in the name of the beneficial owner has numerous administrative advantages. It may allow the service provider to form a company in the beneficial owner’s absence which means they will not have to visit the country where they are forming a company or delay formation waiting for documents to be couriered. On an ongoing basis it will allow the nominee shareholder to attend or conduct Annual General Meetings (AGMs) in the client’s absence and more generally to act on client’s spoken or email instruction to make changes to the structure or activity of the company without waiting for paper documents to be signed by the client.
In many countries the share register is a matter of public record so it may be possible with little effort for a member of the public to identify the owners of a registered company. In many cases the client may not wish to be publically associated with the company and the use of nominee shareholders will conceal their connection. In other countries the share registers may not be a matter of public record but must be provided to other shareholders and in this case the use of a nominee would provide some confidentiality. Another consequence of nominee shareholding is that the client’s company is owned by a licensed nominee who also owns hundreds or perhaps thousands of other similar companies registered at the same address and frequently having the same directors. In this sense the company is part of a group of companies connected to a service provider which may identify or single out any one company. This may also be seen as a negative as explained below.
Although nominee shareholdings gives no tax advantage (as explained below) it can make the transfer of shares to a third-party considerably simpler, faster and less obvious than a transfer from shares held by the beneficial owner directly which is usually recorded on the permanent records of the company and which will depend on the receipt of documents signed by the named shareholder.
Disadvantages of Nominee Shareholders
The use of nominee shareholders usually has a cost, though it is frequently fairly low. The cost is a reflection of the need for the service provider to obtain a licence and to carry out due diligence or Know Your Client (KYC) on the beneficial owner of the shares they hold.
No Tax Advantage
The use of nominee shareholders confers no tax advantage (by comparison with a trust or foundation for example which give tax advantage). Since a nominee has no beneficial interest in the assets they hold, any gains are directly attributable to the beneficial owner and will be taxable on him (this is a general principle but is also usually set out in the nominee declaration signed by the client). Consequently, any tax advantage gained from for example the transfer of shares through a nominee will be based on non-disclosure and could be tax evasion. If tax advantage is desired (as opposed to merely privacy and administrative ease) a nominee alone is not an appropriate method
DisclosureConnection with Service Provider
The use of a nominee connects the company with the service provider (and in many cases it will have the same registered office and directors as hundreds or thousands of other companies). This anonymity may have positive aspects (discussed above) but it may also create an easily traceable route to a company which, for example, may specialise in offshore company formation and tax avoidance and this may not be desirable. This risk can be mitigated by using a broker or law firm as nominee but the connection will always exist and is a reputational consideration. On a more practical level it may delay (or even render impossible in countries where corporate services are not regulated) a change in service providers if the incumbent nominees are reluctant to be replaced. Choice of a nominee should be made with regard to reputation, professionalism (and whether or not licensed) as well as financial stability since in the event that a nominee company would go into liquidation it could be problematic to retrieve control of the shares.
Though nominees will conceal the identity of owners from searches on the public registry and from other shareholders it may nevertheless be necessary to disclose the identity of the beneficial owners and their due diligence documents at various occasions in the life of the company for example to open bank accounts or to commercial partners or to sell part of the company or its underlying assets. Indeed in some countries the formation of a company with nominee shareholders requires a disclosure of the beneficial owner and their due diligence to the company registrar or some other government agency. Generally occasions requiring such disclosure will be the result of local Know Your Client (KYC) requirements and therefore cannot be avoided however the company is structured. This means that this disadvantage is not specific to the use of nominees but it is important to note that the protection offered by a nominee will sometimes need to be lifted or operating the company may become impossible.
A nominee should provide some document proving that the client holds the beneficial interest in the shares they hold. This document is usually a single page and may be called a nominee declaration, a mandatory note or sometimes a declaration of trust (though this is not a true trust, for a comparison please see below). This document will usually outline the relationship between the nominee and beneficial owner and specify that the nominee cannot act without direct instruction from the beneficial owner and that any gains made by the underlying assets are attributable to (and therefore taxable on) the beneficial owner and not the nominee. The nominee deceleration may be attached to the share certificates or may be sent to the client separately but it is advisable for the client to keep at least a soft copy.
Differences from Discretionary Trust
In the case of both a trust and a nomineeship the holder of the assets has legal title but not beneficial interest. In both cases the assets are held for the benefit of the beneficial owner. The difference is that a nominee holds assets in name only for the beneficial owner and must follow instructions whereas a trustee holds assets under trust with discretion on how to administer them or what benefit (if any) to advance to the beneficiaries and whilst they may consult beneficiaries they are not bound to follow their instructions. This important distinction means, for example, that whilst a gain made by assets under trust is taxable in the hands of the trustee a gain made by assets under nominee is taxable in the hands of the beneficial owner.
There are no directly comparable products to a nominee shareholder and it can be seen as complementary in most situations in the sense that a nominee can hold shares in a company for the benefit of either the beneficial owner directly, or in nominee for their trustee or for their holding company or for any other legal or natural person. In this way it can be seen as a further layer of protection to be used in conjunction with other products rather in place of them. Where the client wishes the legal owner of the shares to have a wider discretion (and not to simply follow instructions) a discretionary trust may be desirable however even in this case it is quite normal to use a nominee in conjunction with a discretionary trust, for example the owner of ABC Limited may be DEF Nominees Limited as nominee for GHI Trust Limited, as trustee of the JKL Settlement.