[Opinion] Beneficial Ownership Vs Shareholding | To Veil or Not?

Piyush Baid – [2024] 163 taxmann.com 325 (Article)

In the intricate realm of corporate ownership structures, the legal doctrines of beneficial ownership and shareholding are of paramount importance, albeit often erroneously conflated. While both concepts relate to a proprietary interest in a company, a nuanced legal analysis reveals fundamental distinctions with profound legal and practical ramifications for stakeholders, corporate entities, and regulatory authorities.

Shareholding, the more readily apparent concept, denotes the formal registration of an individual or entity as the legal owner of shares in a company. This documented ownership, readily ascertainable from public records, confers upon the shareholder a bundle of legal rights, including the entitlement to dividends, the power to exercise voting rights, and access to corporate information.

In contrast, beneficial ownership extends beyond the concept of legal title, centering on the natural person(s) who ultimately derive economic advantage from the shares.1. It is worth noting that, while the concept is intuitive, there exists no universally accepted legal definition of beneficial ownership, particularly in the context of tax law.2 This can encompass situations where the registered shareholder functions solely as a nominee, or trustee or otherwise, holding shares for the benefit of another party, or where the true beneficiary’s identity is obscured through complex trust structures or corporate arrangements.

This dichotomy between formal legal ownership (shareholding) and the actual beneficiary of economic rights (beneficial ownership) has assumed heightened importance in Indian jurisprudence in contemporary and not so contemporary times3. The growing interconnectedness of global economies and the increasing complexity of financial systems have made transparency a crucial element in combating illicit financial flows, including tax evasion, money laundering, and corrupt activities4. As such, the identification of the true beneficiaries behind opaque corporate structures has become imperative to safeguarding the integrity of economies and taxing systems5. While the onus on the type of money has shown a shift from income to capital, the emphasis on the person behind the scene remains.

In response to concerns regarding transparency and illicit financial activities, numerous jurisdictions have enacted AML legislation mandating the disclosure of beneficial ownership6. These legal provisions typically impose a duty upon companies to ascertain and report the identities of their beneficial owners mostly to a designated central registry. The information contained within this registry can be utilized by diverse stakeholders to foster corporate transparency and accountability.

Law enforcement agencies can harness beneficial ownership data to investigate potentially illegal activities, identify those responsible for financial crimes, and facilitate the recovery of illicitly obtained assets.

Tax authorities can employ this information to verify that taxes are being remitted by the actual beneficial owners of companies, thereby mitigating the risk of tax evasion and avoidance.

Furthermore, the disclosure of beneficial ownership can serve as a valuable resource for investors, enabling them to make well-informed investment decisions. A comprehensive understanding of a company’s ownership structure empowers investors to better evaluate potential risks linked to conflicts of interest, obscure ownership arrangements, and money laundering.

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