Shareholders to face taxes on loans taken from listed companies

A new clause has been incorporated in the proposed Finance Bill, suggesting that loans taken from public limited companies by its shareholders be treated as dividends and subject to taxation.

Some directors of listed companies have been taking loans from their companies as a means to avoid taxation, often without distributing dividends, according to a senior official of the National Board of Revenue.

Wishing anonymity, the official said shareholders do this because loans are not taxed, but dividends are.

“We have observed instances where directors of public limited companies have taken loans without distributing dividends and delaying repayment while continuing to acquire new loans.”

To combat tax evasion through this method, a new proposal has been introduced in the finance bill, he added.

Currently, if shareholders, typically directors, of “private” limited companies with accumulated profits can take loans from the company, it is treated as dividends and taxed accordingly.

Any income received as dividends is added to the total income of an individual and is taxed at the regular rate, up to a maximum of 30%.

By dropping the word “private” in the new proposal, shareholders of public limited companies will also come under this tax.

Tax experts view this proposal positively as a measure to address tax avoidance.

Syed Md Aminul Karim, former NBR member, told The Business Standard that the move is positive, which is expected to reduce tax avoidance and increase revenue.

He said, “Some company directors are taking loans without distributing dividends, potentially to evade taxes.”

The number of companies listed in the stock market in the country is about 400. More than 300 of these companies are paying dividends against profits.

Rizwan Rahman, former president of Dhaka Chamber of Commerce and Industry (DCCI), said this kind of loan in a public limited company is unethical.

He told TBS that taking loans from a company where not all shareholders have representation on the board could be seen as unethical.

“There are certain companies where sponsors hold barely 30% of the shares while the main liability lies with the public. Therefore, such loans in private limited companies shouldn’t be allowed and should be closely monitored by regulatory authorities,” he added.

However, he does not support treating such loans as dividends and imposing taxes. He believes it is solely the choice of the board of directors whether to grant a loan to a director or not.