I guess i might have presented more than 10 BVP in the past 2 weeks. Business owners are very receptive of the idea and they always have this common concern about whether the premium paid for the BVP is allowable for income tax purpose. If I were to answer the question without referring to the relevant statutes or public ruling, just based on concepts, the answer will be, you either pay tax now or pay later. Haven’t we heard of the infamous phrase “The two certainties in life; death and taxes”. 

If the premium is allowed as an expense, then when there is a claim, the sum assured paid (or surrender/maturity value) will be taxed, so we will need to get a higher cover to take into account of the tax impact on the proceeds. If the premium is added back as non-allowable expense, then logically the sum assured paid out (or surrender/maturity value) will not be taxed.   As far as tax is concern, it is no longer important whether the insurance plan chosen is a wholelife or a term, because the premium will be paid by the individual shareholders. Usually the company will effectively increase the Salary/directors’ fee/ Benefit-in-kinds/Dividend of the individual shareholders(directors) for the amount of premium paid for the insurance policies in relation to the BVP. In other words, the premium amount will be included in the EA forms of the directors (cum shareholders). If the shareholders’ tax bracket is already 28%, then tax will have to be paid accordingly. Instead of going through the EA form, the company can also declared dividend for the amount equivalent to the insurance premium. This will effectively reduce the tax rate to the current corporate tax rate of 26% (or less) 

The common suggestion is to let the company pay for the insurance premium and let the premium be a wholly deductible expense. This will raise 3 issues;

1) service tax of 5% will be levied on the premium paid,

2) term policy will have to be used, and

3) the proceeds will be paid to the company instead of the shareholders.  

Most people have no trouble with 1) and 2), but for 3), if the proceeds is meant for the family of the deceased shareholder, it is quite cumbersome to take it out of the company and to pay to the beneficiaries. The following are some of the suggestions that we find challenging to execute : 

1) Company pay the beneficiaries with the insurance proceeds and the remaining shareholders get the shares.  - The challenges will be Section 67, company’s act 1965, where companies are not allowed to extend funds to shareholders to buy its own shares. Taking the insurance proceeds and pay to the beneficiaries, in exchange for the shares of the deceased shareholders, is effectively using company fund to buy shares. 

2) Company buy the shares from the beneficiaries and cancel the shares. - The challenge will be the restriction on capital reduction/ shares buy-back. Private limited companies are usually not allowed to buy-back their own shares. So if the company were to buy the shares of the deceased from the beneficiaries with the insurance proceeds, it will contravene this statute. 

3) Company pays death gratuity to the deceased estate and the shares transferred back to company at a nominal price – This is somewhat workable but an extremely cumbersome to plan and execute. The gratuity will have to be worded in the employment contract and the buy sell agreement will have to state the nominal value, if required. There is no guarantee that employment contract will be honoured immediately, and the buy-sell agreement could be superfluous or the terms incorporated into the shareholders’ agreement, which can be amended at a later date.

So to end with a good note, the BVP structure is still the best structure after all.

This time round I am going to elaborate a bit more about Business Value Protection Programme. I am going to talk about - what are its purposes, how it affects the different stakeholders in the business, what happens if there is no such plan being put in place and what are the benefits of having BVP.

Mechan and Nikel were good friends. They were both very good engineers and they started an engineering consultancy firm 10 years ago. In the early days, they worked 16 hours a day and 7 days a week and until 1 year ago, thanks to their past tireless efforts, the firm has grown to a RM10million-a-year business.

One day, Mechan had an accident at the site and died on the spot. Initially, there were some disruption to the operations of the firm. Since all cheques require both Mechan and Nikel’s signatures, the firm was unable to pay its suppliers and workers’ wages and salaries. Some suppliers were kind enough to extend the credit terms, but a few stopped delivery of some crucial materials causing delay in some of the ongoing projects. The firm had to pay huge liquidated damages to the main contractors. The widow of Mechan begged Nikel to continue to pay monthly allowances to the family as they really needed the money for their daily expenses. Nikel was able to accommodate for the first few months, but as the effect of the loss of projects and payments for liquidated damages set in, the firm no longer had the cashflow to pay the allowances to Mechan’s family. Nikel was faced with increasing workload as he needed to take care of the job functions which were previously Mechan’s responsibilities. The firms’ staff were also leaving in droves due to lack of confidence in the survival of the business. Mechan’s widow was seen coming into the office every other day to see Nikel to ask for payments. Whenever Nikel was unable to pay her, she had no choice but to persist and share her unhappiness with all her friends and relatives. She suspected Nikel was not honest and had betrayed her. One day she asked Nikel to buy over the shares of the firm she inherited from Mechan. Since she knew that the firm was worth at least a few million ringgit, she demanded RM3million from Nikel. Nikel told her the truth, that the firm’s business was going downhill ever since the demise of her husband, and he can only offer her RM300,000. She refused and went on to seek legal advice.

To cut the long and sad story short, eventually Nikel was forced to set up a new company called Nikel Engineering Consultancy Sdn Bhd, taking along with him all the clients of his former company. Today, Mechan Nikel Engineering Consultancy Sdn Bhd is in the process of winding up. Mechan’s children stopped studying in a private school and his widow was last seen going for job interviews. She was a full time housewife up till a year ago.

Conclusion: as we can see, the chances of the above event happening is very real. The best way to avoid such a mess is to ensure that a proper Business Value Protection Programme is in place.