16 May
UAE Corporate Tax: Will all ‘director’s fees’ be exempt from tax?
Business owners need to check whether no tax on director’s fees applies in all matters
Taxation on an individual’s earnings from company directorship services is once again in the spotlight. On May 13, the UAE’s Federal Tax Authority issued an updated public clarification on the VAT implications from ‘performing the function of director’.
With effect from January 1, 2023, the functions of a member of a board of directors are not considered as a supply of services for VAT purposes. So, VAT was thereafter not applicable on the fee received by such individuals for directorship services. The new update replaces the earlier clarification on the matter to expand the scope of the VAT exclusion.
As per the clarification, the exclusion from VAT extends to services performed as a member of a committee derived from the same board of directors on which the individual serves as a director. As a result, the fee/remuneration for the services to the board of directors – and any committee derived from it – will not be subjected to VAT. The clarification has brought much-needed tax relief to many individuals and senior management personnel.
Critical issues
The relief provided by the recent clarification is an opportunity for business owners to review the tax implications – both VAT and corporate tax – on their earnings.
The VAT exclusion applies only on services performed in the formal capacity as a director on a board of directors. Many individual business owners withdraw funds from their business – often labelled as ‘director’s fee’ – without constituting a board of directors for the company. One needs to examine if such owners could still be considered as ‘directors’ and the fee drawn be excluded from VAT in the absence of a board of directors.
While referring to freelance services rendered by an individual who is not a director, the clarification intriguingly refers to ‘third-party’ individuals. Whether an owner-director could still be excluded from VAT without being a member of a board of directors remains a moot question.
Other services provided by an individual – and activities that qualify as a supply of goods/services such as renting of commercial property – may still be subject to VAT upon meeting the conditions for taxable supplies as stated in the VAT laws.
The fee paid to non-resident directors such as those of multinational companies would neither attract VAT under the reverse charge mechanism (RCM) nor mandate such overseas individuals to register for the UAE VAT regime.
There has been no change in the explanation of transitional provisions in the updated clarification to determine the taxability of services performed prior to January 1, 2023.
Corporate tax on individuals
While VAT is applicable on a supply of goods or services for consideration, the supply should be by a person conducting business in the UAE. This is one of the vital elements for being subject to VAT.
Corporate tax applies on persons conducting business or business activity in the UAE. The expression ‘business’ has been defined similarly under VAT as well as the corporate tax laws.
The recent guide on taxation of natural persons under the corporate tax law states that, generally, director fees will not be considered as a business or business activity, and therefore would not be subject to corporate tax. The VAT amendment states that the performance of a director’s function shall not be considered to be a supply of services, which would inherently mean that the individual is otherwise conducting a business.
The position under VAT and corporate tax laws needs to be harmonised. Will the exclusion from corporate tax apply only if an individual is a member of board of directors? In the absence of a formal board of directors, will the funds drawn as director’s fees be subjected to corporate tax in the individual’s hands or be treated as dividends for the company?
If director’s fee will not be considered as a business, can a legal person who provides directorship services – by delegating a natural person to act as director – be subject to VAT?
These are just some of the pertinent questions that business owners need to ask to optimise the VAT and corporate tax implications on their remunerations.
07 May
UAE Corporate Tax: ‘Black points’ to be issued to tax agents for wrong advice from July 1
Dubai: The operations of registered ‘tax agents’ in the UAE have been tightened up further, with recent guidelines issued on penalties that will be imposed on wrongful advice to clients on their corporate tax obligations. The penalties – in the form of ‘black points’ – will come into effect July 1.
This is on top of the requirements mandated for those who wish to be practicing tax agents in the UAE.
“The Federal Tax Authority (FTA) is raising the bar by introducing a code of conduct for tax agents that are in line with international standards,” said Jeet Gianchandani, Chairman of the consultancy JCA. “These black points will be applied to tax agents – individual or a business – for various acts of misconduct and negligence.
“This includes wrong advice to clients, and which might result in financial costs for them. The new FTA standards will make tax agents update their knowledge continuously.”
How FTA’s new ‘black points’ will be applied
- If a violation is committed by an agent who does not work for that corporate entity, black points shall be applied to the individual.
- If a violation is committed by an agent who works for the client, black points shall be applied to both the individual and the corporate client.
- If a violation is committed by a representative of a corporate tax agent – and such violation is related to or affecting the client – black points shall be applied to both the individual tax agent appointed to represent the client and the tax agency.
- If the violation is committed by a representative working for a tax agency – and such violation is not relating to or affecting the client represented by the agency – black points shall be applied only to the individual tax agent.
These black points will be applied to tax agents – individual or a business – for various acts of misconduct and negligence.
More responsibilites on tax agents
Getting to be a registered tax agent in the UAE already requires individuals to put in a set number of hours, etc. “Nowadays, many professional institutes have made it mandatory for their members to attend educational conferences or seminars to score a minimum number of hours, known as CPE (continuous practice education) hours,” said Gianchandani. “CAs (chartered accounts) have to score 60 hours in a year – and the UAE Ministry of Economy requires 30 hours of training in a year.”
“Clearly, not any Tom, Dick or Harry can become a tax agent.”
Who qualifies to be a tax agent?
Tax agents are an intrinsic part of the unfolding corporate tax regime in the UAE. As per the FTA, they will represent clients before the authority and will oversee the filing of their annual tax returns.
In fact, it is prohibited to practice as a tax agent without completing the registration and receiving an accreditation from the FTA.
- A Bachelor’s or Master’s degree in tax, accounting or law from a recognised educational institution. Or a tax certification from an internationally known tax institution if the Bachelor’s degree is in any other field.
- Recent professional experience of at least three years in either tax, accounting or law.
- Language proficiency document for both Arabic and English, written and spoken.
Penalties on tax agents also come into effect for other acts of omission or commission.
Now, if a tax agent is found to have shared info about the client – or for that matter, any tax payer – with a third-party without their explicit consent in writing, they will face a point deduction of 100 points. (The exception is when agents have a reason to disclose under a ‘legal, professional or regulatory obligation’.)
And 200 points will be docked if tax agents promote, design or jointly design ‘aggressive tax planning’ and which is marketed to a number of taxpayers. If this is done with an ‘intention’ to breach any law or which would jeopardise the ‘integrity of the tax system or result in a loss of revenuedue to the FTA’.
01 Apr
UAE corporate tax: Registration, deadlines explained
If a person has a licence issued in January or February (irrespective of the year), he has to submit a tax registration application by May 31, 2024
The Federal Tax Authority has reitreated deadlines for the registration of taxable persons for corporate tax.
The announcement on X, as part of FTA’s awareness campaign to help taxpayers meet their tax obligations under the Corporate Tax law, are for resident juridical persons that were incorporated or otherwise established or recognised prior to March 1 2024.
The tax are based on the date their licence was issued.
According to the tax authority, if a person has a licence issued in January or February (irrespective of the year), such person shall submit a tax registration application by May 31, 2024.
In case a person does not have a licence on March 1, 2024, such a person shall have three months to submit a tax registration application until May 31, 2024.
The FTA also posted month-wise tax registration deadlines.
22 Oct
UAE Corporate Tax: Business owners should be careful drawing salaries – and bonuses
UAE Corporate Tax: Business owners should be careful drawing salaries – and bonuses
Under UAE corporate tax, owners’ salary remains a contentious – and confusing – issue.
Multiple schools of thought and recommendations exist to justify the salaries drawn by the owners – be it accounting as a salary in the financial statements, or drawing a directorship fee with a significant bonus provided.
While individuals’ salaries remain excluded from corporate tax, business owners should not simply pay themselves a ‘salary’ or ‘directorship fee’ without factoring in the tax regulations.
‘Connected person’ not only includes the owners, but also the directors of the company
Identifying connected persons
To increase the deductible expenses – and reduce the taxable income – of their companies, the owners are inclined to show them drawing a salary for themselves or family members. Sufficient safeguards exist in the form of transfer pricing benchmarking and anti-abuse rules.
The transfer pricing actually covers ‘a payment or benefit provided’ by a company to its ‘connected persons’. The expression ‘payment/benefit’ is much wider in scope compared to goods/services transactions with connected persons.
It therefore becomes imperative to identify all connected persons and the payments/benefits provided to all such persons for tax regulations.
Corporate tax compliance may apply on individual directors – whether owner or independent – if the aggregate directorship fee exceeds Dh1 million
Is directorship services a business?
Whether directorship fee is paid to an owner, family member or an independent director, individual taxation of such directors could emerge as an additional compliance. Subject to certain exclusions such as wages, an individual deriving an annual turnover exceeding Dh1 million from a business or business activity in the UAE need to register for corporate tax.
Directorship fee is generally not considered as wages/salaries. Business includes vocational, professional and service activities.
As such directorship functions were earlier considered as a supply of service and now excluded from VAT only by way of a special exception – the director functions may still be treated as a business in common parlance. As private companies also engage in the business of providing directorship services, the activity per se performed by an individual could well be treated as a business.
Corporate tax compliance may apply on individual directors – whether owner or independent – if the aggregate directorship fee exceeds Dh1 million.
Transfer pricing – documentation vs compliance
A company is not required to maintain transfer pricing documentation for various transaction categories. One such is transaction with a natural person, to the extent that the parties are ‘acting as if they were independent of each other’.
It means the transaction is in the ordinary course of their business and the parties are not exclusively transacting with each other. Independent directors of a company are likely to act independent of each other and result in reduced transfer pricing documentation.
However, documentation is distinct from ensuring that the transactions are at arm’s length. A directorship fee to owner-directors as well as independent directors should be benchmarked at arm’s length.
Safe harbour
I often come across astounding tax planning suggestions such as paying a significant bonus to the owner-director. Could bonus be paid to owner-directors for functioning as a member of a board of directors? Probably not.
Considering the entrepreneurial growth in the UAE and the prominence of family businesses, the administrative and financial costs of benchmarking the payments to owners could be significant and prone to future litigation.
The owners have no practical way to validate the advice received by them from various quarters. It would be immensely helpful for business owners if a safe harbour – a maximum percentage of revenue – could be specified up to which owners could draw as salaries and/or directorship fee from their businesses.
