Khaleej Times, Sunday, Nov 20, 2022 | Rabi Al Thani 25, 1444
VAT on director’s services in UAE: six things to know
Emairtes:
Individuals now have another reason to cheer on at this new year. Effective
January 1, 2023, functions of a member of a board of directors performed by a
natural person will no longer be treated as a supply of services. The
remuneration received by the individuals to perform director’s functions will
thus be outside the scope of VAT.
Direct appointee vs nominee directors
The VAT exclusion will apply only if a natural person is appointed as a director
on a Board of any government entity or any private sector establishment.
If a company holds shares in another company, it is fairly common for the
investor company to appoint a director in the investee company on its behalf. It
has been clarified that the exclusion will not apply to a legal person who may
delegate a natural person to act as director on its behalf.
In the UAE, certain companies provide professional directors’ services and/or
nominee directors’ services. It needs to be examined whether the VAT exclusion
will apply in such situations even if the directors are appointed in their
individual names.
Non-resident directors
For the VAT exclusion to apply, it is not necessary that the individual
directors should be a resident in the UAE. The non-resident directors will also
be excluded from VAT. Accordingly, the recipient companies will not be obligated
to account for VAT under the reverse charge mechanism (RCM). Even if the
director’s functions are performed for a VAT-unregistered company, the
non-resident individual would not be required to obtain VAT registration.
CEO role vs board of directors
The VAT exclusion applies only to the functions of a member of a board of
directors. A Chief Executive Officer (CEO) may also be referred to as the
executive director of a company. The job title will not determine the VAT
implications. It is the function/activity that will determine whether the
corresponding remuneration would be outside the scope of VAT.
If a CEO was also earning a directorship fee in addition to the salary as the
company’s employee, such directorship could have been taxable earlier but will
henceforth be outside the scope of VAT.
Other taxable supplies by the individuals
Though the functions of a director would henceforth be outside the scope of VAT,
any other taxable supplies by an individual would continue to be taxable. To
illustrate, the renting out of commercial properties or taxable supplies through
sole establishments by an individual would remain taxable under the VAT laws.
Further, only the services performed in the formal capacity as director could be
excluded from VAT. If an individual-director provides any other services to the
company, such services could also be taxable.
Transition rules
Individuals benefiting from the aforesaid VAT exclusion should not make a common
mistake of linking VAT obligations with the cashflow i.e. receipt of
directorship fee.
For the director’s functions performed in 2022 whereby the directorship fees was
already known, VAT would be applicable even if the payment is received after
January 1, 2023.
On the other hand, if the directorship fee was contemplated to be paid as per
periodical milestones say, quarterly, the payments payable on or after January
1, 2023 will not be taxable even though the payment corresponds to the functions
performed in 2022.
FTA has clarified the VAT implications in one intriguing scenario - where a
natural person functions as a director in 2022 but the fee payable to directors
will be determined only at the conclusion of the annual general meeting to be
held in 2023. If no tax invoices have been issued, or advance received, before
the AGM, the fee received by the individual for the functions performed in 2022
will be outside the scope of VAT.
De-registration
Effective January 1, 2023, individuals need to evaluate the obligation to
de-register from VAT.
Based on the quantum of other taxable supplies after January 1, 2023, an
individual may be required to apply for VAT de-registration. A monthly penalty
of Dh1,000 up to a maximum of Dh10,000 could apply for the delay in VAT
deregistration.
Concluding remarks
In our previous two Tax Conversations, we had covered the important VAT changes
that will be effective from January 1, 2023. With individuals’ salaries not
being taxable, the VAT relief on director’s remuneration is a welcome
development. Individuals now need to evaluate their other business incomes and
requirement to deregister for VAT to avoid any penalties.