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VAT on director’s services in UAE: six things to know

Remuneration received by individuals to perform director’s functions will be outside the scope of VAT

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.

(Pankaj S. Jain is the managing director of AskPankaj Tax Advisors. For feedback and queries, you may write to info@AskPankaj.com. Views expressed are his own and do not reflect the newspaper’s policy.)