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.
