By Tareq AlWattar
How does value-added tax (VAT) impact money earned from Director's Services?
In this article, I shed some light on a major topic that is either misunderstood or sometimes totally missed - that is 'Director’s Services' provided by UAE VAT residents.
Personally, what I find on this topic is that readers are not sure what they should do, or if their roles are within the scope of Director’s Services.
The easiest example of this is if you are an appointed (not an employee) board member, executive or a director of a company and you earn remunerations against this role, then you should be aware of the conditions and obligations related to Director’s Services and UAE VAT.
In short, the Director’s Services provided by a director should be taxable if:
- the director undertakes services on a regular, ongoing, and independent basis*; and
- the total value of taxable supplies and imports made by the director, including supplies of Director’s Services, exceed the mandatory registration threshold of AED 375,000 ($102,180).
*Independent basis shall mean that a director is not simply an employee of the company.
So, what is the exception to this rule? As indicated above, the exception to this is where employees perform services for their employers and receive salaries, bonuses and similar incentives. In this case, employees are not required to monitor their remuneration threshold and register for VAT.
As I work with a lot of holding and public companies, I hear a common concern from the executives and board members that this is a cost or a burden that they will have now to tackle.
However, it’s not really. The VAT on Director’s Services is not a cost for companies who are charged with the VAT. For them, this is input VAT that can be claimed back in their VAT Return. Subsequently, the director’s role here is to collect the VAT from the company and remit it to the UAE Federal Tax Authority.
There is no cost to the director either, but recordkeeping and VAT returns must be managed. So, there is actually a cost element in compliance to keep track of collected VAT and submission of VAT returns.
Now let me share with you some practical cases that will explain in more detail the place of supply and how to account for VAT in Director’s Services:
1. I am a director resident in the UAE and providing Director’s Services to a UAE entity: Place of supply is the UAE, and the director, if meeting the conditions, shall charge VAT at 5 percent.
2. I am a director resident in the UAE and providing Director’s Services to an entity in a GCC Implementing State: Place of supply is the other GCC Implementing State, and the director, if meeting the conditions, shall not charge UAE VAT.
3. I am a director resident outside the UAE and providing Director’s Services to a UAE entity: Place of supply is the UAE, and the UAE company shall account for such services as an import of services under the Reverse Charge Mechanism.
4. I am a director resident in the UAE and providing Director’s Services to an entity outside the GCC Implementing States – Services are provided from the UAE: The director, if meeting the conditions, may charge VAT at 0 percent if:
- the company does not have a presence in the UAE, and
- the performance of the services is not received in the UAE by any person who would be able to recover the VAT incurred.
5. I am a director resident in the UAE and providing Director’s Services to an entity outside the GCC Implementing States – Services are provided physically outside the UAE: The director, if meeting the conditions, shall charge VAT at 0 percent. Yes correct it is not out of scope but zero rated.
6. I am an employee resident in the UAE who was assigned by my current employer to another company to act as a director in the other company: The company employing the director shall charge VAT at 5 percent to the other company as a normal supply of services. This means that the director is not required to register for VAT purposes.
CAVEAT: This is not a legal or tax advice; each legal person shall seek advice in relation to their own specific case. Tax treatment may change due to various factors and subject to each concluded agreement between the parties.