Why are Directors’ Services taxable?
Directors’ services in the UAE are considered taxable under the VAT system if certain conditions are met. This is because the Federal Tax Authority (FTA) considers some director responsibilities to be a sort of economic activity, especially if the services are delivered commercially. If a director works independently and is compensated for their services, VAT at the regular rate of 5% may apply.
The essential criterion in assessing VAT obligation is whether the director is operating personally or through a business (such as a management consulting firm or a freelance professional). If the director is registered for VAT and earns more above the necessary registration threshold of AED 375,000 per year from their services, they must charge VAT on their invoices and meet regular filing requirements.
However, if a director works for the firm and earns a salary through payroll, their services are not subject to VAT. Employment income is not subject to VAT. The issue rests in whether the individual is classified as an independent service provider or a corporation employee.
The UAE’s approach is consistent with international VAT rules in taxing professional or consultancy services, including those performed by non-executive and freelance directors. To be compliant, directors who provide services to various companies or on a contractual basis should review their revenue and register for VAT if necessary. Furthermore, organisations that hire directors must ensure that any VAT-charged bills are correctly accounted for in their own VAT filings.
Understanding these standards is critical for avoiding unexpected liabilities or penalties. Directors and organisations should contact with tax professionals to assess their unique circumstances and guarantee proper VAT treatment.
Consideration for Supply
To be a taxable supply, services must usually be provided for consideration. Applied to directors, depending on circumstances, consideration may include director fees, bonuses, stock options, recharges for goods and services acquired by the director, and so forth. Consideration may be monetary (e.g., basic director fees and cash bonuses) or non-monetary (e.g., free accommodation).
In other words, all consideration received by directors, apart from the one which is part of the employment contract with the company, would form part of the taxable supply.
Are directors conducting an independent activity or business?
To be taxable under VAT, services must be provided by a person while conducting business. This is a very broad definition, which may encompass most activities which are conducted regularly and independently, & not as an employee. Consequently, directorship activities can be performed in the course of conduct of business.
Where are the services taxable?
UAE VAT is only charged where a supply is treated as taking place in the UAE. Generally, director’s services provided by UAE residents will be treated as taking place in the UAE.
Where a director who is resident in the UAE provides director’s services which are physically performed outside the GCC Implementing States, such services will be zero-rated. Also, If a UAE resident director provides services from the UAE to a company not resident in the GCC Implementing States, the services may be zero rated 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 VAT incurred.
Can directors avail of the input VAT credit on their expenses?
A director should be able to recover input tax attributable to making taxable supplies. This can include, for example, transportation expenses to commute to work and equipment needed for such businesses. A director should not recover any VAT in respect of expenses incurred for solely non-business purposes. In conclusion, assuming a person provides services as a director regularly and independently (that is, they are not simply an employee of the company), the person will be required to charge VAT on their services if the value of such services (supply) exceed the mandatory threshold of AED 375,000.
