Director’s fees is no more a taxable supply effective 1 January 2023
November 23, 2022
Ministry of Finance (MOF) has announced that effective from 1 January 2023, director services undertaken by the natural person serving as a member of boards at entities and institutions (Govt. as well as private) across the UAE will not be subject to VAT. However, it is pertinent to note that VAT would be still applicable to the Director’s services for legal persons serving as board members who delegate a natural person to act in the name of the legal person as a member of the board of directors. Federal Tax Authority (FTA) has published a detailed clarification (VATP031) providing guidance on how to apply the new provision and determine the resulting VAT obligations prior to and post the date of 1 January 2023 on concerned natural persons.
Key points to be considered:
As per the Cabinet Decision amending the Executive Regulation of the Federal Decree Law on VAT (effective 1 Jan 2023), performing the duties of a board of directors member at a govt. or private entity in exchange for a reward (monetary or in-kind) will not be considered as a taxable supply of services for VAT purposes. Prior to the implementation of this amendment, the general rule was that services provided by a natural person or legal person were considered to be a taxable service for VAT purposes provided these services were provided on a regular, ongoing, and independent basis. This amendment does not extend to a legal person, whether private or public, who may delegate a natural person to act as director in their own name.
It is important to note that, the exclusion is provided only to the director services performed as director by a natural person. Other services (e.g. freelance) provided by the directors are considered as taxable supplies. Similarly, director services provided by non-resident directors are also excluded from the qualification of ‘’supply of services’’ for VAT purposes.
Transitional Rules:
FTA has clarified that natural persons performing the functions of a director on a Board of Directors, must review their tax obligations for the period both prior to and from 1 January 2023.
Due to the amendment, it is important to know the date of supply provision clearly as there could be several scenarios arising with respect to the performance of director services as it may span over the amendment date 1 January 2023.
Examples:
- If a natural person is appointed as director for the calendar year 2022 where the board fee was determined and known with effect from 1 January 2022, the date of supply will trigger at the date of completion of service (i.e. within the calendar year itself) regardless payment is received or invoice is issued post 1 January 2022. In such cases, director services will fall within the scope of the UAE VAT legislation as a supply of services.
- If a natural person is appointed as a director for 2 consecutive calendar years, with an arrangement of fee on a continuous basis. The date of supply shall be determined according to Article 26 (1)(c) of the VAT Decree Law. Hence, the payment received prior to the amendment date will fall within the scope of UAE VAT and subject to VAT. Any payments received after 1 Jan 2023 would not have any VAT implications.
- If a natural person performs the functions of a director for the calendar year 2022, however, the fees allocated for the calendar year is only determined after the conclusion of the Annual General Meeting (AGM), the director’s services are then deemed to be completed only when the Board fees are known upon conclusion of the AGM scheduled in 2023 despite the fact that provision of services may have been physically completed earlier. Hence, this will not have any UAE VAT implications.
FTA further clarified through the public clarification that, in case a natural person also has activities, other than performing the function of director on a Board of Directors, that will qualify as supplies of goods or services and liable to registration if it meets the registration threshold.
MBG Remarks:
Due to the amendment, only director services performed by natural persons, whether resident in the UAE or not, can be excluded from the qualification of ‘’supply of services for UAE VAT purposes’’. It is important to understand the applicability of transitional rules for those natural persons acting as director currently and fulfilling the VAT reporting obligations as per the guidance issued by the FTA.