Federal Tax Authority (FTA) amended Regulation states that director’s fees now not taxable for VAT purposes

Executive Summary:

The Federal Tax Authority (FTA) has amended by Cabinet decision No. 99 of 2022 Article 3 of the Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax (“Executive Regulation”).

Article 3(2) of the amended Executive Regulation states that the performance of a Director’s function in formal capacity, by a natural person (whether resident in the UAE or not) and for a remuneration (monetary or in kind), on a Board of Directors of any government or private sector entity, shall not be considered to be a supply of services for VAT purposes with effect from January 1, 2023.

Key Details:

• Taxable persons who provide independent director’s services to other legal entities would not be considered a taxable supply of services.
• The natural person must deregister for VAT purposes with effect from January 1, 2023.
• This amendment does not extend to a legal person, whether private or public, who may delegate in its own name to a natural person to act as Director.
• No application of the reverse charge mechanism in case of the natural person is not resident.
•  If the natural person also has activities, other than performing the function of Director on a Board of Directors, that qualify as supplies of goods or services or any other activities under Article 19 of the Decree-Law, only the performance of functions as Director on a Board of Directors will be excluded from the calculation of the registration threshold.
•   Earlier, these supplies of services were taxable where:
  • the Director performed the services on a regular, ongoing, and independent basis, and
  • the total value of taxable supplies and imports made by the Director, not limited to but also including the Director services, exceeded the mandatory registration threshold.
•  Scenarios:-
  • Free-lance services rendered by a third-party natural person who is not a Director during the meetings of a Board of Directors. Not Exempt
  • Performance of Service in calendar year 2022, fee decide in 2022, even if no Invoice was raised and no payment was released. Not Exempt
  • Performance of Service in calendar year 2022, fee decide in 2023, even if no Invoice was raised and no payment/ advance payment was released. Exempt

Our Analysis:

Prior to 01 January 2023, the general rule was that services provided by Directors, whether the function was performed by a natural person or a legal person, were considered to be services for VAT purposes. 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’’. 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.