Direct Tax

FTA Clarification on Directors & Officers – Article 36 Analysis

The Federal Tax Authority (FTA) has recently issued a Public Clarification (CTP010) that provides guidance on how the terms “director” and “officer” should be interpreted for the purposes of payments to Connected Persons under Article 36 of the Corporate Tax Law (CT Law).

This clarification is particularly important for businesses that make payments to senior personnel, authorized representatives, or individuals with decision-making authority in relation to financial, operational or commercial matters or have authority to enter into Agreements or approve actions that legally or contractually bind a Taxable Person (say a Company). Such payments under the CT Law requires justification from market value perspective besides being mandatory disclosed in the Corporate Tax Return if they exceed prescribed reporting annual monetary threshold.

In this article, we analyze key points of the aforesaid clarification and briefly explain few key takeaways for Taxable Persons to stay compliant.

Why This Clarification Matters ?

Under Article 36 of the CT Law, any payment made to or any benefit (regardless of monetary reporting threshold prescribed by FTA for their disclosure) provided to a Connected Person including directors and officers is deductible while computing taxable income of any taxable person only if:

It corresponds to Market Value; and
It is incurred wholly and exclusively for business purposes.

Additionally, Article 55 of the CT Law requires every taxable person (say a Company) to disclose such transactions in its Corporate Tax Return only if they exceed the monetary reporting threshold of AED 5,00,000 per connected person annually. The clarification helps businesses determine who exactly qualifies as a director or officer, ensuring accurate classification, justification of payments made to them from market value perspective, their timely and proper disclosure by way of corporate tax return, and in having defendable tax positions with respect to admissibility of expenditures incurred while making payments to Connected Persons falling in this category.

Defining “Director”: It’s Not Just a Position or Title based Role

According to the FTA, a “director” is specifically a person holding a position on the board of directors or an equivalent governing body as defined in incorporation or constitutional documents of the Taxable Person (say Memorandum of Association in case of a Company).

Substance Over Form: Having the word “Director” in a job title does not automatically make someone a director for being considered as Connected Person under the CT Law.
Who is included? This includes executive, non-executive, temporary, or alternate directors, as long as they are formally appointed to the board if the taxable person is a Company.
The Litmus Test: If a person has the title but does not sit on the board or an equivalent body, such a person may not be considered as a “director” under Article 36(2)(b) of the CT Law. However, such a person may still be considered as an “officer” and connected person of the taxable person.

Defining “Officer”: The Power of Decision-Making

The term “officer” is broader and focuses on functional authority rather than just any formal title or position. An individual is considered an “officer” if he/she meets any of the following criteria’s:

Planning and Control: Such an Individual has the authority and responsibility for planning, directing, and controlling the activities of the Taxable Person, in line with the framework in International Accounting Standard 24 on Related Party Disclosures.
Strategic Decision-Making: Such an Individual has the authority to make final strategic decisions regarding financial, operational, or commercial matters of the Taxable Person.
Binding Authority: Such an Individual has power to enter into agreements or approve actions that legally or contractually bind the Taxable Person.

Typical “Officers” may include:

Chief Executive Officer (CEO).
Chief Financial Officer (CFO).
General Manager (GM).
Authorized representatives with discretionary authority.

A formal appointment or job title may serve as an indicator when assessing whether a person is an officer or not. However, it should not be relied upon as the sole criterion. If a person does not have a formal appointment or C- suit job title, but through their actual conduct effectively has the authority and responsibility for planning, directing and controlling the activities or have the authority to make strategic decisions, take or approve actions that legally or contractually bind the taxable person, such a person would still be considered as an Officer. The concept of Officer applies to all taxable persons including trusts, foundations and unincorporated partnerships that are treated fiscally opaque for Corporate Tax Purposes.

Hypothetical Examples : Where Do You Stand in terms of the contents of the Public Clarification as far as the term “Officer” is concerned?

To help businesses navigate these definitions, the clarification has explained the concept by providing few illustrations some of which are as under:

The Head of HR: If the Head of HR makes final strategic decisions on manpower planning and performance management, he/she is to be considered as an officer. If their role is limited to routine payroll and leave management without discretionary authority, they are not to be considered as an officer.
Interim Consultants: A person hired as an interim CEO but titled “consultant” is still considered an officer if he/she is actually directing and controlling the company’s activities during the term of his/her consultancy contract.
Power of Attorney (POA) holder: An employee holding a POA is an officer if that POA grants him/her discretionary authority to make strategic decisions. If the POA is purely for administrative tasks already approved by others, they are likely not an officer.
Division Heads: A division head who simply reports to and follows the instructions of the C-suite is not an officer. However, if they have the final word on their division’s commercial strategy, they qualify as officer.
An Employee: An employee named in Trade License of a Taxable Person as a Manager or in Board Resolutions as a Key officer would be an “Officer”, if this gives the employee the final/ultimate authority to approve actions that legally or contractually bind a Taxable Person.

Note:The Clarification also states that these examples are only meant to provide general information of the subject matter and should not be relied upon for legal, accounting, regulatory or tax advise purposes.

Other Considerations

Only a Natural Person can be director or officer of the Taxable Person.
If a person is considered as a Related Party as well as Connected Person of a Taxable Person, such a person would only be considered as Related Party for the purposes of the CT Law.

Key Takeaways for UAE Businesses

Review Your Organization Chart: Evaluate the actual authority and conduct of your senior and core leadership personnel instead of only considering their titles or job position for categorizing them as Connected Person.
Benchmark Compensation: Ensure that salaries, bonuses, and benefits provided to anyone meeting the “director” or “officer” criteria are aligned with Market Value or Arms- length criterion.
Document Decision Making and Binding Authority: Clearly define who has the power to bind the company legally and who makes final strategic decisions in the constitutional documents and board resolutions.
Stay Prepared for Disclosure: Ensure your accounting systems can easily identify and report transactions with these Connected Persons to undertake compliances and potential disclosure obligations under the CT Law.

Conclusion

Navigating the details of Corporate Tax Law of the UAE, requires deeper insights and looking beyond the surface. By understanding who qualifies as a “director” or “officer” a business can ensure that it remains compliant with its obligations under this law.

It merits mentioning, that this Public Clarification only states position of the FTA and neither amends nor seeks to amend any provisions of the CT Law and it is effective as of the date of implementation of CT Law itself.