Taxability criteria for Director Services
Employees who perform services for their employer are not considered to be making a taxable supply. However, taxable persons who provide independent director’s services to other legal entities would be considered to be making a taxable supply of services.
The Director’s Service fee otherwise called as Management Fee is taxable under the UAE VAT Law. The Federal Tax Authority (FTA) has issued a guideline on applicability of tax on Director’s Services in the month of April 2018 (VAT Guide – VATGDS 01).
The Management Fee or Director’s Service Fee is taxable if the below mentioned conditions are satisfied:
1. The director undertakes services on a regular, ongoing and independent basis (such as an individual who acts as an executive or non-executive director on a board or a number of different boards); and
2. If for the last 12 months period, the total value of taxable supplies made by the director, including supplies of director services is more than the mandatory registration threshold ie; AED 375,000/.
3. There is no employer – employee relationship between the such person (director) and the company.
Consideration paid to director may include:
1. Director fee paid in cash
2. Stock Options
4. Accommodation facility given
5. Recharges for goods and services acquired by the director,
6. Other facility or consideration given to the director.
The impact of VAT on services provided by directors varies depending on the two broad classifications of directors:
1. An executive director is a member of the executive management of an organization. The executive director has an employment contract and is therefore viewed as an employee of the organization. Generally, employees who perform services for their employer are not considered to be making a taxable supply for VAT purposes.
2. Non-executive directors are external directors and do not form part of the executive management team. Non-executive directors are usually selected because of their specialized knowledge and are appointed to give expert advice. Consequently, a Non-Executive Director supplies services on a regular, ongoing and independent basis.
If a manager or a managing partner withdraws management fees for his service as the director to a company and if the annual management fee is more than AED 375,000/- per annum, he has to register under FTA in his personal capacity. If such a manager/ managing partner/director is under an employment visa in the company he need not register for VAT in his personal capacity. Because in this scenario, there exists an employer – employee relationship between the company and the manager/ managing partner/director. Hence, the payment made to such person will not be considered as service done independently and taxability doesn’t apply.
Further, if the managing partner withdraws the profit from the company (declaration of dividend) it will not be treated under Director’s Service or management fee. It is only a declaration of dividend.
The VAT on management fee or director’s service fee is not a cost to the company or to the director. For example, suppose Mr. A receives AED 700,000/ as the service fee for the year 2019 from a company called XYZ LLC. He will be charging AED 735,000/ including of VAT and AED 35,000/ will be paid to the Tax Authority. However, XYZ LLC can take the input claim on such expenses. Hence in effect, there is no cost to the company or to the individual.
VAT on management fee or director’s service fee is applicable at a standard rate i.e., 5%. However, in the following cases, the rate of tax or the treatment of tax will be different.
1. If the director is a resident but serving a company in the overseas. It will be an export of services and will be taxed at zero rates.
2. If a UAE company has a director who is non-resident, the fee charged by such director shall be booked under RCM (Reverse Charge Mechanism) by the company (the director need not register in the UAE for VAT under FTA).
Sometimes businesses appoint an employee or a director to serve as a director of another company, or another type of businesses. Here, the normal rule of supply of services will be applicable. The supplier company must account for VAT and not the director appointed. To summarize, it will be the revenue (taxable supply) for the company which appoints director for another company. The Director is not required to register himself in his personal capacity.