What does the new VAT update on Directors’ remuneration mean to you?
The Federal Tax Authority (FTA) recently published a Public Clarification VATP031 on the treatment of the services of a member of a Board of Directors (hereafter referred to as “Director”) introduced in the Executive Regulations to the VAT Law amended in November 2022.
Effective from 01 January 2023, the provision of the Directors’ services is no longer considered a “supply of services for VAT purposes” if the following conditions are met:
- Services are provided by a natural person; and
- The person is appointed as a Director on a Board of any government entity or private sector establishment.
Below we have shared a list of frequently asked questions summarizing the applicability of the new provision and the transitional rules.
- What is the effective date of this amendment?
The amendment is effective from 01 January 2023.
- What were the VAT implications on the Directors’ services before the amendment?
Services provided by Directors (whether the service was performed by a natural or legal person) were considered a supply of services for VAT purposes.
Accordingly, both natural persons and legal persons providing director services were required to register for VAT, collect VAT, report, and remit on a periodical basis.
- What are the VAT implications on the Directors’ services provided by a natural person after 01 January 2023?
Director Services provided by a Natural Person for remuneration in cash or kind to a public or private sector entity is not a supply subject to VAT.
Therefore, the natural person providing directorship support need not register for VAT unless he/ she provides any other supplies.
- Does the amendment apply to a legal person who may delegate in its own name a natural person to act as a director?
No, a natural person acting as a Director upon delegation by a company does not qualify as a natural person for the purpose of the new amendment.
The legal person must register for VAT or continue to be registered for VAT.
- What are the VAT implications on services or activities (other than Director services) undertaken by the Director/natural person?
Only Director services performed in the formal capacity as Director on a Board of Directors can be excluded from the qualification of supply of services for UAE VAT purposes
Other services provided by the member are
considered to be supplies of services for VAT
purposes and may be taxable.
- Are services provided by Corporate Sectaries, Council Members of Foundations, and Controllers covered under the amendment?
No, the services provided by a natural person in the capacity of a Corporate Secretary, Council member of a foundation, or Controller are not covered under the amendment as the natural person does not perform such support in the official capacity of a Director appointed on the Board of Directors.
The services provided in this case would be subject to VAT.
- What are the VAT implications on the Director services provided by a natural person who is not a resident in the UAE?
Such services are no longer subject to the Reverse Charge Mechanism or trigger VAT registration of the natural person in the UAE.
- What are the transitional rules for services commenced before the effective date of the amendment but will be completed after the effective date?
Natural persons appointed and performing a Directors’ function(s) must review their tax obligations for the period both prior to and from 01 January 2023.
The tax implications on the fee earned under such Director services would depend on the Date of Supply defined under the VAT Regulations.
We recommend a review of the transactions that are provided determine whether the performance of the function is deemed to take place before or from 01 January 2023.
- Should the Natural Person acting as a Director apply for deregistration as the service is no longer subject to VAT?
The natural person who is registered for VAT is not meeting the requirements for mandatory registration anymore due to a change of taxability of the Director services provided, such a natural person must deregister for VAT purposes.
The deregistration application must be submitted within 20 business days from the date on which the natural person is no longer eligible to be registered.
Director – Tax
Senior Director — Finance and Tax