Remuneration received by natural persons for the exercise of the functions of administrator will be outside the scope of VAT
The VAT exclusion will only apply if a natural person is appointed as a director on the board of any government entity or private sector establishment. – Stock photo
Individuals now have another reason to cheer this New Year. As of January 1, 2023, the functions of a member of a board of directors exercised by a natural person will no longer be treated as a provision of services. Remuneration received by natural persons for the exercise of the functions of administrator will thus be outside the scope of application of VAT.
Directly Appointed Directors vs Appointed Directors
The VAT exclusion will only apply if a natural person is appointed as a director on the board of any government entity or private sector establishment.
If a company holds shares in another company, it is quite common for the investing company to appoint a director of the beneficiary company on its behalf. It has been clarified that the exclusion will not apply to a legal person which can delegate a natural person to act as a director on its behalf.
In the UAE, some companies provide professional administrator services and/or appointed administrator services. It should be considered whether the VAT exclusion will apply in such situations even if the directors are appointed in their own name.
For the VAT exclusion to apply, the individual directors need not be residents of the UAE. Non-resident directors will also be excluded from VAT. As a result, beneficiary companies will not be required to account for VAT under the reverse charge mechanism (RCM). Even if the duties of director are carried out for a company not registered for VAT, the non-resident natural person would not be required to obtain VAT registration.
Role of CEO vs Board of Directors
The VAT exclusion only applies to the functions of a member of a board of directors. A Chief Executive Officer (CEO) can also be referred to as an executive director of a company. The job title will not determine the VAT implications. It is the function/activity that will determine whether the corresponding remuneration would be outside the scope of VAT.
If a CEO also received an attendance fee in addition to the salary as an employee of the company, this mandate could have been taxable before but will now be outside the scope of VAT.
Other taxable supplies made by individuals
While the duties of a director would henceforth be outside the scope of VAT, any other taxable service provided by an individual would continue to be taxable. For example, the letting of commercial goods or taxable supplies through single establishments by an individual would remain taxable under VAT laws.
In addition, only services performed in the formal capacity of a manager could be excluded from VAT. If an individual director provides other services to the company, those services could also be taxable.
Persons benefiting from the aforementioned VAT exclusion should not make the common mistake of linking VAT obligations to cash flows, i.e. the receipt of attendance fees.
For directorships performed in 2022 for which the amount of attendance fees was already known, VAT would be applicable even if payment is received after January 1, 2023.
On the other hand, if attendance fees were to be paid according to periodic milestones, for example quarterly, payments payable from January 1, 2023 will not be taxable even if the payment corresponds to the functions performed in 2022.
FTA has clarified the implications of VAT in an intriguing scenario – where a natural person acts as a director in 2022 but the fees payable to directors will only be determined at the end of the annual general meeting to be held in 2023 If no tax invoice has been issued, or the advance received, before the GM, the fees received by the person for the functions performed in 2022 will be outside the scope of VAT.
From January 1, 2023, individuals must assess the obligation to deregister from VAT.
Based on the amount of other supplies taxable after January 1, 2023, an individual may be required to apply for VAT write-off. A monthly penalty of 1,000 Dh up to a maximum of 10,000 Dh could apply for the delay in deregistering VAT.
In our previous two tax conversations, we covered the significant VAT changes that will come into effect on January 1, 2023. As private salaries are not taxable, the VAT relief on directors’ remuneration is a development welcome. Individuals must now assess their other business income and the obligation to deregister for VAT to avoid any penalties.
(Pankaj S. Jain is the managing director of AskPankaj Tax Advisors. For comments and questions, you can write to info@AskPankaj.com. The opinions expressed are his own and do not reflect the policy of the newspaper.)