Individuals who act as Directors and receive remuneration for their services should consider their VAT position carefully as they may be required to register and charge VAT on their fees. Failure to account for VAT correctly could lead to the Federal Tax Authority (“FTA”) not only claiming the foregone VAT but also imposing penalties. The penalties could be wide ranging from late registration (AED20,000) to failure to issue tax invoices (AED5,000 per invoice).
The recently released Director’s Services VAT guide clarifies the tax position as well as provides some practical examples and exceptions. The FTA considers that Directors provide a service to their companies and, if the remuneration for such services (in addition to any other services provided) exceeds the VAT registration threshold, Directors must register for and charge VAT on their fees. The default rate is 5% unless the service can be treated as an export, in which case a 0% rate would apply.
The registration threshold is triggered if the total remuneration is in excess of AED375,000 in the preceding 12 months or this threshold will be breached in the next 30 days. Remuneration does not have to be monetary – other forms of payment could also count towards the VAT threshold.
It is important to note that UAE VAT is only chargeable if the place of supply of the Director’s services is in the UAE. The starting position in the VAT legislation is that the place of supply of services is where the supplier is located. Therefore, a UAE-resident Director would generally be treated as providing a service in the UAE, subject to two notable exceptions:
- If the recipient of services is a business located in another GCC implementing state and registered for VAT in that state, the place of supply is in that other state;
- If a non-UAE resident director provides a service to a business based in the UAE, the place of supply is in the UAE;
The FTA has also clarified that where the service is performed to an overseas company and is physically performed outside the UAE, no UAE VAT will be due.
The guidance also specifically calls out the VAT treatment where a business supplies one of their employees or Directors to another business to act as a Director. In such instances, VAT will need to be charged assuming the service is supplied in the UAE.
Because the VAT rules on Director’s fees are complex, if in doubt of your VAT position, we recommend that professional and tailored VAT advice is obtained. Global Tax Services is an FTA-registered tax agent with extensive VAT and International Tax experience, including impact assessments, VAT training and assisting businesses with compliance obligations. We work with our clients to ensure their tax affairs are efficient, effective and compliant, and can advise businesses and individual Directors on how VAT will impact them.