VAT and Corporate Tax on Management Remuneration: Key Insights for Directors and Managers in the UAE

The introduction of VAT and the corporate tax regime in the UAE has brought significant changes to the taxation landscape, especially for businesses paying remuneration to their management teams. Directors and managers often receive various forms of compensation, but the VAT and corporate tax treatment of these payments can be complex. In this article, we’ll explore the VAT implications and corporate tax treatment of management remuneration, focusing on directors and managers in the UAE.

VAT Treatment of Directors’ Remuneration: Key Changes

Value Added Tax (VAT) in the UAE is governed by the Federal Decree-Law No. 8 of 2017 on VAT, which was implemented on January 1, 2018. The Executive Regulation of this Decree, detailed in Cabinet Decision No. 52 of 2017, outlines the key principles for VAT in the UAE. However, recent amendments to this regulation, through Cabinet Decision No. 99 of 2022, have changed the treatment of directors' services under VAT law, effective from January 1, 2023.

Pre-2023 VAT Treatment of Directors' Services

Before January 1, 2023, services provided by directors—whether performed by a natural person or a legal entity—were generally considered to be taxable under VAT, provided the services were rendered on a regular, independent, and ongoing basis. Additionally, VAT would apply if the director’s total taxable supplies exceeded the mandatory VAT registration threshold, which is currently set at AED 375,000.

Changes Post-2023: A New Rule for Directors’ Services

With the amendments to the Executive Regulation that took effect on January 1, 2023, there is now a new provision regarding VAT and directors’ remuneration. According to Article 3 of the amended regulation, director’s services performed by a natural person for remuneration (monetary or in-kind) are no longer considered a supply of services for VAT purposes if the following conditions are met:

• The services are provided by a natural person (an individual, rather than a corporate entity).

• The director is appointed to a Board of Directors of either a government entity or a private sector establishment.

  
  

This means that from January 2023 onwards, directors’ services (in their capacity as board members) are exempt from VAT, regardless of whether the director is working for a government or private sector entity. This is a notable shift from the previous approach, where such services were typically taxable.

In essence, directors' remuneration for their role on the Board of Directors (including related committees) will no longer attract VAT, making it easier for businesses to manage VAT compliance in this area. However, if the director is providing services beyond their directorial duties—such as consulting or advisory services—these may still be subject to VAT, and businesses should consider separate invoicing for those services.

Corporate Tax and the Deductibility of Management Remuneration in the UAE

The UAE introduced a corporate tax regime starting June 2023, with a 9% tax rate applicable to businesses generating taxable profits exceeding AED 375,000. Under this framework, businesses must carefully consider the tax treatment of management remuneration, including payments made to directors, managers, and other key employees.

Is Remuneration Paid to Management a Deductible Expense Under Corporate Tax?

For businesses operating in the UAE, management remuneration—including salaries, bonuses, and other compensations—is generally deductible as an expense when calculating taxable profits, provided the remuneration is reasonable and directly related to the company’s operations. This means that a company can deduct the costs associated with paying directors and managers, but there are some important caveats.

Here are a few considerations businesses should keep in mind when it comes to deducting management remuneration under corporate tax:

1. Reasonableness of the Remuneration The UAE tax authorities expect management remuneration to be reasonable and commensurate with the services provided. If a company pays excessive compensation to its management team, this could raise concerns during audits. To ensure deductibility, businesses must ensure that the remuneration is aligned with industry standards and justified by the services performed.

2. Transfer Pricing Rules If a company pays remuneration to its management through a related entity—such as a parent company or subsidiary—the remuneration must adhere to transfer pricing rules. These rules stipulate that payments must be made at an arm’s length price, meaning the amount must reflect what an unrelated third party would charge for similar services. Any payments exceeding this arm’s length price will not be deductible.

3. Documentation and Business Purpose To support the deductibility of management remuneration, businesses should maintain proper records and documentation. This includes employment contracts, board resolutions, meeting minutes, and project reports that demonstrate the direct link between the remuneration and the company’s operations. Without clear documentation showing that the remuneration is necessary for the company’s business activities, the tax authorities may challenge the deductibility of the payments.

4. Excessive Remuneration As mentioned, if a company pays remuneration that is not aligned with the market rate or business needs, the authorities may view it as excessive. In these cases, the remuneration may not qualify for tax deduction, and the business could face additional scrutiny.

5. Proof of Services Rendered The company must also demonstrate that the management team (including directors) actually performed the services for which they were compensated. This might involve providing records such as meeting minutes, financial reports, and project updates, which show that the remuneration is related to actual services rendered by the director or manager.

Key Points to Remember for VAT and Corporate Tax on Management Remuneration

• Directors' remuneration is no longer subject to VAT from January 1, 2023, if the director is providing services in their capacity as a board member, regardless of whether the entity is public or private.

• Management remuneration is generally deductible for corporate tax purposes, provided it is reasonable, related to the business’s operations, and adequately documented.

• Transfer pricing rules apply if remuneration is paid between related entities, ensuring that payments are made at arm’s length prices.

• Excessive or unjustified remuneration may not be deductible and could lead to tax scrutiny.

Conclusion

Navigating the VAT and corporate tax implications of management remuneration in the UAE requires a solid understanding of the latest regulatory changes. While VAT on directors' services is no longer applicable for board functions (effective January 2023), the treatment of management remuneration under corporate tax remains crucial for tax compliance. Businesses must ensure that management remuneration is justifiable, reasonable, and well-documented to avoid potential challenges during audits.

For businesses uncertain about the application of VAT and corporate tax, consulting with a tax professional is highly recommended to ensure compliance and to optimize their tax position.

Elhassan Abdelrazek

Partner

NHB LEGAL