A Detailed Guide to VAT Applicable on Director’s Services in the UAE
The director of the LLC in the UAE who receives the director’s remuneration for his services to companies regularly and independently are responsible to charge VAT on their directorship fee or management fee to the LLC company. The VAT at the standard rate of 5% applies to the director fee. The Federal Tax Authority (FTA) has issued a VAT Guidance (VATGDS1), which clarifies that the services provided by the directors are taxable under VAT in the UAE. Since most Limited Liability Companies(LLC) in the UAE appoint directors, it is imperative to ensure tax compliance for which services of registered VAT consultants in the UAE come in handy.
Companies and the persons who provide director services are required to understand their VAT obligations such as VAT registration, VAT return filing, VAT refund etc. In this article, we provide you with detailed guidance on how directors can ensure VAT compliance in the UAE in line with the FTA’s norms. Read on.
VAT Liability on Director’s Services
The services provided by a director is taxable under the following conditions,
- The person provides services to a company in the capacity of a director on a regular, ongoing and independent basis. This could be an executive or nonexecutive individual acting as a director on a board or a number of different boards.
- The total value of taxable supplies made by the director, including supplies of director services, exceed the mandatory registration threshold of AED 375,000 on an annual basis.
In view of these conditions, a person who provides director services independently and regularly is required to charge VAT on their services. This means the director should not be acting as an employee of the company while providing the services. Consult with registered VAT consultants in Dubai, UAE, to clear the air on the VAT obligations.
When does Directorship Services Become a Taxable Supply?
The UAE VAT Law defines a taxable supply as any supply of goods or services for consideration by the person who conducts a business in the UAE. Further, the supply of goods or services should not be an exempt supply. Director services are classified as a supply of services for VAT purposes as the Federal Decree-Law No. (8) of 2017 defines a “supply of services” to be any supply that is not considered a supply of goods.
Services must usually be provided for consideration to be considered as a taxable supply. Consideration is all that is received or expected to be received for the supply of the services, irrespective of whether in money or other forms of payment. Director’s services become a taxable supply in this respect as well. Also, directors’ services are not an exempt supply, making it eligible to be considered as a taxable supply.
VAT Registration Obligation for a Company Director
A person serving as a director or a manager in the company should register for VAT if the annual fee he or she charges for directorship services exceed the mandatory registration threshold of AED 375,000. The director or manager working under the employment visa provided by the company need not register for VAT as it establishes an employee-employer relationship. The directorship, in this case, won’t be considered as taxable as it is not delivered independently.
Determining Place of Supply of Directorship Services
VAT is charged when a supply is treated as taking place in the UAE. This rule makes it vital to determine the place where the supply of taxable services take place. The directors need to consider the following place of supply rules to determine their VAT obligations:
As per VAT in the UAE, the residence of the supplier is regarded as the place of supply for services. In this case, the place of residence of the director is the place of supply.
There are cases where the company that receives the directorship services is a resident of another VAT-implementing GCC state and is registered for VAT there. In such cases, the place of supply will be the place of residence of the recipient of services.
If the recipient of services is in business and its place of residence in the UAE, and the director does not have a place of residence in the UAE, the place of supply in the UAE.
VAT Obligation of Director Working Overseas
If a UAE-resident director provides services that are physically performed outside the GCC implementing states, such services will be considered zero-rated for VAT purposes. For example, directorship services will be zero-rated if a UAE resident director is contracted to physically attend board meetings in the UK. VAT consultancy firms in the UAE can guide the directors in accurately determining the VAT obligations in such cases.
VAT on Director’s Services to an Overseas company
If a UAE-resident director provides services from the UAE to a company not resident in the GCC implementing countries, then the services can be zero-rated, provided the company doesn’t have a presence in the UAE.
VAT on Business Supplied Director
Sometimes a company or a government entity may provide an employee or a director to act as a director of another government entity or company. In such cases, the company that supplies the director should account for VAT on any payment it receives for entering into the agreement, given the place of supply in the UAE.
VAT Obligation for Common Director
In cases where a person serves as a director to multiple related companies, the VAT will apply to the director’s fee paid by one of the companies. One company may pay all the director’s fees and then allocate the costs to recover appropriate proportions from the others. However, no VAT is due on the share of money recovered from each company.
Right to a Director
The fee charged for appointing a director is taxable when a company appoints a board member for the company in which they are investing. Normally a fee is charged by the company appointing the director and is paid by the company to which the director has been appointed. The fee should be treated as consideration for a taxable supply made by the director’s original company and is subject to VAT. Hire FTA-approved tax agents in Dubai to ensure compliance with the VAT norms.
How Can Jitendra Chartered Accountants Assist Directors?
Directors providing services to companies independently and regularly must comply with VAT requirements provided there is no employee-employer relationship with the company. The director fee is liable for VAT, and therefore, the directors need to register for VAT and file returns to the FTA. Dealing with VAT compliance while serving as a director to one or more companies can be stressful, and therefore, the directors require the services of the best VAT consultants in Dubai, such as Jitendra Chartered Accountants (JCA).
JCA’s registered tax agents in Dubai, UAE, can assist the directors to account for VAT. JCA ensures the directors comply with requirements such as VAT return filing, record keeping, financial reporting, and VAT refund. Failing to ensure VAT compliance in the UAE is an offence that attracts hefty penalties, and therefore consult with JCA today to be on the right side of the law.