The Federal Tax Authority (FTA) in the UAE has recently made changes to the Value Added Tax (VAT) treatment of director’s fees. The FTA has amended Article 3 of the Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax (“Executive Regulation”) by Cabinet Decision No. 99 of 2022.
According to the amendment, the performance of a director’s function in a formal capacity, by a natural person (whether resident in the UAE or not) and for a remuneration (monetary or in kind), on a Board of Directors of any government or private sector entity, shall not be considered to be a supply of services for VAT purposes with effect from January 1, 2023. This means that taxable persons who provide independent director’s services to other legal entities would not be considered a taxable supply of services.
However, it is important to note that the natural person must deregister for VAT purposes with effect from January 1, 2023. Additionally, this amendment does not extend to a legal person, whether private or public, who may delegate in its own name to a natural person to act as a director.
The reverse charge mechanism will not apply in the case of the natural person if they are not a resident. If the natural person also has activities, other than performing the function of director on a Board of Directors, that qualify as supplies of goods or services or any other activities under Article 19 of the Decree-Law, only the performance of functions as a director on a Board of Directors will be excluded from the calculation of the registration threshold.
Previously, director’s services were considered to be taxable supplies of services for VAT purposes. However, with this amendment, only director services performed by natural persons, whether resident in the UAE or not, can be excluded from the qualification of ‘supply of services for UAE VAT purposes.’ It is important for natural persons performing the functions of a director on a Board of Directors to review their tax obligations for the period both prior to and from January 1, 2023.
In conclusion, this amendment is a welcome relief for natural persons who serve as directors on a Board of Directors. This change in VAT treatment is expected to have a positive impact on businesses in the UAE, as it will ease the burden of VAT compliance for these individuals.
This article was published on 08 February 2023
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