The Director’s Service fee otherwise called as Management Fee is now taxable under the UAE VAT Law. The Federal Tax Authority (“FTA”) has issued a guideline on applicability of tax on Director’s Services:
Please see below a summary in Q&A format for lucid and faster understanding:
- What are the conditions to be satisfied to consider the Director’s Service Fee or Management fee as taxable under the UAE VAT Law?
The Management Fee or Director’s Service Fee is taxable if the below mentioned conditions are satisfied:
- The person provides independent director’s services to other legal entity or entities.
- The annual fee in cash or in kind exceeds the monetary value AED 375,000/-.
- There is no employer – employee relationship between such person (Director) and the company.
- When will Management Fee or Director’s Service Fee not be taxable under UAE VAT?
In the following cases, management fee or director’s service fee will not be taxable.
- If there is an employer – employee relationship between the director and the company.
- If for the last 12 months period, the service fee is not more than the mandatory registration threshold i.e.; AED 375,000/-
- Whether the Manager or the Managing Partner in an LLC company or a free zone company has to register for VAT in his personal capacity?
- Yes, if a manager or a managing partner withdraws management fees for his service as the director to a company and if the annual management fee is more than AED 375,000/- per annum, he has to register under FTA in his personal capacity. If such a manager/ managing partner/director is under an employment visa in the company he need not register for VAT in his personal capacity. Because in this scenario, there exists an employer – employee relationship between the company and the manager/ managing partner/director. Hence, the payment made to such person will not be considered as service done independently and taxability doesn’t apply.
- Further, if the managing partner withdraws the profit from the company (declaration of dividend) it will not be treated under Director’s Service or management fee. It is only a declaration of dividend.
- Whether the VAT on management fee or director’s service fee is a cost to the company or for the director?
The VAT on management fee or director’s service fee is not a cost to the company or to the director. For example, suppose Mr. X receives AED 500,000/ as the service fee for the year 2018 from a company called ABC LLC. He will be charging AED 525,000/ including of VAT and AED 25,000/ will be paid to the Tax Authority. However, ABC LLC can take the input claim on such expenses. Hence in effect, there is no cost to the company or to the individual.
- What is the Rate of Tax applicable for Management fee or Director’s Service fee?
VAT on management fee or director’s service fee is applicable at a standard rate i.e., 5%. However, in the following cases, the rate of tax or the treatment of tax will be different.
- If the director is a resident but serving a company in the overseas. It will be an export of services and will be taxed at zero rate.
- If a UAE company has a director who is non-resident, the fee charged by such director shall be booked under RCM (Reverse Charge Mechanism) by the company (the director need not register in the UAE for VAT under FTA).
- What is the value of consideration taxable under directors’ service or management fee?
The following should be considered to arrive the value of the consideration for taxable purpose:
- The service fee charged in cash
- Accommodation facility given
- Stock Options
- Or any other facility or consideration given to the director.
Note: Consider a director in ABC LLC is eligible for a director’s service fee or management fee of AED 40,000/- per month. In this case, his total eligible amount of director’s fee or management fee for one year will be AED 480,000/-. Even if there is no practice of paying the fee on monthly basis, since the terms of payment of service fee is on monthly basis, the director has to register for VAT. Which means, the payment is not the only criteria. Even if the amount is due for any particular year, it will be taxable.
- Whether can a director can recover the input tax he has incurred?
Similar to other businesses, the directors also can avail the eligible input credits. If any service is incurred or goods are purchased for executing the directors’ service, the input tax incurred on such expenses can be recovered.
- What happens when a company appoints a person to act as a director for another company?
Sometimes businesses appoint an employee or a director to serve as a director of another company, or another type of businesses. Here, the normal rule of supply of services will be applicable. The supplier company must account for VAT and not the director appointed. To summarize, it will be the revenue (taxable supply) for the company which appoints director for another company. The Director is not required to register himself in his personal capacity.