Company directors are required to pay 5% VAT
This is applicable if the earnings exceed the mandatory registration threshold of Dh375,000
The earnings of the director of a company are subject to value-added tax (VAT) if he undertakes services on a regular and independent basis and if the earnings exceed the mandatory registration threshold of Dh375,000, according to a note issued by the UAE's Federal Tax Authority (FTA).
Pratik Shah, partner, WTS Dhruva Consultants, said the directors should charge VAT on the earnings received, which may be monetary such as basic fees and cash bonuses or non-monetary such as stock options or free accommodation. The directors will have to obtain a tax registration number (TRN) as well.
"The exception where a director's services may not attract VAT is when s/he is an employee of the company or if it is provided overseas or to an overseas entity which shall be considered as zero-rated. While the services would be taxable, the director can recover input tax on the purchase of goods and services in the course of business, subject to certain conditions," Shah said.
Geet Shah, director, WTS Dhruva Consultants, said companies need to comply with the clarification provided and ensure that due VAT has been charged or paid for the director's services.
Mayank Sawhney, MD, MaxGrowth Consulting, said this is a landmark guide issued by the FTA on services provided by independent directors who are not acting in the capacity of an employee of the company as they have been brought under the VAT domain.
"This puts to rest the stand taken by a lot of individuals acting as directors of various companies in the UAE who were debating that director services are not subject to VAT in spite of the total taxable supplies made by them over the past 12 months or expected over the next 30 days were exceeding the mandatory registration threshold of Dh375,000," Sawhney added.
He said those who have not registered for VAT till now need to ensure that they have applied for VAT registration prior to April 30, 2018, to avoid being subject to penalties for late registration. Once they have received the TRN, they need to issue tax invoices with 5 per cent VAT with effect from January 1, 2018, for all services, Sawhney added.
Shailesh Khandelwal, CEO and founder, Shailesh Khandelwal Accounting & Book Keeping Services, said the FTA's guide has put the highly-debated query on the applicability of VAT on director's services to rest.
He noted that if the fees of independent directors for services - in addition to any other supplies that might be made by the person - exceed the VAT mandatory registration threshold of Dh375,000, they are liable to register for VAT and charge VAT on the director fees.
"VAT needs to be collected and paid on the consideration received by the taxable persons. Consideration is all that is received or expected to be received for the supply of services, irrespective of whether in money or other forms of payment. Consideration for directors may include fee, commission, service charges for providing guarantee for loan taken by company, bonuses, stock options, rent-free accommodation, recharges for goods and services acquired by the director, and so forth," Khandelwal added.
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