Public Clarification P0037 replaces the previously issued PO031 which also related to the VAT implications on providing directorship by a natural person
Legislative Background:
With effect from 01 January 2023, VAT Executive Regulations (ER) is amended by Cabinet decision No. 99 of 2022. Amongst other amendments, there has been an update in Article 3 of the ER
Article 3(1) of the ER provides for cases which are considered as Supply of “Services”. It specifies that “A supply of Services shall be every supply that is not considered a supply of Goods”
The definition is not exhaustive and thus potentially can include all types of supply transactions which do not fall in the definition of ‘goods’ as defined in the Law and ER.
Services performed by a Director
One such supply which was earlier considered as a ‘supply of service’ was the functions performed by a director on the Board of Director (BOD) of any entity.
Since the directors, in their role as such, perform their services on a regular, independent basis and do not form an employer-employee relation with the entity, the services performed by the director would generally be classified as a ‘supply of service’ subject to VAT as per the general rules in the VAT Law
Accordingly, if the total value of taxable supplies and imports made by a natural person in the capacity of a director (including any other supply they may have in their personal capacity) exceeded the mandatory threshold of AED 375,000, the natural person was required to obtain a VAT registration and charge VAT at the applicable rates on its supplies
Amendment:
Article 3(2) is introduced in the ER which specifies that the following shall be excluded from the definition of services:
“the functions of a member of a board of directors, performed by a natural person appointed as such, for any government entity or private sector establishment, shall not be considered a supply of Services”
As a result of the amendment, an exception is carved out to restrict the definition of services and accordingly, functions performed by a natural person as director, in the capacity as such, will no longer be considered as a ‘supply’
Key Aspects of Clarification:
The Public Clarification assists in determining the impact of such change on natural persons and the compliance requirement in terms of transitional provisions and de-registration ,as and where required
The key aspects of the clarification are summarised below.
| Key Aspects |
Particulars |
| Effective Date |
|
| Cases where the amendment applies |
- 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”.
- This amendment does not extend to a legal person, whether private or public, who may delegate in its own name a natural person to act as Director
|
| Nature of Services where the exclusion applies |
- Only Director services performed as Director on a Board of Directors of a government entity or a private establishment can be excluded
- Only the services performed in the formal capacity as Director can be excluded from the qualification
- Exclusion extends to services performed as a member of a committee derived from the same Board on which the Director serves
- The exclusion applies to all natural persons i.e. whether resident or not
|
| Cases where the exclusion does not apply |
- Free-lance services rendered by a third-party natural person who is not a Director during the meetings of a Board of Directors or of a committee derived therefrom
- Any other services provided by the director to the entity which is not performed in the capacity of a director (eg: commercial rent earned by a person who is also a director of the tenant entity)
|
| Transitional Provisions |
- A natural person shall determine the date of supply of his services in the capacity of a director
- Any services where the ‘date of supply’ for such director services falls before 01 January 2023 will continue to be subject to VAT. Likewise, if the date of supply falls on or after 01 January 2023, the services will be outside the purview of UAE VAT
|
| Date of Supply |
- The person shall determine the Date of Supply (DoS) of such services in accordance with Article 25 and 26 of the VAT ER
- Example 1: The appointment is for one year and services are performed for FY 2022 with a fee pre-determined at the start of the year
- DoS: The date of supply will be the date of completion i.e., 31.12.2022 and thus subject to VAT
- Example 2: The appointment is for two year (continuous service) and services are performed for FY 2022 and FY 2023 with a fee pre-determined. Further, it is contractually agreed that the fee will be payable quarterly on the first day after the end of the quarter.
- DoS: In accordance with Article 26 of ER, the date of supply will be agreed date of payment i.e., first day after each quarter. Thus, only the date of supply which is triggered before 31.12.2022 will be subject to VAT. In such case, the date of supply for functions performed for Q4 2022 falls on 01.01.2023 (first day after the end of the quarter). Thus, the value of supply for Q4 2022 will not be subject to VAT
- Example 3: The appointment is for one year and services are performed for FY 2022, however, the fee will be determined after the conclusion of Annual General meeting (AGM)
- DoS: The date of supply will be the date of conclusion of AGM. This is subject to the condition that the natural person has not raised any invoice and has not received any advance prior to the conclusion of AGM
|
| De-registration |
- As a result of the above exclusion, effective 01 Jan 2023, a natural person shall not consider the value of his director fees as a taxable supply.
- If the person has other supplies in individual capacity eg: rental income etc, the person shall ensure that the value of such other taxable supply is expected to be above the voluntary threshold
- If the total value of his taxable supplies excluding director fee falls below the VAT registration threshold, the person shall mandatorily apply for VAT de-registration within the applicable timelines
|
It is important to note that above applies only to natural persons. Further, the exclusion applies only from 01 January 2023. Thus, if a person has failed to register for taxable supplies made prior to the effective date of exclusion, the person will still be required to undertake an analysis of the past transactions and take corrective actions to discharge correct VAT liability to the Authorities
