UAE Exempts Director's Fees from VAT Starting January 1, 2023

The UAE's Federal Tax Authority has issued an updated clarification on VAT exemption for director's fees, effective from January 1, 2023. The exemption applies to services performed by natural persons as directors of government entities or private establishments.

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Bijay Laxmi
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UAE Exempts Director's Fees from VAT Starting January 1, 2023

UAE Exempts Director's Fees from VAT Starting January 1, 2023

The UAE's Federal Tax Authority (FTA) has issued an updated clarification on the Value-Added Tax (VAT) exemption for director's fees, effective from January 1, 2023. The amendment to 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 states that the functions of a member of a Board of Directors performed by a natural person will not be considered as a supply of services for VAT purposes.

Why this matters: This exemption has significant implications for businesses and individuals serving as directors in the UAE, as it reduces their tax burden and aligns with the country's efforts to create abusiness-friendly environment. The clarification also highlights the importance of reviewing tax obligations and compliance for companies and their board members.

To qualify for the VAT exemption, several key conditions must be met. The director's services must be performed by a natural person, whether resident in the UAE or not. Additionally, the services must be performed as a Director on a Board of Directors of a government entity or private establishment, and in the formal capacity as Director.

Business owners must review their tax obligations for the period both prior to and from January 1, 2023. The Date of Supply is governed by Articles 25 and 26 of the Executive Regulation. Two examples are provided to illustrate the application of the transitional rules.

In the first scenario, a natural person performs the function of Director for the calendar year 2022, and fees were determined and known with effect from January 1, 2022. "In this case, the date of supply will be the date of actual completion of the services, and the Director's services will fall within the scope of the UAE VAT legislation as a supply of services," the FTA clarified.

In the second scenario, a natural person is appointed as Director for two consecutive calendar years, and fees are fixed and known from the start of 2022. The date of supply shall be determined according to Article 26 of the Decree Law, which is the date of receipt of payment.

The UAE introduced VAT on January 1, 2018, at a standard rate of 5% on most goods and services. The new clarification from the FTA provides welcome guidance for businesses and individuals serving as directors, ensuring they can properly comply with their VAT obligations. The exemption of director's fees from VAT aligns with the UAE's efforts to create a business-friendly environment and reduce administrative burdens on companies and their board members.

Key Takeaways

  • UAE's FTA exempts director's fees from VAT, effective Jan 1, 2023.
  • Exemption applies to natural persons serving as directors in UAE.
  • Services must be performed in formal capacity as Director.
  • Businesses must review tax obligations for pre- and post-Jan 1, 2023.
  • FTA provides guidance on transitional rules and date of supply.