It must be news to some people, but yes, the
management fee, otherwise known as Director’s service fee, is also taxable
under VAT laws in UAE. Therefore, fees charged by the Independent Directors are
subject to VAT in UAE.
Independent Directors provide managerial
services to companies and organizations. In return for these managerial and
administrative services, they charge a certain amount of fee. If annual revenue
exceeds the threshold for VAT registration criteria, such directors need to
register for VAT and make sure they comply with FTA guidelines. The same goes
for companies that supply management and director services.
All You Need to Know About VAT on Director and
Management Services
As per Federal Tax Authority (FTA) guidelines,
here is everything you need to know about VAT implications on the Management
fee and Director’s service fee in UAE.
1. What conditions need to be
satisfied for the Director’s services fee to be taxable under VAT law in UAE?
The Director’s service fee and the management the fee is taxable if any one of the following conditions is satisfied:
·
The annual fee exceeds the monetary
value of AED 375,000 (both in cash and in-kind).
·
The individual provides an independent
Director’s services to another company or legal entity.
·
There is no employee-employer relationship
between the company and the person (Director) providing his services.
To know more about the outset of the services
and date of supply for the Director’s fee, make sure to contact one of the Best
VAT consultancy in Dubai to ensure compliance with FTA laws and avoid
penalties.
2. When will the Director’s
services fee or Management fee be non-taxable?
In the following cases, the Director’s service
fee and management fee will not be considered taxable under VAT in UAE:
·
If there is an employee-employer
relationship between the company and the Director (as discussed below).
·
If the service fee is not more than
AED 375,000 per annum as a mandatory threshold for registration set by the FTA.
3.
What is the VAT rate applicable
for Director’s service fee?
In general, VAT on Director’s services and the
management fee is applied at a standard rate of 5%. However, there are special
cases in which the treatment of VAT will be different. These cases are:
·
If the Director providing the service
is a resident of the UAE but is serving an overseas company. In such cases, the
service will be treated as an export and will be taxed at a zero-rate
(zero-rated product).
·
If a UAE based company hires services
of a director who is a non-resident, in such cases, the Director’s fee will be
charged under the Reverse Charge Mechanism (RCM) by the company, and the Director
does not need to register for VAT in UAE.
4. When does a company have to
register for VAT?
If a manager withdraws a management
fee for his services of providing a director to a company and is the annual
management fee is more than AED 375,000, then he has to register as per FTA
rules. However, if the Director is working under an employment visa in the
company, he does not need to register for VAT in UAE individually. In such
cases, there exists an employee-employer relationship and not an independent service.
Sometimes, businesses appoint
a director to serve another company. In such cases, the supplier of the
director services will account for VAT and not the Director himself. The
revenue of the supplier company will be the taxable supply. In such cases, the Director
himself does not have to register for VAT, the supplier company does.
5. Is the VAT cost to the company
or the Director?
The VAT charged on the Director’s services fee,
or management fee is not a cost for either the company or the Director himself.
You can consult a VAT expert in UAE for further information.
For example, suppose Mr. John receives AED
500,000 for his services for the year 2019 from a company XYZ. The Director
will charge a total amount of AED 525,000 from which AED 25,000 will be paid to
the FTA. However, the company XYZ can apply for a refund of input tax incurred
on such expenses. Therefore, VAT is not a cost to the company or the individual
Director.
6. Can the Director recover the input
tax incurred?
Just like any other VAT registered business in
the UAE, the Director providing his services to other companies is eligible for
recovering input tax. If the Director incurred input tax on the purchase of
goods used for executing his services, such input tax could be recovered.
For example, the cost of the laptop purchased,
traveling expenses, etc. In the case of some supplies, the full VAT amount
cannot be recovered. We suggest contacting the best
VAT consultancy in Dubai to identify the proportion of VAT that can be
recovered on goods and services.
VAT Advisory is Essential in case of Director’s Services
When it comes to the independent Director’s
services and management services, companies need to consult a VAT company in
UAE to get advice concerning VAT conditions and regulations. They can review
the financial statements of the previous years to determine the Director’s fees
and the applicable tax amount.
These VAT experts can also help you identify
if any benefit was given to the Director, which is not reflected in the
statements. Happy VAT filing!
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