Whether Management Fee or Director’s Service Fee is taxable in the UAE?
Yes, the Director’s Service fee otherwise called as Management Fee is taxable under the UAE VAT Law. The Federal Tax Authority (FTA) has issued a guideline on the applicability of tax on Director’s Services in the month of April 2018 (VAT Guide - VATGDS 01).
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 ie; 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 has 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 the 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
- Bonuses
- 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 a director can recover the input tax he has incurred?
Similar to other business or 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.
For example:
Cost of the laptop purchased, maintenance services for the laptop, travelling expenses, etc.
Sometimes the acquired goods or services are partly used in the course of making supplies that allow for the recovery of input tax and some are partly used for making supplies for which VAT is not recoverable. In these kind of situations, the director may need to use input tax apportionment rules to identify the proportion of VAT that 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.
How will Emirates Chartered Accountants Group provide advisory service in relation to the Director’s Service Fee or Management Fee on UAE VAT?
- Review the memorandum of association or board resolution of the company to identify the clause related to management fee or director’s service fee.
- Review the financial statement for the previous year/s to ensure that there is a practice of booking the management fee or director’s service fee in the books of accounts properly.
- Meeting with the accounts department and management of the company to identify if any benefit is given to the directors in kind which is not reflected in the books of accounts / audited financial statement.
- Once the eligibility for VAT Registration under FTA is confirmed (the management fee or director’s service fee is more than the minimum threshold limit), we will support for the director to get registered under FTA.
- Once the registration is successfully done and the due date for filing the return is received, we will extend our service to the director to file the VAT Return with FTA.
Emirates Chartered Accountants Group operates a full swing division for VAT Services in Dubai, Abu Dhabi, Sharjah, Ajman, Fujairah & Ras Al Khaimah. Our Tax experts are equipped with professional experience in taxation with different industries in the region. We Provide a tailored approach to the clients in the best professional way.
Looking for TAX Services in the UAE?
We provide:
For Tax Services in Dubai:
Mr. Pradeep Sai
sai@emiratesca.com
+971 – 556530001
For Tax Services in Abu Dhabi:
Mr. Navaneeth
nav@emiratesca.com
+971 – 558892750
For Tax Services in Northern Emirate (Sharjah, Ajman, RAK, Fujairah)
Mr. Praveen
praveen@emiratesca.com
+971 – 508873115
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