Understanding VAT Public Clarification VATP037: Director Services Performed by a Natural Person

Understanding VAT Public Clarification VATP037: Director Services Performed by a Natural Person

Introduction

The Public Clarification VATP037, which replaces the previous VATP031, is a crucial update in VAT regulations. Effective from January 1, 2023, this provision significantly impacts the VAT treatment of director services performed by natural persons. This article aims to understand these changes and their implications comprehensively.

Director Services Prior to January 2023

Before the implementation of VATP037, director services performed by either a natural or legal person, appointed by the Board of Directors in any government or private entity, were considered a supply of services within the scope of VAT. Directors needed to meet specific criteria to qualify as regular, ongoing, and independent service providers. Additionally, their taxable sales and imports, including director services, had to exceed the mandatory registration threshold of AED 375,000.

Key Changes Effective from January 2023

From January 1, 2023, the remuneration (monetary or in-kind) received by a natural person appointed as a Director by the Board of Directors in the public or private sector is not considered a supply of services for VAT purposes. The following conditions must be met for these services to be considered out of scope:

• Natural Person Requirement: The services must be performed by a natural person, whether resident or non-resident. Non-residents are not required to register for VAT or apply the reverse charge mechanism.
• Appointment by the Board: The natural person must be appointed as a director in any public or private sector’s Board of Directors.

It is important to note that this amendment does not apply to any legal entity, whether private or public, that appoints a natural person to act as Director on its behalf.

Board of Directors' Role and Implications

Services performed by natural persons appointed as directors by the Board of Directors in any public or private sector do not qualify as a supply of services for VAT purposes. This exemption also applies to services performed as a member of a committee derived from the same Board. However, any other services provided by the member outside of the Board committee are subject to VAT. The director must perform services in a formal capacity for these to be considered out of scope.

Tax Obligations for Different Periods

Example 1:

A director (natural person) completed his function in November 2022 and received payment for his services in 2023. According to Article 25 of the Decree-Law, the date of supply is the actual completion date of the services. Since the services were completed in 2022, they fall within the scope of UAE VAT.

Example 2:

A natural person appointed as a director performs duties from 2022 to 2023, with automated payments until January 2024. According to Article 26 of the Decree-Law, the date of supply for any contract that includes periodic payments or consecutive invoices is the earliest of:

• The date of issuance of any tax invoice
• The date payment is due as specified on the tax invoice
• The date of receipt of payment
• The date of expiration of one year from the date the services were provided

In this scenario, the payments received from April 2022 to October 2022 fall under the scope of VAT. Payments received from January 2023 are considered out of scope.

VAT Deregistration

A natural person registered for VAT who does not meet the mandatory registration threshold of AED 375,000 must deregister for VAT purposes by Article 21 of the Decree-Law and Article 14 of the Executive Regulation, without prejudice to Article 18 of the Executive Regulation.

Conclusion

For further clarification or support regarding VAT Public Clarification VATP037 on Director Services, you can reach out to our Senior Manager ECAG Tax, CA Ajil Varghese. Ajil can provide expert guidance on the implications and requirements of the new provisions. Contact Ajil Varghese for any VAT support required or send an email to tax@emiratesca.com for more detailed assistance.

Director Remuneration and VAT: What You Need to Know in the UAE