Key Updates on VAT Treatment for Directors' Services in the UAE

                                                                                              LISTEN TO THIS ARTICLE

The FTA has released a Public Clarification VATP037 outlining the VAT implications for directorship services provided by natural persons. It updates the previous guidelines under VATP031 and reflects changes to Article 3(2) of the VAT Executive Regulations.

VAT Treatment for Directors' Services

The new clarification states that directorship services are not considered a supply of services for VAT purposes if two conditions are met:

• The services are provided by a natural person, whether UAE resident or not;
• For a remuneration (monetary or in kind); and
• The person is appointed as a director on a board of any government entity or private sector establishment.

This means that such services are excluded from VAT, reducing the administrative burden for individuals serving as directors.

The clarification further provides that a natural person who is registered for VAT is not meeting the requirements for mandatory registration anymore because of the exemption, must deregister for VAT purposes.

Effective Date

The new provision is effective from 1 January 2023. Prior to this date, services provided by directors, whether by a natural person or a legal person, were considered to be services for VAT purposes and were taxable if the value of the services exceeded the registration threshold.

The clarification provides for transitional rules to determine whether the services of a director are taxable under the pre-amendment provisions or are exempt under the provisions post 1 January 2023. The general rule is that the VAT treatment (whether taxable or exempt) is determined considering whether the performance of the function is deemed to take place before or from 1 January 2023.

Scope of Exemption

Only director services performed by natural persons, whether resident in the UAE or not, can be excluded from the supply of services for UAE VAT purposes. This includes services performed as a member of a committee derived from the same board on which the director serves. For example, if a director is also part of a sub-committee of the board, the services provided in that capacity are also excluded from VAT.

However, this exemption does not extend to a legal person who may delegate in its own name a natural person to act as director. Further, freelance services rendered by a third-party natural person who is not a director during board or committee meetings are considered a supply of services.

Conclusion

The FTA’s issuance of VATP037 provides essential clarity on the VAT treatment of directorship services. By confirming that services provided by natural persons in their capacity as directors are not subject to VAT, the FTA reduces the administrative burden on natural persons. Businesses and individuals should review these guidelines to ensure compliance and adjust their practices accordingly.

Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.