LISTEN TO THIS ARTICLE
A concerning trend has emerged among owner-managed businesses in the UAE—shareholders increasingly paying themselves salaries for so-called “executive functions.” While this may seem like a smart tax strategy, it poses serious risks if not carefully structured and substantiated.
Executive Role vs. Shareholder Role: Know the Difference
Executive functions: Involve actual fiduciary duties and accountability within a governance structure.
Shareholder roles: Relate to ownership rights and return on investment—not operational duties.
This distinction becomes blurred in closely held businesses, where formal boards may not exist, and shareholders are involved in day-to-day operations.
What the FTA Says: Director Services Not Typically Taxable
The Federal Tax Authority (FTA) clarifies that directors’ services are generally not considered a business activity. However, terms like “as a general rule” and “normally be treated” indicate that this is not absolute. Every case will be judged on its facts, especially where arrangements appear to be tax-motivated.
Structuring to Minimize Corporate Tax Exposure
Align compensation models with FTA’s factual examples. If the classification of an activity is uncertain, have a fallback plan that ensures no tax liability even if it’s later treated as a business.
As per Article 11(3)(c) of the UAE Corporate Tax Law, UAE-resident individuals are subject to corporate tax if they carry out a Business or Business Activity. Article 1 defines a “Business” as any activity conducted regularly, independently, and on an ongoing basis.
Employment vs. Service Contracts: Substance Over Form
If a director also holds a genuine employment contract (e.g., as General Manager) alongside a board-level service contract, the risk of reclassification as an independent business is reduced.
Wages under valid employment contracts do not count toward the AED 1 million corporate tax registration threshold. Clearly separate roles and compensation, adhering to arm’s length and economic reality principles. From a compliance standpoint, robust documentation is key to proving that compensation is aligned with actual roles—and not an attempt to reduce taxable profit.
Under the CT regime:
Compensation exceeding AED 500,000 paid to Connected Persons (including shareholders) must be disclosed in the Transfer Pricing Disclosure Form (TPDF).
The FTA may scrutinize “salary” payments to shareholders, especially since the UAE does not levy personal income tax—making this an easy avenue for profit shifting.
Final Thoughts:
Getting executive compensation right is not just a formality—it’s central to staying compliant under the UAE’s evolving Corporate Tax regime. Missteps here can lead to penalties, reclassification, and scrutiny.
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.
Contributor
Neetu Jose is a Partner at Stuart & Hamlyn Chartered Accountants and a Fellow member of the Institute of Chartered Accountants of India. With over 20 years of professional experience in both India and the UAE, she is a seasoned finance professional. Neetu has accumulated over a decade of industry experience in the UAE, demonstrating proficiency in accounting, auditing, financial advisory services, and UAE VAT. Her diverse background includes working in various sectors such as retail, manufacturing, health & hospitality, and shipping.
