Issue Article 3 of the Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree- Law No. 8 of 2017 on Value Added Tax (“Executive Regulation”) has been amended by Cabinet decision No. 99 of 2022, which introduced a new provision.
Article 3(2) of the amended Executive Regulation states that the functions of a member of a Board of Directors (hereafter referred to as “Director”), performed by a natural person, appointed as a Director, for any Government entity or private sector establishment, shall not be considered as a supply of services.
The new provision takes effect as from 1 January 2023.
This Public Clarification provides guidance on how to apply the new provision and determine the resulting VAT obligations prior and post the date of 1 January 2023 on concerned natural persons.
Summary With effect from 1 January 2023, the performance of a Director’s function, by a natural person and for a remuneration (monetary or in kind), on a Board of Directors of any government or private sector entity, shall not be considered to be a supply of services for VAT purposes.
Prior to 1 January 2023, the general rule was that services provided by Directors, whether function was performed by a natural person or a legal person, were considered to be services for VAT purposes. These supplies of services were taxable where:
- the Director performed the services on a regular, ongoing, and independent basis, and
- the total value of taxable supplies and imports made by the Director, not limited to but also including the Director services, exceeded the mandatory registration threshold.
Detailed analysis
General For the provision of Directors’ services not to be considered as a supply of services for VAT purposes according to the amended Executive Regulation, the following conditions must be met:
- The services are provided by a natural person.
- The person is appointed as a director on a Board of any government entity or private sector establishment.
Natural Person
Only Director services performed by natural persons, whether resident in the UAE or not, can be excluded from the qualification of “supply of services for UAE VAT purposes”.This amendment does not extend to a legal person,whether private or public, who may delegate in its own name a natural person to act as Director.
Board of Directors
Only Director services performed as Director on a Board of Directors of a government entity or a private establishment can be excluded from the qualification of “supply of services for UAE VAT purposes”. For clarity, this exclusion extends to services performed as a member of a committee derived from the same Board on which the Director serves.Other services provided by the member, are considered to be supplies of services for VAT purposes and may be taxable subject to meeting conditions for taxable supplies as stated in the VAT legislation.1
Capacity as Director
Only the services performed in the formal capacity as Director can be excluded from the qualification of “supply of services for UAE VAT purposes”. For example, free-lance services rendered by a third-party natural person who is not a Director during the meetings of a Board of Directors or any committee derived therefrom are considered to be supplies of services for VAT purposes and will be taxable subject to meeting other conditions. In case the services are performed by Directors who are not resident in the UAE, these services will evidently also be excluded from the qualification of “supply of services for UAE VAT purposes”. There will be no application of the reverse charge mechanism or need for the natural person to register in the UAE for VAT purposes.
Transitional rules Natural persons performing the function(s) of Director on a Board of Directors, as defined above, must review their tax obligations for the period both prior to and from 1 January 2023. The Date of Supply is governed by Articles 252 and 263 of the Executive Regulation. The rules laid down in these Articles will determine whether the performance of the function is deemed to take place before or from 1 January 2023. Examples for guidance:
The natural person performs the function of Director for the calendar year 2022 whereby fees from services to the Board, and any committee derived therefrom, for the year were determined and known with effect from 1 January 2022. No payments were released to the natural person during 2022 and no Tax invoices were issued. In this scenario, and in accordance with Article 25 Decree-Law, the date of supply will be the date of actual completion of the services, and the Director’s services will fall within the scope of the UAE VAT legislation as a supply of services, regardless of whether payment was made in 2023 or not. The natural person is appointed as Director for 2 consecutive calendar years, i.e., 2022 and 2023. Fees for services to the Board, and any committee derived therefrom, are fixed and known from the start of 2022 and automated payments are made on the first business day after the end of each calendar quarter (1 April 2022, 1 July 2022, 3 October 2022, 2 January 2023, 3 April 2023, 3 July 2023, 2 October 2023 and 2 January 2024). It is also agreed between the Director and the entity that the Director issues his/her tax invoice after receipt of the payment. The scenario at hand covers continuous Director services for 2 calendar years and with contractually agreed periodic payments. accordance with Article 26 of the Decree-Law, the date of supply of services for any contract that includes periodic payments or consecutive invoices shall be the earliest of any of the following dates: a. The date of issuance of any tax invoice. b. The date payment is due as specified on the tax invoice.
The date of receipt of payment. d. The date of expiration of one year from the date the goods or services were provided.
The date of supply shall be determined according to Article 26(1)(c) of the Decree-Law, i.e. the date of receipt of payment, being the earliest of the dates mentioned for scenario at hand. Hence, the payments received on 1 April 2022, 1 July 2022 and 3 October 2022 will be considered as triggering the date of supply for Director’s services that are within the scope of the UAE VAT legislation as a supply of services. The other payments (including the payment received on 2 January 2023) will not fall within the scope of the UAE VAT legislation as a supply of services. The natural person performs the functions of a Director for the calendar year 2022 but the fees allocated for that calendar year are only determined after the conclusion of the Annual General Meeting (“AGM”), to be held on 31 January 2023.
If the natural person did not issue any invoice and did not receive any advance payment, the date of supply is the date on which the services was completed, in accordance with Article 25 of the Decree-Law. The Director services are then deemed to be completed only when the fees for services to the Board, therefrom, are known upon conclusion of the AGM on 31 January 2023, despite the fact that the provision of the services may have been Hence, the Director’s services provided by the natural person will not qualify as a supply of services for UAE VAT purposes.
For further guidance with determining the time of supply of Director services, please also refer to Public Clarification VATP009 on available on the FTA’s website.
Deregistration If, because of the coming into effect of Article 3(2) of the Executive Regulation, a natural person who is registered for VAT is not meeting the requirements for mandatory registration anymore, such natural person must deregister for VAT purposes, in accordance with Article 21 of the Decree-Law4 and Article 14 of the Executive Regulation5, without prejudice to Article 18 of the It is important to note that, in case the natural person also has activities, other than performing the function of Director on a Board of Directors (including any committee derived from such Board), that qualify as supplies of goods or services or any other activities under Article 19 of the Decree-Law7, only the performance of functions as Director on a Board of Directors .
(including committees derived from such Board) will be excluded from the calculation of the registration threshold from 1 January 2023. For example, the Director may also rent out commercial properties and/or make other supplies through sole establishments. The value of these supplies must still be taken into account for VAT registration threshold purposes, as well as the value of any other activity as stated in Article 19 of the Decree-Law.
This Public Clarification issued by the FTA is meant to clarify certain aspects related to the implementation of the Federal Law No. 7 of 2017 on Tax Procedures and its amendments, Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments and their Executive Regulations.
This Public Clarification states the position of the FTA and neither amends nor seeks to amend any provision of the aforementioned legislation. Therefore, it is effective as of the date of implementation of the relevant legislation, unless stated otherwise.
Legislative References: In this clarification, Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments is referred to as “Decree-Law”, Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments is referred to as “Executive Regulation”.
- Article 1 of the Decree-Law defines a taxable supply to be a supply of goods or services for consideration during the course of business by any person in the State, and does not include exempt supply.
- Article 25 of the Decree-Law states that tax shall be calculated on the date of supply of goods or services, which shall be the earliest of any of the following dates:
1. The date on which goods were transferred, if such transfer was under the supervision of the supplier.
2. The date of placing the goods at the disposal of the recipient of goods, if the transfer was not supervised by the supplier.
3. Where goods are supplied with assembly and installation, the date on which the assembly or installation of the goods was completed.
4. The date on which the goods are imported under the customs legislation.
5. The date on which the recipient of goods accepted the supply, or a date no later than 12 months after the date on which the goods were transferred or placed at the disposal of the recipient of goods, if the supply was made on a returnable basis.
6. The date on which the provision of services was completed.
7. The date of receipt of payment or the date on which the tax invoice was issued.
Article 26 of the Decree-Law states that: contract that includes periodic payments
1. The date of supply of goods or services for any or consecutive invoices shall be the earliest of any of the following dates:
- 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 goods or services were provided.
2. The date of supply, in cases where payment is made through vending machines, shall be the date on which funds are collected from the machine.
3. The date of deemed supply of goods or services shall be the date of their supply, disposal, change of usage or the date of deregistration, as the case may be.
4. The date of a supply of a voucher shall be the date of issuance or supply thereafter.
Article 21 of the Decree-Law states that: 1. A registrant shall apply to the Authority for tax deregistration in any of the following cases:
If he stops making taxable supplies.
If the value of the taxable supplies made over a period of 12 consecutive months is less than the voluntary does not meet the the condition stipulated in Clause 2 of Article 17 of this Decree-.
2. The Authority may, in accordance with the controls and conditions specified in the Executive Regulation of this Decree-Law, issue a tax deregistration decision, if the Authority finds that continuity of such tax registration may prejudice the integrity of the tax system.
3. Tax deregistration shall not result in the relinquishment of the Authority’s right to claim any due tax or administrative penalties.
Article 14 of the Executive Regulation states that: 1. The registrant must apply to the Authority for de- registration in accordance with the cases mentioned in the Decree-Law, within 20 business days of the occurrence of any of them.
2. The Authority shall accept a registrant’s application for deregistration where the two following conditions are met:
he registrant stops making supplies referred to in article 19 of the decree-law and does not expect to make any such supplies over the next 12-month period;
The value of supplies referred to in Article 19 of the Decree-Law made, or taxable expenses incurred, by the registrant over the previous 12- months is less than the voluntary registration threshold and the Authority is satisfied that his supplies, according to the provisions of the Decree-Law, or taxable expenses, expected over the next 30 days, are not expected to exceed the voluntary registration threshold.
3. If the deregistration application is approved, the Authority shall cancel the tax registration of the registrant with effect from the last day of the tax period during which the registrant has met the conditions for deregistration or from such other date as may be determined by the Authority.
4. Where the Authority is satisfied that the conditions in Clause 2 above are met, and the registrant has not for deregistration, the Authority .
5. A registrant shall not be deregistered unless he has paid all tax and administrative penalties due and filed all tax returns as due under the Decree-Law and the Federal Law No. 7 of 2017 on Tax Procedures.
6. For the purposes of Clause 5 of this Article, any goods and services forming part of the assets of business carried on by a registrant shall be deemed to be supplied by him at a time immediately before ceasing to be a registrant and any tax payable shall be included in the final tax return, unless the business is carried on by an appointed trustee in bankruptcy pursuant to the Federal Law No. 7 of 2017 on Tax Procedures.
7. Where a registrant requests to be deregistered from tax due to the reduction of his taxable supplies to less than the mandatory Authority will, if in agreement with the Registrant, cancel the tax registration with effect from:
The date requested by the registrant in the application; or The date on which the request is made if the Registrant did not indicate the preferred deregistration date.8. Where the Authority has deregistered a registrant from tax, it shall notify that registrant of the date on which deregistration takes effect within 10 business days of making the decision.
Article 18 of the Executive Regulation states that deregistration does not exempt the person from his obligations and liabilities that were applicable under the Decree-Law while he was still a registrant. Article 19 of the Decree-Law states that to determine whether a person has exceeded the mandatory registration threshold and the voluntary registration threshold, the total of the following shall be calculated:
The value of taxable goods and services.
The value of concerned goods and concerned services received by the person unless covered by Clause 1 of this Article.
The value of the whole or relevant part of taxable supplies that belong to a person if he has, wholly or partly, acquired a business from another person who made the supplies.
The value of taxable supplies made by related parties pursuant to the cases stated in the Executive Regulation of this Decree-Law.