22 November 2022
UAE issues clarifications for taxability of Director Services and changes in VAT law

The Federal Tax Authority (FTA) has recently issued two public clarifications under UAE VAT law that discusses the VAT treatment on:
A. Amendments to VAT Federal Decree-Law – Federal Decree-Law No. 18 of 2022 ; and
B. Performing the function of Director on a Board of Directors by a Natural person

We have summarized below the gist of the key UAE VAT positions discussed in the clarification:
A. Amendments to VAT Federal Decree-Law - Federal Decree-Law No. 18 of 2022
UAE Federal Decree-Law No. 8 of 2017 on VAT (hereinafter referred to as VAT Law) was amended by the Federal Decree-Law No. 18 of 2022 and will be effective from 1 January 2023. The same can be referred to here: http://bit.ly/3VfZ6iP
B. Performing the function of Director on a Board of Directors by a Natural person.
  1. The FTA issued Director’s Services VAT Guide in March 2018, whereby taxable persons who provided independent Director’s Services to other legal entities would be considered to be making a taxable supply of services (subject to the place of supply rules).
  2. Furthermore, Article 3(2) of the amended Executive Regulation provides to exclude services provided by an individual to perform functions in the formal capacity of a member of the Board of Directors of any government entity or any private entity from the definition of supply. The same shall be effective from 1 January 2023. The following conditions are required to be fulfilled for not considering the said provision as supply:
    • Services are provided by a Natural person (whether in UAE or outside UAE); and
    • Is appointed as Director on a Board or any government entity or private sector establishment.
    The same is not applicable to a legal person, whether private or public, who may delegate in their own name a Natural person to act as Director.
  3. However, where freelance services are rendered by a third-party Natural person who is not a Director (whether in UAE or outside UAE) during the meetings of a Board of Directors are considered to be supplies of services for VAT purposes and will be taxable as standard rated supply, subject to conditions.
    Accordingly, in the case of foreign Natural persons,
    • Reverse charge mechanism in this case will not be applicable, or
    • Even the need for the Natural person to register in the UAE for VAT purposes.
  4. For determining whether the date of supply is prior or post 1 January 2023, the following table can be referred to for certain key supplies. Kindly note that further guidance for determining the time of supply of Director Services , Public Clarification VATP009 issued in said regard can be referred. Below is an illustrative list and there may be further scenarios that shall require detailed examination on a case-to-case basis:

    Sr. No. Date/Period of Supply Date of Issue of Invoice Date of Payment Whether Prior or Post 1 January 2023
    a 1 January 2022 to 31 December 2022 (fees known during the provision of service). No invoice issued. No payment made. Prior to 1 January 2023. VAT shall be payable.
    b 1 January 2022 to 31 December 2022 and 1 January 2023 to 31 December 2023 (fees due on a periodic basis). First business day after the end of each calendar quarter. First business day after the end of each calendar quarter.
    • Payment received prior to 1 January 2023 is subject to VAT, and
    • Payment received post 1 January 2023 not subject to VAT.
    Article 26(1)(c) of the Decree-Law - Continuous Supply of Service provision.
    c 1 January 2022 to 31 December 2022 (fees for service are not known during provision of service). No invoice issued. No payment made. No VAT payable as services is deemed to be completed only when the Board fees are known upon conclusion of the AGM on 31 January 2023, despite the fact that the provision of services has been physically completed earlier. Furthermore, it is clarified that, in this scenario, as per Article 26, said service cannot be treated as a continuous supply of service.
  5. The VAT Public Clarification also provides detailed comments for de-registration and the manner of determining the threshold for purpose of VAT registration, as below.
    • If a person is registered for VAT and is not meeting the requirement for mandatory registration, then the said person must deregister.
    • Furthermore, if the said Natural person is performing some other activities including Director Services, then services supplied by way of Director Services shall be excluded from 1 January 2023. For e.g. the Director may also rent out commercial properties and/or make other supplies through sole establishments, the value shall be considered for VAT registration threshold and other purposes under VAT law.
Our Comments
The FTA has clearly provided detailed clarification on inclusion and exclusion from VAT in relation to the provision of services provided by Natural persons from 1 January 2023. Accordingly, it will be imperative for businesses to analyze their existing contract with their respective Directors, as applicable, and understand changes applicable to them, considering the aforesaid provisions would be effective from 1 January 2023.
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