Economic Substance Regulations in UAE

economic-substance-law-uae

​ As part of the UAE’s commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the European Union (“EU”) Code of Conduct Group on Business Taxation, the UAE introduced a Resolution on the Economic Substance (Cabinet of Ministers Resolution No.31 of 2019, the “Regulations”) on 30 April 2019.  Guidance that provides further clarity on the application of the Regulations was issued on 11 September 2019. The Regulations require UAE onshore and free zone companies and other UAE business forms that carry out any of the “Relevant Activities” listed below to maintain an adequate “economic presence” in the UAE relative to the activities they undertake. 

 
Relevant Activities:
  • Banking Business
  • Insurance Business
  • Investment Fund management Business
  • Lease – Finance Business
  • Headquarters Business
  • Shipping Business
  • Holding Company Business 
  • Intellectual property Business (“IP”)
  • Distribution and Service Centre Business​
 
 
The Regulations provide a definition to each of the above Activities. The provisions of the Regulations shall not apply to Companies in which the Federal Government of the UAE or the Government of any Emirate of the UAE, or any governmental authority or body or any of them has at least 51% direct or indirect ownership in their share capital. The Regulations apply to financial years commencing on or from 1 January 2019. Entities that are governed by the Regulations will need to submit a notification to their Regulatory Authority (defined under Cabinet Decision No (58) of 2019 issued on 4 September 2019) from 1 January 2020 onwards, and prepare and submit to the same Regulatory Authority an economic substance declaration  within 12 months from the end of their financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019). An entity is not required to meet the economic substance test and file an economic substance declaration for any financial period in which it has not earned income from a Relevant Activity. Failure by an entity to comply with the Regulations shall result in administrative penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), and potential suspension, revocation or non-renewal of its registration.

The Economic Substance Regulations

1.Why has the UAE introduced Economic Substance Regulations?

The UAE introduced Economic Substance Regulations to honour the UAE’s commitment as a member of the OECD Inclusive Framework on BEPS, and in response to a review of the UAE tax framework by the EU which resulted in the UAE being included on the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist). The issuance of the Economic Substance Regulations on 30 April 2019 (the Regulations), and the subsequent release of the Guidance on the application of the Regulations on 11 September 2019, was a requirement for the removal of the UAE from the EU Blacklist on 10 October 2019. The purpose of the Regulations is to ensure that UAE entities that undertake certain activities (see question 4) are not used to artificially attract profits that are not commensurate with the economic activity undertaken in the UAE.

2.What is the first reportable Financial Year?

The Regulations apply to financial years starting on or after 1 January 2019. Example 

1: A UAE company with 1 January 2019 – 31 December 2019 financial year: First assessable period would be 1 January 2019 – 31 December 2019. Example 

2: A UAE company with 1 April 2019 – 31 March 2020 financial year: First assessable period would be 1 April 2019 – 31 March 2020. No need to comply with the Regulations for the period 1 January 2019 – 31 March 2019.

3.Who are the “Regulatory Authorities”?

The Regulations are administered by the Regulatory Authorities listed in Cabinet Resolution No (58) of 2019 Determining the Regulatory Authorities Concerned with the Business Mentioned in Cabinet Resolution No (31) of 2019 Concerning Economic Substance Regulations 

Does your business fall under Economic Substance Regulations in the UAE?

If your business falls under the entities with the above-mentioned activities in the UAE, then you may need assistance to determine the applicability if Economic Substance Regulations is relevant for you as you need to analyze the implication of this new regulation in the UAE.

The team at Alya Auditors will assist you in providing preliminary assessments of your company’s current compliance obligations, and assist with possible future strategies, in response to this new legislation.

For more details on "Economic Substance" read
Source  :  Ministry of Finance Website

VAT on Directors service Fees -Tax Treatment

TAX/VAT on Director's Services in UAE

Whether Management Fee or Director’s Service Fee is taxable in the UAE ? Is The Management Fee also VATable Now in UAE !! ?

Yes, the Director’s Service fee otherwise called as Management Fee is taxable under the UAE VAT Law. The Federal Tax Authority (FTA) has issued a guideline on applicability of tax on Director’s Services in the month of April 2018 (VAT Guide – VATGDS 01).

What are the conditions to be satisfied to consider the Director’s Service Fee or Management fee as taxable under the UAE VAT Law?

The Management Fee or Director’s Service Fee is taxable if the below mentioned conditions are satisfied:

  • The person provides independent director’s services to other legal entity or entities.
  • The annual fee in cash or in kind exceeds the monetary value AED 375,000/-.
  • There is no employer – employee relationship between the such person (director) and the company.

 When will Management Fee or Director’s Service Fee not be taxable under UAE VAT?

In the following cases, management fee or director’s service fee will not be taxable.

  • If there is an employer – employee relationship between the director and the company.
  • If for the last 12 months period, the service fee is not more than the mandatory registration threshold ie; AED 375,000/.

Whether the Manager or the Managing Partner in an LLC company or a free zone company has to register for VAT in his personal capacity?

Yes, if a manager or a managing partner withdraws management fees for his service as the director to a company and if the annual management fee is more than AED 375,000/- per annum, he has to register under FTA in his personal capacity. If such a manager/ managing partner/director is under an employment visa in the company he need not register for VAT in his personal capacity. Because in this scenario, there exists an employer – employee relationship between the company and the manager/ managing partner/director. Hence, the payment made to such person will not be considered as service done independently and taxability doesn’t apply.

Further, if the managing partner withdraws the profit from the company (declaration of dividend) it will not be treated under Director’s Service or management fee. It is only a declaration of dividend.

Whether the VAT on management fee or director’s service fee is a cost to the company or for the director?

The VAT on management fee or director’s service fee is not a cost to the company or to the director. For example, suppose Mr. X receives AED 600,000/ as the service fee for the year 2018 from a company called XYZ LLC. He will be charging AED 630,000/ including of VAT and AED 30,000/ will be paid to the Tax Authority. However, XYZ LLC can take the input claim on such expenses. Hence in effect, there is no cost to the company or to the individual.

What is the Rate of Tax applicable for Management fee or Director’s Service fee?

VAT on management fee or director’s service fee is applicable at a standard rate i.e., 5%. However, in the following cases, the rate of tax or the treatment of tax will be different.

  • If the director is a resident but serving a company in the overseas. It will be an export of services and will be taxed at zero rate.
  • If a UAE company has a director who is non-resident, the fee charged by such director shall be booked under RCM (Reverse Charge Mechanism) by the company (the director need not register in the UAE for VAT under FTA).

What is the value of consideration taxable under directors’ service or management fee?

The following should be considered to arrive the value of the consideration for taxable purpose:

  • The service fee charged in cash
  • Accommodation facility given
  • Stock Options
  • Bonuses
  • Or any other facility or consideration given to the director.

Note: Consider a director in ABC LLC is eligible for a director’s service fee or management fee of AED 60,000/- per month. In this case, his total eligible amount of director’s fee or management fee for one year will be AED 720,000/-. Even if there is no practice of paying the fee on monthly basis, since the terms of payment of service fee is on monthly basis, the director has to register for VAT. Which means, the payment is not the only criteria. Even if the amount is due for any particular year, it will be taxable.

Whether a director can recover the input tax he has incurred?

Similar to other business or businesses, the directors also can avail the eligible input credits. If any service is incurred or goods are purchased for executing the directors’ service, the input tax incurred on such expenses can be recovered.

For example: Cost of the desktop purchased, maintenance services for the desktop, travelling expenses, etc.

Sometimes the acquired goods or services are partly used in the course of making supplies that allow for the recovery of input tax and some are partly used for making supplies for which VAT is not recoverable. In these kind of situations, the director may need to use input tax apportionment rules to identify the proportion of VAT that can be recovered.

What happens when a company appoints a person to act as a director for another company?

Sometimes businesses appoint an employee or a director to serve as a director of another company, or another type of businesses. Here, the normal rule of supply of services will be applicable. The supplier company must account for VAT and not the director appointed. To summarize, it will be the revenue (taxable supply) for the company which appoints director for another company. The Director is not required to register himself in his personal capacity.

How will Alya Auditors provide advisory service in relation to the Director’s Service Fee or Management Fee on UAE VAT?

  1. Review the memorandum of association or board resolution of the company to identify the clause related to management fee or director’s service fee.
  2. Review the financial statement for the previous year/s to ensure that there is a practice of booking the management fee or director’s service fee in the books of accounts properly.
  3. Meeting with the accounts department and management of the company to identify if any benefit is given to the directors in kind which is not reflected in the books of accounts / audited financial statement.
  4. Once the eligibility for VAT Registration under FTA is confirmed (the management fee or director’s service fee is more than the minimum threshold limit), we will support for the director to get registered under FTA.
  5. Once the registration is successfully done and the due date for filing the return is received, we will extend our service to the director to file the VAT Return with FTA.

Alya Al Marzooqi Auditing one top ten audit firms in Dubai, operates a full swing division for VAT Services in UAE. As an audit firm in Dubai, our Tax experts are equipped with professional experience in taxation with different industries in the region.  We Provide tailored approach to the clients in the best professional way.