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:
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.
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.
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:
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?
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.