The UAE’s Ministry of Finance has scrapped VAT payments for board members who render services. Younis Haji Al Khoori, the Ministry’s undersecretary, made the announcement. According to Al Khoori, the cabinet decision will officially come into effect by January 1st, 2023.
The recent decision covers all members of a Board of Directors, whether in the public or private sector. It also applies to board members that perform their duties in exchange for a monetary or non-monetary reward. Under the ambits of the VAT, this transaction will be considered a supply of services by the board member.
Who does the VAT payment exemption apply to?
According to the Ministry, the VAT development applies only to natural persons who render their services as board members. Thus, all legal persons who delegate their services as board members to natural persons will still be charged for VAT. However, members providing services below the threshold for VAT registration will still be exempted from payment.
In the UAE’s current commercial landscape, duties executed by board members will only be regarded as taxable when the specific services are provided independently, regularly, and continuously. However, with the recent amendment, board services provided by natural persons are subject to VAT exemption. This means companies acting as board members will still be subjected to VAT payments. Also, all activities provided by legal persons regarding their position as board members will be subject to VAT payments.
Al Khoori also stated that where a board member provides services that span across the amendment’s effective date, the date of the supply will be considered to determine VAT exemption. Thus, the VAT obligations of board members providing services till January 1st and beyond will be considered based on relevant supply dates.
Besides the new position on taxable services for board members, directors might also need to reassess their positions under VAT obligations. This means supply values below the VAT threshold will need to be deregistered. Moreover, board members will also need to deregister since their services are no longer taxable. Compliance operations will need to be strengthened for most companies and natural persons working as board members to ensure adherence to legal provisions.
Moreover, legal persons will need to keep track of their VAT obligations, service supply, report relevant transactions, and make VAT payments on time. This will reduce the possibility of legal penalties or reputational risk for companies.
Also, the VAT exemption applies to all natural persons within the UAE, including Emiratis and expatriates. However, the VAT development does not amend the current VAT rate of 5 percent. All natural persons that provide taxable services outside their board member duties will still be subjected to VAT payments. The only difference with the new VAT rule is that board member duties will be exempted from expected payments.
In recent years, the UAE has focused on increasing its commercial environment’s attractiveness. The new VAT rule significantly removes the tax burden on individual board members. This will help incentivize more companies to appoint natural persons as board members.