Taxability of Directorship services in different jurisdictions in GCC

dilip jaindilip jain    19 July 2020
Taxability of Directorship services in different jurisdictions in GCC

Taxability of Director Services:

UAE Vat law

In particular, employees who perform services for their employer are not considered to be making a taxable supply. However, taxable persons who provide independent director’s services to other legal entities would be considered to be making a taxable supply of services (subject to place of supply rules).

Services provided by a director should be taxable if:

  • the director undertakes services on a regular, ongoing and independent basis (such as an individual who acts as an executive or non-executive director on a board or a number of different boards); and
  • the total value of taxable supplies made by the director, including supplies of director services, exceed the mandatory registration threshold.

A “taxable supply” is defined in the VAT legislation as any supply of goods or services for consideration by a person conducting business in the UAE.

Applied to directors, depending on circumstances, consideration may include the director fee, bonuses, stock options, recharges for goods and services acquired by the director, and so forth.

In conclusion, assuming a person provides services as a director regularly and independently (that is, they are not simply an employee of the company), the person will be required to charge VAT on their services.

The impact of VAT on services provided by directors varies depending on the two broad classifications of directors:

  1. An executive director is a member of the executive management of an organization. The executive director has an employment contract and is therefore viewed as an employee of the organization. Generally, employees who perform services for their employer are not considered to be making a taxable supply for VAT purposes.
  2. Non-executive directors are external directors and do not form part of the executive management team. Non-executive directors are usually selected because of their specialized knowledge and are appointed to give expert advice. Consequently, a Non-Executive Director supplies services on a regular, ongoing and independent basis.

 

Bahrain Vat law

Board members and directors are considered to be instruments of the entity they represent when carrying out their core duties in their capacity as board members or directors. On this basis, they are not considered to be independent from the entities concerned. Hence, a board member is not regarded as carrying on an economic activity in relation to that activity, and remuneration for services as a board member is outside the scope of VAT.

Other functions : Other functions exercised by persons in an independent way on behalf of an entity of which they are a board member which are not core duties are considered to be an economic activity and may trigger an obligation for these persons to register and account for VAT on the services provided. One example includes the provision of consultancy services for an additional fee.

Bahrain Trading Group B.S.C. is a family owned company that holds shareholdings in a number of trading companies. By virtue of its shareholdings, it is entitled to appoint directors to the trading companies. It appoints family members and third parties as board members of these companies. In some cases, the companies pay Bahrain Trading Group B.S.C. a fee for providing the directors and, in others, fees are paid directly by the companies to the directors. The activities of Bahrain Trading Group B.S.C. in appointing the directors and the activities of the directors themselves will not be regarded as an economic activity and neither Bahrain Trading Group B.S.C. nor the individuals will be required to account for VAT on fees received from the companies.

 

Saudi Vat law ( VAT on Employee Benefits Guideline )

  1. Employee and Employer: These terms are not defined for VAT purposes. However, the Implementing Regulations specify rules relating to the VAT treatment of those working in an Employee capacity. Therefore, some of the definitions in the Labour Law have been used.(1)

    For the purposes of executing the Implementing Regulations, GAZT anticipates a broader interpretation to include those working under arrangements equivalent to an employment contract. In cases where there is no formal employment contract, GAZT will nonetheless consider individuals to be working as ‘Employees’ – i.e. within a relationship of Employer and Employee - where all of the following conditions are met:

    (1) Only the Employer is able to instruct / determine the activities of the Employee;

    (2) The Employee does not have materially different working conditions to other Employees

    (3) The Employer bears the risk of payment based on time spent (or other remuneration where equivalent to that of other Employees)

    (4) The Employee cannot carry out work for other parties during the period of the contract;

    (5) The Employer specifically hired that individual Employee for the activities, and the Employee or supplier is not able to substitute the individual without the Employer’s approval.

    Likewise, non-Executive Directors who are not Employees but charge a director’s fee to the company, will be viewed to be undertaking independent economic activity as a supplier of services and must register for VAT if their turnover are above the registration threshold.

  2. FEDERAL LAW NO. (8) OF 1980 ( labor law)
  • Employer - Any natural or juridical person employing one or more workers in consideration of a remuneration of any kind whatsoever.
  • Worker- Any male or female person who receives remuneration of any kind for work performed thereby in the services of an employer and under his management or control, even if the employee is off employer's sight. This meaning shall also apply to officials and employees who are in the service of the employer and are subject to the provisions hereof.
  • Employment Contract - Any Agreement, whether for a limited or for an unlimited period, concluded between an employer and an employee under which the latter undertakes to work in the service of the employer and under his management or control against a remuneration payable to him by the employer.
  • Remuneration - Remuneration is whatever is given to the employee in consideration of his services under the employment contract, whether in cash or in kind, payable annually, monthly, weekly, daily, hourly, or by piece-meal or pro rata to the production or as a commission

 

What are “independent” and “non-executive” directors?

A board member could be either; (i) a natural person, or (ii) a corporate entity. By law, a corporate entity could be appointed as a board member provided that it is represented on the board by a natural person who is the representative of the entity.The board membership criteria stipulated under the Decree will therefore be addressed according to these categories.

Natural persons

Board members, whether natural persons or corporate entities, are classified into three sub-categories:

1. Executive members:

Executive members are members responsible for the daily management of the company and, are the delegates of the board to take certain decisions determined in their assignment. They must be full time members and fully dedicated for the assigned managerial duty and may be granted a fixed salary for managerial tasks apart from the annual remuneration of the board.
Any board member who is granted a fixed salary aside from the annual board remuneration determined by the general assembly will be considered an executive member. Other expenses, allowances and salaries granted to the board member as a result of a board member being appointed as a member of the board’s committees will not be considered as a fixed remuneration that would fall into executive members’ remuneration.

2. Non-Executive Board Members:

As stipulated under the Decree, the majority of the board members must be non-executive members, who have adequate experience to protect the interests of the company and, to bring a diversified vision to the board and the process of decision making. The non-executive board member should be able to devote the time necessary for undertaking duties and responsibilities of their membership, and membership of the board does not constitute a conflict of interest with any other positions they hold.

Under the Decree, the roles of the chairman and the managing director should not be exercised by the same individual to avoid the potential conflict of interest between the duties of the chairman, being a non-executive member and the managing director or the manager of the company as a part of the executive team of the company.

It is worth a noting that the Decree did not address the position of the vice chairman, who replaces the chairman upon his absence, and whether the vice chairman should be elected from the executive or the non-executive members. However, applying the merits of the Decree, we would argue and recommend that the role of vice chairman must be elected from the non-executive members to maintain the same criteria applicable on the chairman being his replacement.

3. Independent Board Members

As mentioned earlier, the board is constituted of at least one third of independent members. The independency criterion is related to the nature of the relationship between the board member, the company and its related parties.

A board member will not be considered independent if, the member himself, his spouse or any first degree relatives have served as a member of the executive management of the company during the last two years, or has had any a relationship that resulted in financial dealings with the company, its parent company, sister company, or allied company, within the previous two years, in an amount exceeding 5% of the paid up capital of the company, or the amount AED 5 million whichever is lesser.

Board members lose their independence if they:

  1. Own by themselves or by any of their children a share in the company’s capital that exceeds 10% of the capital of the company;
  2. Have been an employee of any related party to the company during the last two years;
  3. Are directly related to a company that performs consulting business or provides consulting services to the company or any of its related party;
  4. Enter into personal service contracts with the company or any of its related parties, or the executive management of the company;
  5. Are directly related to not-for-profit organization that receives a material financing or aid from the company.
  6. Are related to, or being an employee of, any external auditor or former external auditor of the company or any of its related parties.

 

Federal Law No. 2 of 2015 On Commercial Companies

Article 71- Definition of the Company

1- A Limited Liability Company is a company where the number of partners is at least two (2) but shall not

exceed fifty (50). A partner shall be liable only to the extent of its share in the capital.

2- A single natural or corporate person may incorporate and hold a Limited Liability Company. The holder of

the capital of the company shall not be liable for the obligations of the company other than to the extent of the

capital as set out in its Memorandum of Association. The provisions of the Limited Liability Company

contained in this Law shall apply to such person to the extent not in conflict with the nature of the company.

 

Management of the Company

Article 83- Managers of the Company

1- The management of a limited liability company shall be undertaken by one or more Managers as

determined by the partners in the Memorandum of Association. Such Managers shall be elected from the

partners or third parties. If the Managers are not appointed in the Memorandum of Association of the company

or an independent contract, the general assembly of the partners shall appoint such Managers. If there is more

than one Manager, the partners may appoint a Board of Directors. Such board shall have such powers and

functions as set out in the Memorandum of Association.

2- Unless the contract appointing the Manager of the company or its Memorandum of Association or Articles

of Association provides for the powers granted to the Manager, such Manager shall be authorized to exercise

full powers to manage the company and his acts shall be binding to the company, provided that the capacity of

Manager is stated upon doing such acts.

 

Disclaimer: Content posted is for informational & knowledge sharing purposes only and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/ interpretation of the publisher is based on the available Law, guidelines, and information. Each reader should take due professional care before you act after reading the contents of that article/ post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide and should not be relied on for tax or accounting advice.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax. 

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