VAT on Director's Fees Comparison between KSA , UAE and Bahrain

VAT on the services by directors of corporate has drawn enormous confusion over the last year to such an extent that three VAT countries in the GCC have issued specific guidelines to clarify the position on such transactions.

The confusion drawn on account of the arrangement of directors and the companies has resulted in non-compliance by way of not obtaining VAT registration, non-payment of VAT and non-filing of VAT returns by various directors consequently resulting in imposing of penalties.

It is important to note that not all the directors are liable to register under VAT, thus one should know which directors should register and discharge VAT. Generally, the Company appoints executive, as well as non-executive directors, also called as independent directors. Non-executive directors are not employed by the Company but only appointed on the board to govern the functioning, independent of any interest in the organization and are eligible to a director's fee. Alternatively, there are executive directors which are employees of the organization bound by an employment contract.

It is a well-established fact that any remuneration given to employees are not subject to VAT. Accordingly, any directors fee given to such directors is not subject to VAT @5%.

Given that each VAT implementing state in GCC has brought out their own guidance,it is important to refer such guides to understand and analyze the difference in the applicability of VAT on such transactions.

SAUDI ARABIA

In KSA, the guide on 'VAT on Employee Benefits Guideline' specifically provides for:

'Individuals who are not Employees, but instead provide regular and continuous services to legal persons (specifically businesses) under a services agreement or similar, will carry on an Economic Activity for VAT purposes.

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.”

This entails that non-executive directors who are not employees shall discharge VAT @ 5% on the directors' fee received from the Company provided they exceed the mandatory threshold.

UNITED ARAB EMIRATES

The 'Director's Services' guide issued in UAE provides the following:

• 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 and imports made by the director, including supplies of director services, exceed the mandatory registration threshold.

It has been clearly provided that consideration recovered by directors providing services on an independent basis are subject to VAT @5% provided they exceed a mandatory threshold.

Thus, it is very clear in KSA as well as in UAE that services provided by independent directors are subject to VAT @5%. Accordingly, directors who are board members of various organizations and earn directors' fees in excess of AED 375,000 should comply with all the requirements of the applicable VAT Laws.

BAHRAIN

Bahrain has most recently issued guide on the 'director services'. In this guide, it has been clarified that any consideration paid to a person appointed legally by the shareholders shall not be subject to VAT. Thus, one can interpret that consideration paid to a non-executive director appointed by shareholders on the board should not be subject to VAT.

This difference may cause an issue for directors who render services to companies in all the regions.

Apart from the standalone case of applicability of VAT on directors' fee, there are various other scenarios wherein the applicability of VAT should be analysed:

• If the directors render services to companies located outside UAE
• A consulting business may provide directors to the company
• A common director for various companies located in one or more countries
• Director appointed by a company in UAE is providing services to a company located outside UAE

Accordingly, it is important to analyse on case to case basis for such directors in order to avoid any non-compliance from a VAT standpoint.