WPS Transfer from Group company: Is it taxable as per UAE VAT Law?

CA Rajiv HiraCA Rajiv Hira    20 July 2020
WPS Transfer from Group company: Is it taxable as per UAE VAT Law?

Let's understand some of the concepts relating to the article:

What is Wages Protection System (WPS)?

WPS is an electronic salary transfer system that allows companies / institutions to pay workers wages via banks, bureaux de change, and financial institutions approved and authorized to provide the service. The system, developed by the Central Bank of the UAE, allows the Ministry of Labour to create a database that records wage payments in the private sector to guarantee the timely and full payment of agreed-upon wages.

What is defined as Salary?

A salary is a form of payment from an employer to an employee, which may be specified in an employment contract. From the point of view of running a business, salary can also be viewed as the cost of acquiring and retaining human resources for running operations and is then termed personnel expense or salary expense. In accounting, salaries are recorded in payroll accounts.

Its important to note that there should be employer and employee relationship.

What is 'Taxable supply', as per VAT Law?

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, excluding exempt supplies.'

Therefore, a supply would be a taxable supply if the following conditions are met:

  • It is a supply of goods or services;
  • for consideration;
  • by a person conducting business.

The VAT legislation defines 'business' as 'any activity conducted regularly, on an ongoing basis and independently by any Person, in any location, such as industrial, commercial, agricultural, professional, service or excavation activities or anything related to the use of tangible or intangible properties.'

What provision makes 'Salary' as 'Out of Scope' as per VAT Law?

Salary is considered as 'Out of Scope' since the condition in the definition of 'Taxable Supply' is not complied with i.e. 'Independent by any person'. As an employee, every action or act is done for and on behalf of company (organisation) i.e. employer & hence it done not fulfill the criteria of independence.

With above interpretation, 'Salary' is considered as Out-of-Scope supply as per UAE VAT Law, since Salary payment is by an employerto THEIR employee.

Let's understand implication of VAT, using some practical examples.

Basic assumption used:

  1. Companies in discussion are not part of same Tax group, where these both entities are based in UAE.
  2. 'UAE Company' i.e. company having place of establishment & fixed establishment in UAE.
  3. Value of salary (services provided) are considered to be above the threshold for registration of VAT.
  4. Both entities are registered UAE VAT entities.


Employees hired in 'UAE Company A' (Work Visa from 'UAE Company A').

Employees are performing activity for 'UAE Company B'.

WPS for the salary of Employees are paid / transferred directly form the bank account of 'UAE Company B'.


  1. 'UAE Company A', recharge invoice to 'UAE Company B' for cost of employee.
  2. 'UAE Company A' Should raise the tax invoice (charging VAT) to 'UAE Company B'.
  3. WPS Transfer from 'UAE Company B' should only be considered as intercompany transfer, in terms of accounting below accounting entries may be passed:

Books of 'UAE Company A'
Salary Account                 Dr. XXXX
To Salary Payable                        XXXX
(Recognition of Salary)

Salary Payable                  Dr. XXXX
To 'UAE Company B'                    XXXX
(WPS initiated by 'UAE Company B' on behalf of 'UAE Company A')

UAE Company B               Dr. XXXX+VAT
To Service Invoice                    XXXX
To Output TAX (VAT)                  VAT
(Tax invoice issued for value of services provided)

Books of 'UAE Company B'
'UAE Company A'               Dr. XXXX
To Bank Account                            XXXX
(WPS initiated for transfer of salary by 'UAE Company B' on behalf of 'UAE Company A').

Expenses                            Dr. XXXX
Input TAX (VAT)                  Dr. VAT
To 'UAE Company A'                     XXXX+VAT

Note: WPS transfer will not substantiate the employer / employee relationship, this transfer can be on behalf of other company (example in above case transfer done by 'UAE Company B' is considered as transfer on behalf of 'Company A').

However, there is a different view provided in KSA VAT guidance note i.e. 'Financial Services Sector Industry Guide' stating 'In cases where a supplier provides an employee to a customer, and the outsourced employee is under the direction of the customer and acts in a manner equivalent to an employee, the provider of outsourced labour may view the on-charge of the salary cost for the outsourced labour as a direct disbursement. VAT must still be charged on the agency fee.

Note that:

  1. it's important to review the contracts and implication effectively for application of scenarios.
  2. Supply discussed above, warrants effective analysis where recipient of services is:
  • not able to claim the input tax; or
  • is in business of mixed supply activity (where partial input tax cannot be claimed).

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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