UAE Corporate Tax: Considerations for Business Owners When Drawing Salaries and Bonuses

UAE Corporate Tax: Considerations for Business Owners When Drawing Salaries and Bonuses

UAE Corporate Tax: Considerations for Business Owners When Drawing Salaries and Bonuses

In the ever-evolving landscape of the UAE’s corporate tax system, business owners are urged to exercise caution when determining their salaries and bonuses. While the corporate tax rules are relatively clear, the issue of business owners’ salaries remains contentious and bewildering, with multiple schools of thought on the matter. In this article, we will explore the key considerations for business owners in the UAE when it comes to drawing salaries and bonuses.

The matter of business owners’ salaries in the UAE is a complex one, with no single solution that is entirely free from doubts. It’s crucial to recognize that individual salaries are exempt from corporate tax. However, business owners should not merely pay themselves a ‘salary’ or ‘directorship fee’ without taking into account the intricacies of tax regulations.

The term ‘connected person’ in the UAE’s corporate tax regulations encompasses not only business owners but also the company’s directors and their relatives up to four levels of kinship. Additionally, it includes companies that are owned or controlled, to the extent of at least 50 percent, by these individuals. This broad definition underlines the importance of identifying all connected persons and understanding the payments or benefits provided to them concerning tax regulations.

To optimize tax deductions and reduce taxable income, business owners are inclined to allocate a portion of their company’s revenue as salaries to themselves or family members. In this context, safeguards are in place, including transfer pricing benchmarking and anti-abuse rules.

Transfer pricing encompasses any payment or benefit provided by a company to its connected persons. It’s important to note that the scope of ‘payment/benefit’ is broader than goods and services transactions with connected persons. This means that not only owners but also directors and their relatives can be impacted by transfer pricing regulations.

The question of whether directorship fees are considered a business activity is a significant one. Regardless of whether the directorship fee is paid to an owner, a family member, or an independent director, individual taxation of such directors may be required under certain circumstances. For instance, if an individual derives an annual turnover exceeding Dh1 million from a business or business activity in the UAE, they need to register for corporate tax.

Directorship fees typically do not fall under the category of wages or salaries. However, the supply of services within the context of business activities is generally subject to VAT. As of January 1, 2023, the functions of a board member, when performed by a natural person, are no longer considered a supply of services for VAT purposes. Nonetheless, it’s essential to recognize that directorship services were previously categorized as a supply of service and were only excluded from VAT through a special exception. Therefore, the activity itself could still be considered a business.

Companies are not required to maintain transfer pricing documentation for all transaction categories. One such exemption pertains to transactions with natural persons when the parties involved act as if they were independent of each other. Independent directors of a company are more likely to engage in such transactions that do not necessitate extensive transfer pricing documentation.

However, having documentation is distinct from ensuring that transactions are conducted at arm’s length. Whether it’s a directorship fee paid to owner-directors or independent directors, benchmarking at arm’s length is crucial to compliance with tax regulations.

In light of the UAE’s entrepreneurial growth and the prevalence of family businesses, the administrative and financial burdens of benchmarking payments to owners can be significant, not to mention the potential for future litigation. Many business owners seek clarity and guidance in this complex landscape.

A proposed solution is the establishment of a safe harbor, which would specify a maximum percentage of revenue that owners can draw as salaries and/or directorship fees from their businesses. Such a provision would provide much-needed clarity and predictability for business owners, allowing them to navigate the complex waters of corporate tax regulations with confidence.

In conclusion, navigating the intricacies of UAE corporate tax regulations, especially concerning owners’ salaries and bonuses, is no simple task. Business owners should exercise diligence, stay informed about the latest developments, and consider seeking professional advice to ensure compliance with the law while optimizing their financial arrangements. With the potential for significant financial implications, it’s essential to approach these matters with a thorough understanding of the rules and regulations in place.

Summary of article by: Pankaj S. Jain, Gulf news

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