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Monday, June 17, 2024

“Caution Advised for UAE Business Owners Regarding Salaries and Bonuses in Corporate Taxation”

Amidst the landscape of UAE corporate tax, the matter of business owners salaries emerges as a perplexing and debated topic. Various schools of thought offer diverse recommendations for justifying these salaries, whether categorizing them as standard wages in financial records or structuring them as directorship fees paired with substantial bonuses. However, clarity remains elusive, and no single solution is deemed definitive.

Navigating Tax Regulations: The Imperative for Business Owners

Despite the exemption of individual salaries from corporate tax, business owners must tread carefully when deciding on a ‘salary’ or ‘directorship fee’ for themselves, especially in the absence of a clear-cut regulatory framework. Many owners opt to show themselves drawing a salary, possibly extending this arrangement to family members to bolster deductible expenses and reduce taxable income. To ensure compliance and equity, they must adhere to safeguard measures, including transfer pricing benchmarking and anti-abuse rules.

Understanding Transfer Pricing and Connected Persons: Corporate

The concept of transfer pricing extends to any ‘payment or benefit provided’ by a company to its ‘connected persons,’ encompassing a broader scope than mere goods and services transactions. ‘Connected persons’ not only include business owners but also company directors, their relatives within four degrees of kinship, and companies under their ownership or control, with a minimum ownership share of 50 percent. Hence, a comprehensive understanding of all connected persons and the payments and benefits they receive is imperative within the framework of tax regulations.

Individual Taxation Complexities for Directors: Corporate

Considering the individual taxation of directors adds another layer of complexity, irrespective of whether they are business owners, family members, or independent directors. Compliance may necessitate individual registration for corporate tax, subject to specific exclusions such as wages. The trigger for mandatory registration occurs when an individual derives an annual turnover exceeding Dh1 million from a business or business activity in the UAE.

Directorship Fees and VAT Implications: Corporate

Directorship fees, while typically not categorized as wages or salaries, fall under the purview of VAT within the context of services supplied during business activities. Notably, the nature of directorship functions as a supply of services for VAT purposes was eliminated for individuals performing these functions for government entities or private sector establishments starting from January 1, 2023. However, these functions may still be perceived as a business activity, particularly for private companies engaged in providing directorship services.

Corporate Tax Compliance and Directorship Fees

The prospect of corporate tax compliance applying to individual directors, whether they are owners or independent, arises when the cumulative directorship fees surpass Dh1 million. In the realm of transfer pricing documentation, exceptions exist for certain transactions, particularly those involving natural persons who act independently. This alleviates the burden of extensive transfer pricing documentation.

Balancing the Equation: Bonuses and Owner-Directors

Tax planning suggestions occasionally involve awarding substantial bonuses to owner-directors. However, the feasibility of awarding bonuses to owner-directors for their roles as board members remains a subject of debate. This practice, though intriguing, adds layers of complexity and potential financial and administrative costs for owners.

Seeking Clarity Through a ‘Safe Harbor’

Amidst the intricacies of UAE corporate tax and the growth of entrepreneurial ventures, a ‘safe harbor’ concept emerges as a potential solution. Specifying a maximum percentage of revenue serves as a guide for business owners, enabling them to determine permissible limits for drawing salaries and directorship fees from their enterprises.

UAE Corporate Tax: Seeking Clarity and Compliance

In the realm of UAE corporate tax, the matter of business owners’ salaries is a multifaceted conundrum that demands comprehensive guidance and considerations to foster clarity and compliance in this intricate landscape.

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