Should services performed by a member of a board of directors towards the company of which s/he is a member be subject to VAT? This is a question that keeps many VAT legislators, authorities, and advisors around the world busy. It is an area that has seen numerous changes in tax policy, sometimes as a result of interventions by tax policy strategy makers such as the European Commission, or as a result of judicial court decisions. This article discusses the most recent change in VAT legislation in the United Arab Emirates (UAE) as well as the state of play in the European Union (EU).
Recent changes to company directors’ services treatment under UAE VAT law
The change in the new UAE VAT law entails that, as of 1 January 2023, the performance of a (UAE) director’s function, by a natural person and for a remuneration (monetary or in-kind), on a board of directors of any government or private sector entity, shall not be considered to be a supply of services for VAT purposes.
When it comes to the rationale for the described changes in VAT, unfortunately, there is no reasoning provided by the UAE Ministry of Finance and/or the FTA.
There is also no published UAE court case that might have led to such a change.
In the absence of any guidance provided, it might be helpful to look at recent developments under EU VAT in this area to put the provision at comment into a broader perspective. The relevant analysis is made later in this article after describing the legislative changes under UAE VAT.
UAE VAT treatment of company director’s services prior to 1 January 2023
For the period till 1 January 2023, UAE Federal Tax Authority (FTA), VAT Public Clarification VATP031. Performing the Function of Director on a Board of Directors by a Natural Person. the general rule is that services provided by company directors, whether the function is performed by a natural person or a legal person, are considered to be services for UAE VAT purposes when a person conducts an activity regularly on an ongoing basis and independently, in any location.Article 1 of the UAE VAT Law (Federal Decree Law no 8 of 2017).
The total value of taxable supplies and imports made by the company director, not limited to director services, should also exceed the mandatory registration threshold of AED 375,000.Article 13 of the UAE VAT Law and Article 7(1) of the UAE VAT Regulation (Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax).
This approach to company directors’ services aligns with the general VAT concept of economic activity and the taxable person definition in the Unified VAT Agreement for The Cooperation Council for the Arab States of the Gulf (GCC countries).Article 1 of the Unified VAT Agreement for The Cooperation Council for the Arab States of the Gulf: ‘Taxable Person: A Person that conducts an Economic Activity independently for the purpose of … Continue reading
UAE VAT treatment of company director’s services as of 1 January 2023
The amended Article 3 in the Executive RegulationArticle 3 of the UAE VAT Regulation (Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree Law No. 8 of 2017 on Value Added Tax as amended by Cabinet decision No. 99 of … Continue reading introduces a new provision. It states that the functions of a member of a board of company directors, performed by a natural person appointed as director for any government entity or private sector establishment, shall not be considered a supply of services.
The new article only applies to company director services performed by a natural person, irrespective of whether they are being performed by a resident in the UAE. This amendment does not extend to a legal person, whether private or public, who may delegate a natural person to act as a director in its own name.
Noteworthy is that only the services performed in the formal capacity as a company director can be excluded from the qualification of ‘supply of services for UAE VAT purposes’. Other services performed by a third-party natural person who is not a director during the meetings of a board of directors will still be considered to be supplies of services for VAT purposes and taxable according to the general UAE VAT rules.
In other scenarios, where the services are provided by company board directors who are not resident of the UAE, these services will also be excluded from the supply of services qualification for UAE VAT purposes and the reverse charge mechanism will not apply, or there will not be any registration obligation in the UAE for VAT purposes for non-resident natural persons.
Transitional rules, deregistration and rationale for UAE VAT changes
Natural persons providing services as company directors on a board of directors should review their tax obligations before and from 1 January 2023.
The date of supply rules in the VAT legislation and the VAT public clarification ‘Date of Supply for Independent Directors’ will be instrumental in determining the tax obligations.UAE Federal Tax Authority (FTA), VAT Public Clarification VATP009. Date of Supply for Independent Directors.
As a result of the amendment, natural persons not meeting the requirementsArticle 21 VAT Law, Article 14 of UAE VAT Regulation without prejudice to Article 18 of the UAE VAT Regulation. for mandatory VAT registration anymore should deregister for VAT purposes.
Directors’ services by natural persons under UAE Corporate Tax
A question might also arise on what the change in the UAE VAT Regulations and the exclusion of company directors’ services from the scope of VAT means for the taxability of these services by natural persons under the recently published UAE Corporate Tax (CT).Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. Will the exclusion for VAT mean that these services are also not taxable for CT purposes?
Although more clarifications will be published by the FTA and more details will be known to the public in UAE Cabinet Decisions, it can be assumed that the directors’ services might fall under the ‘business’ definition in the new legislation:Article 1 of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. ‘Any activity conducted regularly, on an ongoing and independent basis by any Person and in any location, such as industrial, commercial, agricultural, vocational, professional, service or excavation activities or any other activity related to the use of tangible or intangible properties’ and that natural persons are covered by the definition of a ‘Person’: ‘Any natural person or juridical person’. In short: a natural person conducting a business as defined in the legislation can be subject to UAE CT. This should be determined on a case-by-case basis.
Whilst all conditions in the business definition are important, we emphasise that the condition of conducting a business ‘independently’ might require extra attention. The reason for this will become evident in the following paragraphs, where the terminology ‘independently’ played a crucial role under EU VAT case law. Under normal circumstances, comparing definitions in different legislations covering different taxes is not a route tax practitioners take for predicting the tax determination. However, when you look at the ‘business’ definitions in UAE VAT and CT, you will notice that the two definitions are identical. In other words, facts that play an important role in determining UAE VAT and clarifications obtained for UAE VAT can shed some light while determining liabilities for other taxes (namely, UAE CT).
Treatment of company directors’ services under EU VAT
EU VAT is silent on the VAT treatment of activities performed by a member of a board of directors towards the public or private company of which s/he is a member. No specific provision is contained in Article 9 of the VAT Directive, which deals with the concept of ‘taxable persons’ for EU VAT purposes. The VAT Implementing Regulation is also agnostic about this issue.
Some indications on how to deal with company directors’ services can be retrieved from other sources of EU VAT law. Notably, the VAT Committee’s guidelines provide the following as regards services supplied by company directors: ‘[…] services supplied by a legal person as a member of a company’s board of directors should be regarded as economic activities carried out independently within the meaning of Article 4(1) and (2) [of Council Directive 77/388/EEC, now Article 9(1) of the VAT Directive] and that they should therefore be subject to VAT’.EU VAT Committee, Guidelines resulting from the 53rd Meeting of 4-5 November of 4-5 November 1997, XXI/97/2.454, Article 4. Services Supplied by Company Directors (Document XXI/97/1.424 – Working … Continue reading However, the VAT Committee has not (yet)See EU Commission, Proposal for a Council Directive amending Directive 2006/112/EC as regards Conferral of Implementing Powers to the Commission to Determine the Meaning of the Terms used in Certain … Continue reading been entrusted with implementing legislative powers, and its guidelines are not legally binding on tax authorities and taxpayers.
CJEU’s VAT case law on company directors’ services
The Court of Justice of the European Union (CJEU) has also approached the VAT treatment of company directors’ services. More specifically, in IO (TVA – Activité de membre d’un conseil de surveillance) (C-420/18), the CJEU considered that a member of the supervisory board of a foundation did not carry out an economic activity independently, so that that individual was not a taxable person performing VAT-relevant activities.
In that case, the CJEU found no employer-employee relationship between the foundation and the member of its supervisory board. Accordingly, Article 10 of the VAT Directive, which excludes ‘employed and other persons from VAT in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability’, could not apply to the case of a member of a supervisory board.The CJEU ruled differently in Van der Steen (C-355/06), where an individual was bound by a contract of employment to a company of which was also the sole shareholder.
Nevertheless, the CJEU reasoned that the supervisory board’s member did not act in his own name, on his own behalf or under his own responsibility, but on behalf of and under the responsibility of the supervisory board. The individual member also did not bear the economic risk arising from his activities, since he received a fixed remuneration which did not depend on his meetings or hours actually worked. As such, the supervisory board’s member did not carry out an economic activity ‘independently’ within the meaning of Article 9 of the VAT Directive.
The CJEU based its reasoning on a close examination of the role and functions performed by a supervisory board member. Apparently, the EU Court considered it relevant that the supervisor board’s member acted as an instrument of the foundation and/or its supervisory board.See IO (TVA – Activité de membre d’un conseil de surveillance) (C-420/18, para. 41), observing that the activity of the supervisory board’s member ‘includes, in some cases, representing … Continue reading This approach finds further correspondences in the precedent CJEU’s case law, notably, in Heerma (C-23/98), where the EU Court implicitly referred to what is usually termed as the ‘organic theory’ of directors under company law.See Heerma (C-23/98, para. 18), stipulating that ‘the partner, in letting tangible property to the partnership, acts in his own name, on his own behalf and under his own responsibility, even if he … Continue reading Previously, Advocate General (AG) Van Gerven expressed similar views in his opinion in Polysar (C-60/90).See AG Van Gerven in Polysar (C-60/90, point 6), submitting that ‘[a] director or officer of the company does not act on his own behalf but only binds the (subsidiary) company whose instrument he … Continue reading
Besides the CJEU’s case law, the Supreme Court of the Netherlands (Hoge Raad) also applied an essentially equivalent reasoning with reference to the activity of a member of a public advisory committee in a decision issued in June 2020, after the CJEU’s judgement in IO (TVA – Activité de membre d’un conseil de surveillance) (C-420/18).Supreme Court of the Netherlands (Hoge Raad), Judgment of 26 June 2020, Case No. 18/0284, ECLI:NL:HR:2020:1143. See also AG (Procureur-Generaal) Ettema’s Opinion of 10 January 2020 in Case No. … Continue reading
Company directors’ services: in or out of the scope of EU VAT?
Based on the considerations above, it might be assumed that activities by a board of directors shall remain outside the scope of VAT, since those activities must be viewed not as activities belonging to the individual materially carrying them out but as acts performed by the company itself. To translate this idea in EU VAT terms, a member of a board of directors lacks the capacity to act as a taxable person while performing duties on behalf of the company of which s/he is a director (although s/he might have taxable person’s status and capacity for other activities).See Van Doesum et al., Fundamentals of EU VAT Law (2nd ed., Kluwer Law International 2020), p. 60, observing that ‘[t]he capacity in which a person operates essentially comes down to the questions … Continue reading
Still, the VAT treatment of company directors’ services under EU VAT remains unclear. EU Member States might adopt different approaches in this regard due to non-harmonised national company laws.See, e.g., De Maeijer et al., VAT and Directors’ Fees in the Benelux, 28 International VAT Monitor 3 (2017), comparing the VAT treatment of company directors’ activities in the Netherlands, … Continue reading It shall not be surprising that a case on the VAT treatment of company directors’ services is pending before the CJEU. In its preliminary reference, the national court seeks clarification on whether a member of the board of directors of a public limited company incorporated under Luxembourg law acts as a taxable person and, in such a role, whether s/he provides VAT-relevant activities to the company.Request for a preliminary ruling from the Tribunal d’arrondissement (Luxembourg) lodged on 29 April 2022 – Administration de l’Enregistrement, des Domaines and de la TVA (C-288/20).
Comparison of company directors’ services under UAE and EU VAT
From the comparative analysis carried out above, it can be concluded that company directors’ services are excluded from the scope of VAT both in the UAE and the EU.
However, the authors note differences in how UAE and EU VAT law achieved this result. The UAE has decided to legislate on this issue, clarifying that company directors’ services are irrelevant for VAT purposes.UAE tax authorities show a propensity to provide VAT clarification by means of legislation or administrative guidance, sometimes transposing the CJEU’s findings into legislative or administrative … Continue reading This implies that a company director acting only in such a capacity shall no longer be registered for UAE VAT purposes. Instead, EU VAT does not contain any provisions regarding the treatment of company directors’ services. However, the VAT Committee and particularly the CJEU have analysed this issue in several cases.
There is a further (more substantial) point of departure in the treatment of company directors’ services under UAE and EU VAT. This difference relates to the fact that UAE VAT (Article 3(2) of the amended UAE VAT Regulation) provides that ‘functions of a member of a board of directors … shall not be considered as a supply of service’. Therefore, the exclusion from the scope of VAT applies at the level of the ‘taxable transaction’. Under EU VAT, based on the CJEU’s case law, the exclusion from the scope of VAT of company directors’ services instead follows from those activities being carried out by an individual not acting independently and therefore not in a capacity of a ‘taxable person’.
UAE VAT law can essentially be considered a legal transplant of EU VAT law.On VAT as a legal transplant, see Kristoffersson, Value Added Tax as a Legal Transplant, 49 Intertax 2 (2021), pp. 186-197. And yet, even if stemming from the same roots, the two branches might take different development patterns, as the peculiar case of company directors’ services shows.
For Halil Erdem: The views expressed in this article are solely of the author and do not necessarily reflect the position of the employers or the parties with which the author is affiliated.
For Giorgio Beretta: This work has been developed within the framework of the Amsterdam Centre for Tax Law (ACTL) research project “Designing the tax system for a cashless, platform-based and technology-driven society” (CPT project). The CPT project is financed with university funding and funds provided by external stakeholders (i.e., businesses and governments) interested in supporting academic research to design fair, efficient and fraud-proof tax systems. For more information about the CPT project and its partners, please visit its website https://actl.uva.nl/cpt-project/cpt-project.html. The usual disclaimers apply.