With the businesses in the UAE expected to align their operations and structure to comply with the evolving corporate tax rules, the Federal Tax Authority just announced a major update. The Public Clarification CTP010 lays down the definition of director and officer in relation to connected persons transactions and deductible expenses.
On paper, the clarification to Article 36 of the UAE Corporate Tax Law might be technical, but in reality, it speaks to something larger. Detailing how businesses will interpret the law and offering clarification regarding the concerns about who qualifies as a director and officer, along with the regulatory structure.
Beyond the initial uncertainty, the law has been clear on the deductible payments to connected persons. Only payments that are incurred exclusively for business purposes and reflect the true value of the services fall under its umbrella. However, the Public Clarification will enable corporate tax consultants to operate with greater certainty.
FTA Clarification
A Closer Look
As per the clarification, a person may only be considered as a director if he/she is formally appointed to the company’s board of directors or any equivalent governing body. This may include:
- Executive Directors
- Non-Executive Directors
- Alternate Directors
- Temporary Directors
- Committee Members with board-level authority
But even if there are positions that have the title of ‘Director’ but do not have any authority or powers, then they can not qualify as directors for tax purposes. This clarification ensures that people who are not mere placeholders but have the authority to take key decisions will be considered as directors.
The FTA further adopts a substance-over-form approach when explaining an individual who will be considered an officer. As per the clarification, an individual will only be considered as an officer if they:
- Manage or control the business
- Actively participate in key decision role
- Hold significant executive authority
- Can bind the entity
Unlike in the case of the director, individuals who have no formal board appointment may fall under this category based on their actual function. This understanding will enable businesses and enterprises to review their internal governance structures and align executive compensation arrangements in line with the UAE’s corporate tax rules.
Impact on Connected Persons Transactions
A key highlight of the clarification is the direct impact it has on transactions and payments made to shareholders, directors, officers, owners, and related parties that are involved with the business. This will include:
- Salaries and bonuses
- Management fees and consultancy payments
- Allowances, reimbursements and benefits
Reinforcing the fact that the deductibility of these payments will not be limited to just where they were incurred, but will also consider if they can be commercially justified. Businesses now would have to demonstrate if the commercial terms linked to the payment are in line with the market value conditions. But the FTA has also further detailed the conditionality that businesses have to meet before the transaction will be considered deductible. The conditions are:
- The expense is for genuine business purposes;
- The amount is commercially justifiable; and
- The value is at market level.
Any excess over market value may be disallowed for Corporate Tax purposes.
Conclusion
For every business to properly function, it has to ensure that it maintains supporting documents for its decisions. The clarification by the FTA about Article 36 of the UAE Corporate Tax Law further puts this point into the spotlight. With respect to the market value, businesses are now expected to maintain documentation such as:
- Employment and service agreements
- Board resolutions
- Benchmarking and salary studies
- Job descriptions and role clarity
- Evidence of services rendered
The clarification becomes more than just a guideline that clarifies the terminologies. It shapes the corporate tax structure with the broader principle of substance over form.
