UAE Corporate Tax: Business owners should be careful drawing salaries – and bonuses

While individuals’ salaries remain excluded from corporate tax, business owners should not simply pay themselves a ‘salary’ or ‘directorship fee’ without factoring in the tax regulations.

‘Connected person’ not only includes the owners, but also the directors of the company

–

Identifying connected persons

To increase the deductible expenses – and reduce the taxable income – of their companies, the owners are inclined to show them drawing a salary for themselves or family members. Sufficient safeguards exist in the form of transfer pricing benchmarking and anti-abuse rules.

The transfer pricing actually covers ‘a payment or benefit provided’ by a company to its ‘connected persons’. The expression ‘payment/benefit’ is much wider in scope compared to goods/services transactions with connected persons.

It therefore becomes imperative to identify all connected persons and the payments/benefits provided to all such persons for tax regulations.

Corporate tax compliance may apply on individual directors – whether owner or independent – if the aggregate directorship fee exceeds Dh1 million

–

Is directorship services a business?

Whether directorship fee is paid to an owner, family member or an independent director, individual taxation of such directors could emerge as an additional compliance. Subject to certain exclusions such as wages, an individual deriving an annual turnover exceeding Dh1 million from a business or business activity in the UAE need to register for corporate tax.

Directorship fee is generally not considered as wages/salaries. Business includes vocational, professional and service activities.

As such directorship functions were earlier considered as a supply of service and now excluded from VAT only by way of a special exception – the director functions may still be treated as a business in common parlance. As private companies also engage in the business of providing directorship services, the activity per se performed by an individual could well be treated as a business.

Corporate tax compliance may apply on individual directors – whether owner or independent – if the aggregate directorship fee exceeds Dh1 million.

Transfer pricing – documentation vs compliance

A company is not required to maintain transfer pricing documentation for various transaction categories. One such is transaction with a natural person, to the extent that the parties are ‘acting as if they were independent of each other’.

It means the transaction is in the ordinary course of their business and the parties are not exclusively transacting with each other. Independent directors of a company are likely to act independent of each other and result in reduced transfer pricing documentation.

However, documentation is distinct from ensuring that the transactions are at arm’s length. A directorship fee to owner-directors as well as independent directors should be benchmarked at arm’s length.

Safe harbour

I often come across astounding tax planning suggestions such as paying a significant bonus to the owner-director. Could bonus be paid to owner-directors for functioning as a member of a board of directors? Probably not.

Considering the entrepreneurial growth in the UAE and the prominence of family businesses, the administrative and financial costs of benchmarking the payments to owners could be significant and prone to future litigation.

The owners have no practical way to validate the advice received by them from various quarters. It would be immensely helpful for business owners if a safe harbour – a maximum percentage of revenue – could be specified up to which owners could draw as salaries and/or directorship fee from their businesses.

(A Permanent Account Number or PAN card, issued by the Indian Income Tax Department, and an Aadhar, a government-issued 12 digit identification number, are two ID documents assigned to each Indian citizen who either resides or looks to reside in India, while transacting amounts in Indian rupees.)

What does the statement mean and what has changed?

As per the notification, ‘every person, at the time of entering into a transaction [must] quote his permanent account number (PAN) or Aadhaar number and every person, who receives such documents, shall ensure that the said number has been duly quoted and authenticated’.

What this means is that prior to this government alert, your bank was already required to ensure that such transactions have PAN. But now your bank will be required to keep the PAN in the bank’s records and inform the same to the Income tax department regarding such financial transactions.

Earlier, as per income tax norms, PAN was mandatorily required in case of cash deposit exceeding Rs50,000 (Dh2,325) in a single day, but no annual aggregate limit for cash deposits was given before. While there was no limit for cash withdrawal, which has been prescribed now.

What if one does not furnish or have PAN? Are there fines?

The notification specifies how ‘every person’ making a cash deposit and withdrawal aggregating to Rs2 million (Dh93,041) or more in the financial year in one or more bank accounts are to reveal their PAN.

If not, he or she would not be able to perform such transactions. Paying or receiving cash above the limits set is also punishable by a steep penalty of up to 100 per cent of the amount paid or received.

Individuals who do not have a PAN need to apply for a PAN at least seven days before entering any transaction of above Rs50,000 (Dh2,325) a day or above Rs2 million (Dh93,041) a financial year.

Why did the changes come into effect? Are there more changes?

The Income Tax department, along with other central government departments, has been updating and amending rules to reduce the risk of financial fraud, illicit money transactions and other money crimes over the past few years, and tax experts suggest this move in line with this.

“The government also monitors receiving cash worth more than Rs200,000 (Dh9,303) to restrict the use of cash in high-value transactions. So, a person cannot accept more than Rs200,000 (Dh9,303) in cash, not even from close family,” said an independent tax consultant Brijesh Meti based in India.

Since the rules are applicable since May 26, experts also opine how authorities may need to clarify whether the transactions are undertaken prior to May 26, shall be considered for computing the aggregate value of Rs2 million (Dh93,041) for this financial year or not.

Does this apply to Non-Resident Indian (NRI) transactions?

While PAN may be required, this rule doesn’t apply to NRIs when it comes to having Aadhar, clarified Dixit Jain, Managing Director at The Tax Experts DMCC.

“It is not mandatory for NRIs, as NRIs are not mandatorily required to have an Aadhar card, even though they can easily apply for one when they come to India,” Dixit Jain added. “However, PAN may be required.”

In other words, more than this rule change impacting NRIs who would have already added PAN details to their bank accounts, as initially required by banks, it is aimed at getting banks to keep the PAN on record, and not seek PAN with each transaction, and officially declare any withdrawals over Rs2 million.