The UAE’s Value Added Tax (VAT) system includes specific rules governing services provided by company directors and employee benefits. These rules are clarified through several Federal Tax Authority (FTA) guides and public clarifications, including:

• VATGDS1 – Director’s Services (March 2018)
• VATP009 – Date of Supply for Independent Directors
• VATP028 – Mobile Phones, Airtime & Data Packages for Employees
• VATP031 / VATP037 – Performing the Function of Director by a Natural Person

Understanding these clarifications is critical for UAE businesses, especially when dealing with director remuneration, board services, employee benefits, and input VAT recovery. This article explains the VAT treatment, compliance obligations, and practical implications for companies operating in the UAE.

VAT on Director Services in the UAE

Overview of Director’s Services (VATGDS1)

The VAT Guide on Director’s Services (VATGDS1) explains how VAT applies when a director provides services to a company. Under the UAE VAT regime, services supplied independently by a director may constitute a taxable supply of services depending on the nature of the arrangement.

VATGDS1 clarifies that historically, a natural person acting as a director could be considered to be supplying services in their personal capacity. Where such services were provided independently and on a regular basis, the director could be regarded as carrying on a business for VAT purposes.

The guide focuses on key questions such as:

• Whether director services are considered a taxable supply
• When VAT registration is required
• How the place of supply is determined
• The applicable VAT rate

Generally, VAT applies to services supplied by independent persons in the course of business, whereas services performed by employees under an employment contract are outside the scope of VAT. 

The guide also explains that where a director is appointed through a corporate entity (for example, a management or consultancy company), the supply may instead be treated as a taxable supply made by that entity depending on the contractual structure.

VAT Treatment of Directors – Changes Introduced in 2023

1. Pre-2023 VAT Treatment

Before 1 January 2023, director services were generally treated as taxable supplies when:

• The director performed services independently and regularly, and
• The value of taxable supplies exceeded the mandatory VAT registration threshold of AED 375,000.

This meant directors could be required to:

• Register for VAT
• Charge 5% VAT on director fees
• Issue tax invoices
• File VAT returns

This treatment was based on the interpretation that directors providing services in their personal capacity were engaged in an independent economic activity unless the relationship clearly qualified as an employer-employee relationship.

2. New Rule Under VATP037 (Replacing VATP031)

A major change occurred following amendments to the VAT Executive Regulation.

From 1 January 2023, services performed by a natural person acting as a director on a board of directors are not considered a supply of services for VAT purposes.

This change was introduced through Cabinet Decision No. 100 of 2022, which amended Article 3 of the Executive Regulation of the UAE VAT Law. The amendment clarified that services supplied by a natural person in their capacity as a member of the board of directors of a government entity or private sector entity are outside the scope of VAT.

Key Conditions

The exemption applies only when:

1. The service is provided by a natural person.
2. The individual is formally appointed as a board director.
3. The services are performed in their official capacity as a board member.

FTA Public Clarification VATP037 further confirms that this treatment applies regardless of the type of board remuneration received, including fixed board fees, meeting attendance fees, or other compensation paid for board participation.

Implications for Businesses

As a result:

• Directors no longer charge VAT on board remuneration.
• The director does not need VAT registration solely for board services.
• Companies cannot recover VAT because no VAT is charged.

However, if the director is already VAT registered because of other business activities (for example consulting services or other independent work), those activities remain subject to VAT and must still be reported accordingly.

Important Limitation

The exclusion applies only to board director services.

If the same individual provides separate consultancy or advisory services, those services remain subject to VAT.

FTA guidance clarifies that services such as strategic advisory, management consulting, operational support, or other professional services performed outside the official board role continue to qualify as taxable supplies where they are supplied independently.

Date of Supply for Independent Directors (VATP009)

The date of supply determines when VAT becomes due.

Under the UAE VAT law, the date of supply generally occurs at the earliest of:

• The date services are performed,
• The date of invoice issuance, or
• The date payment is received.

Public Clarification VATP009 provides guidance specifically for independent directors, clarifying how Articles 25 and 26 of the VAT Decree-Law determine the timing of VAT obligations when director fees are paid periodically.

The clarification addressed situations where directors received periodic remuneration but did not issue invoices immediately. In such cases, the date of supply could still arise based on the completion of the service period or the receipt of payment, even if the invoice had not yet been issued.

Practical Application

For example:

• If a director invoices quarterly fees, the date of supply may arise at the time of invoicing or payment, whichever occurs first.
• If no invoice is issued, the date services are completed or fees are determined may trigger the VAT obligation.

Although services performed by natural persons as board directors are outside the scope of VAT from 1 January 2023 onward, VATP009 remains relevant for historical periods before 2023 and for situations where director-like services are provided as consultancy or professional services.

This clarification ensures that VAT is accounted for correctly when director remuneration structures vary.

VAT on Employee-Related Benefits

In addition to director services, UAE VAT law also addresses benefits provided by employers to employees. One of the most common issues relates to mobile phones and telecom packages.

Mobile Phones, Airtime & Data Packages for Employees (VATP028)

Many businesses provide employees with company phones, call allowances, or internet packages to support business operations.

Public Clarification VATP028 explains the VAT treatment of these expenses and whether businesses can recover input VAT.

1. Input VAT Recovery Rules

Businesses may recover VAT on telecom expenses only if the services are used exclusively for business purposes.

To qualify for VAT recovery, companies must meet several conditions:

1. The business is the customer on the telecom contract.
2. The supplier issues tax invoices in the business name.
3. The company has a clear internal policy restricting personal use.
4. The business actively monitors usage.
5. Appropriate action is taken if employees misuse services. ‘

The FTA also expects businesses to maintain supporting evidence demonstrating business use, such as telecom usage reports, internal policies, employee acknowledgements, and disciplinary procedures for misuse where necessary.

2. Personal Use Restrictions

The FTA acknowledges that phones and data packages may be used outside office premises. However, VAT recovery is allowed only when:

• Personal use is prohibited or strictly limited, and
• The employer can demonstrate monitoring and enforcement.

If these requirements are not satisfied, the input VAT may be blocked and not recoverable.

Where significant personal use is permitted or cannot be effectively controlled, the FTA may treat the telecom expense as an employee benefit rather than a business expense and may disallow the input VAT recovery.

3. Reimbursements vs Company-Owned Contracts

VAT treatment differs depending on who holds the telecom contract.

Recoverable VAT

Input VAT is typically recoverable if:

• The company purchases telecom services directly from the provider.

Potentially non-recoverable

VAT may be disallowed when:

• Employees purchase services in their own name and are later reimbursed.

In such cases, the reimbursement may be treated as an employee benefit rather than a direct business expense unless the employer can clearly demonstrate that the expense was incurred strictly for business purposes.

This distinction is critical for businesses to structure telecom expenses correctly.

Practical VAT Compliance for UAE Businesses

Businesses should implement clear policies to manage director remuneration and employee benefits.

Key Compliance Steps

1. Review Director Engagement Models

Confirm whether directors are:

• Board directors (outside scope of VAT)
• Independent consultants (taxable services)

Businesses should carefully review engagement contracts to ensure that consultancy or advisory services are not incorrectly classified as board services, as this may lead to incorrect VAT treatment.

2. Update Contracts

Ensure agreements clearly define:

• Director responsibilities
• Consultancy services (if any)
• Fee structure

Clear contractual documentation helps distinguish between board responsibilities and separate professional services, which is important for VAT compliance and FTA audit purposes.

3. Implement Employee Usage Policies

For telecom benefits:

• Create a written policy restricting personal use
• Monitor usage and maintain evidence

Companies should also require employees to acknowledge the policy in writing and retain monitoring records to demonstrate compliance during FTA reviews.

4. Maintain Documentation

Businesses should keep:

• Contracts with telecom providers
• Internal policies
• Usage monitoring records
• VAT invoices

Proper documentation is essential during FTA audits or tax assessments.

Common VAT Risks for UAE Companies

Companies frequently face compliance risks in this area.

Misclassifying Director Services

Treating consultancy services as board services may lead to unpaid VAT liabilities.

Incorrect Input VAT Claims

Recovering VAT on employee benefits without proper monitoring policies may result in VAT adjustments and penalties.

Failure to Update VAT Position

Businesses must ensure VAT treatment reflects regulatory changes effective from 2023.

In particular, companies should ensure their accounting systems and VAT processes have been updated to reflect the post-2023 treatment of director services.

How German Fintax Consultancy Can Help?

Navigating the UAE’s VAT regulations related to director services and employee-related benefits can be complex, particularly with evolving FTA clarifications and regulatory amendments. Businesses must carefully assess whether director services fall inside or outside the scope of VAT, determine the correct date of supply, and ensure input VAT recovery on employee benefits such as telecom services is fully compliant with Federal Tax Authority requirements.

German Fintax Consultancy supports UAE businesses with practical, compliance-focused VAT advisory services. Our team assists companies in reviewing director remuneration structures, identifying whether services qualify as board functions or taxable consultancy services, and ensuring accurate VAT treatment under the latest FTA public clarifications. We also help businesses implement clear internal policies for employee benefits, structure telecom expense management to enable legitimate input VAT recovery, and maintain proper documentation for FTA audits.

With extensive experience advising companies across multiple industries in the UAE, German Fintax Consultancy provides end-to-end support including VAT advisory, compliance reviews, VAT return filing, and risk assessments. Our goal is to help businesses reduce VAT exposure, avoid penalties, and maintain full regulatory compliance while focusing on their core operations.

If your business requires guidance on director services, employee benefits, or VAT compliance in the UAE, our specialists are ready to assist with tailored solutions designed for your organisation.