UAE Corporate Tax Public Clarification on Directors and Officers

The Federal Tax Authority (FTA) of the United Arab Emirates recently issued a Corporate Tax Public (CTPO10) Clarification to define what is meant by “Director” and “Officer” for a Taxable Person when it comes to transactions between connected persons.

The Authority, under Article (36) of the Corporate Tax Law, explicated the critical ambiguities in connection to the definition of “Director” and “Officer”. This clarification helps the taxable person in determining whether the provision of payments or other monetary benefits to the connected person strictly falls under Article 36 and fulfills the deductibility limitations and disclosure requirements.

The authority urges to consider substance over form.  The core objective of this clarification is to keep job titles aside and focus on an individual’s actual authority, decision-making power, and operational control in the business.

Who is a Connected Person?

Under the corporate tax law, the following are considered as “Connected Persons”.

1 – Owners and Partners

Any owner who has a significant controlling interest on the business or company will be considered a connected person. If a company or a business is an unincorporated partnership, then all the partners are regarded as connected persons.

2 – Leadership and Management

Anybody who has the decision-making authority or controls the business’s main activities is connected to the company. According to Article 36 (2) (b) of corporate tax law, the officers and directors of a business are regarded as connected persons.   

3 – Relatives

The close family members of the owner, partners, directors, or officers are considered connected persons. It includes blood or marriage relationship up to the fourth degree (spouse, children, parents, grandparents, uncle, aunts, and cousins)

4 – Associated Business

If the company has a sister company or any other business controlled by the owner, then that particular sister company or business will be considered a connected person.

According to Article 55(1) of corporate tax law, if a business has made a significantly large transactions with a connected party (connected person), it must report these transactions in its corporate tax return filing.

The FTA aims to clarify the terms “director” and “officer” according to Article 36 (2) (b) and 55 (1) in this public clarification CTPO10.

Who is a “Director”?

The tax authorities define the term “director” as a natural person having a position on the board of directors. If a company or a business does not have a board of directors, the term may refer to an individual who holds office on any equivalent governing body depending on applicable governing law or constitutional documents.  

Furthermore, the authorities also clarify that simply having the term “director” in the job title does not make an individual a connected person. For that person must hold a position on the board of directors. For example, an IT director or a marketing director will not be considered directors, because they are not members of the board of directors committee. However, they could be an officer if their role or duties fall under the definition of the term “officer”.

Who is an “Officer”?

According to this clarification, an officer is a person who: 

1. provides management services including planning, controlling, and directing for the taxable person, following the principles outlined in accounting standard IAS-24 on related party disclosures.
2. handles strategic decision-making tasks related to the financial, operational, and commercial matters of the organization.
3. Has the authority or power of attorney (POA) to enter into agreements, sign contracts and negotiate deals, or authorize actions that contractually bind the taxable person.

The following designations/titles may fall in the category of “officer”

• GM – General Manager
• CCO – Chief Commercial Officer
• CEO – Chief Executive Officer
• CFO – Chief Financial Officer
• COO – Chief Operating Officer

A person who doesn’t have any of the above titles but is authorized to perform management functions (planning, directing and controlling), involved in core strategic decision-making matters (financial, operational and commercial), or have the authority to approve any actions that are lawfully and contractually binding to a taxable person, will also be considered as “officer”.

On the other hand, a person acting as divisional head who has no real authority or someone who decides the matters within a pre-set framework and follows the commands of the board of directors or an equal authority, is not considered an “officer”

For example, following will usually not be considered as “officer”:

• If the head of “Human Resources” only manages the leaves and payroll processing, without any discretionary authority.
• If the Power of Attorney is provided to perform already approved predefined tasks without any decision-making authority.
• If the material, commercial, and legal agreements have already been signed and an employee or outsourced management personnel is hired to conclude only contractual arrangements.
• An administrator or a trustee designated by court may not be an “officer if they are appointed to perform only the duties assigned by court and they do not have any discretionary decision-making authority.

The clarification also highlights that only a “natural person” can be considered a director or an officer. Furthermore, if a person meets the definition of a “connected person” as well as a “related party”, they will be considered only “related party” for the purpose of corporate tax.

What this Means for Your Business?

The FTA clarification is a reminder for a taxable person to identify “connected persons” and evaluate compliance obligations according to Article 36. This clarification assists the taxable person in adhering to the disclosure requirements regarding salaries and other monetary benefits provided to its connected persons. It helps in accurately identifying the “directors” and “officers” and prevents avoiding transfer pricing rules (e.g. deliberately paying higher salary than actual market wages) for undue tax benefits.

Before filing the corporate tax return, the organization should strictly analyze connected persons and the transactions with them.  If the benefits provided to a connected party exceed the specified threshold, the company is bound to disclose it at the time of tax return filing. This is to ensure that the transactions with the directors or officers are in accordance with arm’s-length pricing rules and are solely for the business purposes.

It was a much-needed clarification as it will help the companies to accurately file tax returns and avoid corporate tax penalties that may arise due to any misunderstanding.