Public Clarification CTP010

#Issue

Corporate Tax in the UAE is regulated by Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Business and its amendments (“Corporate Tax Law”), and its implementing decisions.

As per Article 36(1) of the Corporate Tax Law, a payment or benefit provided by a Taxable Person to its Connected Person shall be deductible only if and to the extent that the payment or benefit corresponds with the Market Value of the service or benefit provided by the Connected Person.¹

The definition of Connected Person as per Article 36(2)(b) of the Corporate Tax Law includes a director or officer of the Taxable Person.²

Further, in accordance with Article 55(1) of the Corporate Tax Law, the FTA requires a Taxable Person to disclose transactions and arrangements with Connected Persons as part of the Tax Return submission, if they exceed a specified threshold.³

This Public Clarification intends to clarify the terms “director” and “officer” in the context of Articles 36(2)(b) and 55(1) of the Corporate Tax Law.

#Summary

A “director” refers to a Person that holds a position on the board of directors or an equivalent governing body as determined under the applicable law governing the Taxable Pers on’s incorporation, or constitutional documents.

An “officer” includes a Person who:

•possesses the authority and responsibility for planning, directing, and controlling the activities of a Taxable Person, in accordance with the framework set out in International Accounting Standard 24 on Related Party Disclosures, or

•has the authority to make strategic decisions in relation to financial, operational, or commercial matters of a Taxable Person, or

•has the authority to enter into agreements or to approve actions that legally or contractually bind a Taxable Person.

The term “officer” does not include a Person who does not possess the final/ultimate strategic decision-making or binding authority.

#Detailed Analysis

Under Article 36(1) of the Corporate Tax Law, a payment or benefit provided by a Taxable Person to its Connected Person shall be deductible only if and to the extent the payment or benefit corresponds to the Market Value of the service, benefit or otherwise provided by the Connected Person and is incurred wholly and exclusively for the purposes of the Taxable Person’s Business . As per Article 36(2)(b) of the Corporate Tax Law, a Connected Person of a Taxable Person includes its director or officer.^1,2

Further, as per Article 55(1) of the Corporate Tax Law, the FTA may require a Taxable Person to file a disclosure containing information regarding its transactions and arrangements with its Connected Persons . The FTA currently requires payments or benefits provided by a Taxable Person to its Connected Persons to be disclosed as part of the Tax Return submission, if they exceed a specified threshold.³

These provisions ensure that payments or benefits provided to directors or officers are:

•deductible only if the amount does not exceed the Market Value, and

•appropriately disclosed.

#Meaning of “director”

The term “director” refer s to a Person that holds a position on the board of directors. A director can be an executive, non-executive, temporary, permanent, or alternative director, if they are appointed on the board of directors, including any member of a board committee If a Taxable Person does not have a board of directors, the term “director” refers to a Person that holds a position on any equivalent governing body (including but not limited to board of trustees or board of governors) as determined under the applicable law governing the Taxable Person’s incorporation, or constitutional documents (including but limited to memorandum of association, articles of association, partnership deed, or trust deed).

The inclusion of the term “director” in a Person’s job title in itself does not render that Person a director for the purposes of Article 36(2)(b) of the Corporate Tax Law.²

Where a Person’s job title includes the term “director” but they do not hold a position on the board of directors or an equivalent governing body as per the Taxable Person’s incorporation or constitutional documents, they would not be considered a “ director ” for the purposes of Article 36(2)(b) of the Corporate Tax Law.²

However, it is necessary to evaluate whether such Person could be considered an “officer”.

#Meaning of “officer”

The term “officer” includes a Person who:

•possesses the authority and responsibility for planning, directing, and controlling the activities of a Taxable Person, in accordance with the framework set out in International Accounting Standard 24 on Related Party Disclosures, or

•has the authority to make strategic decisions in relation to financial, operational, or commercial matters of a Taxable Person, or

•has the authority to enter into agreements or to approve actions that legally or contractually bind a Taxable Person.

The term “officer” does not include a Person who does not possess the final/ultimate strategic decision-making or binding authority.

An “officer” may include, but is not limited to, Chief Executive Officer (“CEO”), General Manager (“GM”), Chief Financial Officer (“CFO”), Chief Operating Officer (“COO”), Chief Commercial Officer (“CCO”), and an authorised representative with discretionary authority (collectively referred to as “C -suite ”).

A formal appointment or job title may serve as an indicator when assessing whether a Person is an officer or not. However, it should not be relied upon as the sole criterion. If a Person does not have a formal appointment or C-suite job title, but through their actual conduct effectively has the authority and responsibility for planning, directing, and controlling the activities, or have the authority to make strategic decisions, take or approve actions that legally or contractually bind a Taxable Person, such a Person would still be considered an “officer”.

The concept of “officer” applies to all Taxable Persons including trusts, foundations, and unincorporated partnerships that are treated as fiscally opaque for Corporate Tax purposes.

#Other Considerations

Only a natural person can be a "director" or "officer" of a Taxable Person.

If a Person is considered a Related Party as well as a Connected Person of a Taxable Person, such Person will only be considered a Related Party for the purposes of the Corporate Tax Law.

Examples:

•The GM of a Limited Liability Company (“LLC”) that has the authority and responsibility for the overall management of the LLC would be an “officer”.

•The head of a division would be an “officer” if they have the authority to make final/ultimate strategic decisions in relation to financial, operational, or commercial matters of a Taxable Person. On the contrary, if the head of division does not have such authority but only reports to and decides matters within frameworks set by, and follows instructions of the C-suite, board of director or an equivalent governing body, then the head of division would not be considered an “officer”.

•The head of Human Resources (“HR”) of a Taxable Person has the final/ultimate authority to make strategic decisions such as manpower planning, organisation structure, or performance management. In such circumstances, the head of HR would be an “officer”. However, i f the role of head of HR is only limited to routine HR functions such as payroll processing or leave management without any discretionary authority, they would not be considered an “officer”.

•An employee named in the trade licence of a Taxable Person as a manager or in board resolutions as a key officer would be an “officer”, if this gives the employee the final/ultimate authority to approve actions that legally or contractually bind a Taxable Person.

•An employee who holds a power of attorney would be an “officer” if the power of attorney grants that employee discretionary authority for planning, directing, and controlling the activities, or to make final/ultimate strategic decisions relating to the activities of a Taxable Person. However, an employee may not be considered an “officer” if the power of attorney is provided only from an administrative perspective to perform predefined tasks that have already been approved or to follow instructions without final/ultimate strategic decision -making authority.

•An employee or third party secondees or outsourced management personnel may not be regarded as an “officer” if they are authorised to only conclude contractual negotiations after the material commercial and legal terms have been agreed. However, they may be regarded as an “officer”, if they have the final/ultimate authority to make strategic decisions or authority to enter into agreements that legally or contractually bind a Taxable Person.

•A GM of a Permanent Establishment would be an “officer”, if the GM possesses the authority and responsibility for the planning, directing, and controlling the activities of a Permanent Establishment.

•If a Taxable Person hires a Person to perform the role of CEO on an interim basis and gives them the title “consultant”, that Person would be an “officer” of a Taxable Person for the interim period if that Person possesses the authority and responsibility for planning, directing, and controlling the activities of a Taxable Person.

•A natural Taxable Person who is an owner of a Business has appointed a GM. That GM would be an “officer” of the Business, if the GM possesses the authority and responsibility for planning, directing, and controlling the activities of the Business of the natural person that is a Taxable Person.

•The trustee of a trust, which is Taxable Person, would be an “officer” if they possess the authority and responsibility for planning, directing, and controlling the activities of the trust.

•The trustee or administrator appointed by a court may not be an “officer” if they only carry out assigned duties by court without any discretionary decision-making authority.

This Public Clarification issued by the FTA is meant to clarify certain aspects related to the implementation of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Business, and its amendments.

This Public Clarification states the position of the FTA and neither amends nor seeks to amend any provision of the aforementioned legislation. Therefore, it is effective as of the date of implementation of the relevant legislation, unless stated otherwise.

The examples in this Public Clarification show how these elements operate in isolation and do not show all the possible interactions with other provisions of the Corporate Tax Law that may occur. They do not, and are not intended to, cover the full facts of the hypothetical scenarios used nor all aspects of the Corporate Tax regime, and should not be relied upon for legal, accounting, regulatory or tax advice purposes. These examples are only meant for providing the readers with general information on the subject matter of this Public Clarification. They are exclusively intended to explain the rules related to the subject matter of this Public Clarification and do not relate at all to the tax, accounting, regulatory or legal position of any specific juridical or natural persons.

#Legislative References

In this clarification, Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Business, and its amendments is referred to as the “Corporate Tax Law”.

Article 1 of the Corporate Tax Law defines the following terms as:

“Business” – 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. “Connected Person” – Any Person affiliated with a Taxable Person as determined in Clause 2 of Article 36 of the Corporate Tax Law.

“Corporate Tax” – The tax imposed by the Corporate Tax Law on juridical persons and Business income.

“Market Value” – The price which could be agreed in an arm’s - length free market transaction between Persons who are not Related Parties or Connected Persons in similar circumstances.

“Permanent Establishment” – A place of Business or other form of presence in the UAE of a Non-Resident Person in accordance with Article 14 of the Corporate Tax Law.

“Person” – Any natural person or juridical person.

“Related Party” – Any Person associated with a Taxable Person as determined in Clause 1 of Article 35 of the Corporate Tax Law.

“Tax Return” – Information filed with the FTA for Corporate Tax purposes in the form and manner as prescribed by the FTA, including any schedule or attachment thereto, and any amendment thereof.

“Taxable Person” – A Person subject to Corporate Tax in the UAE under the Corporate Tax Law.