How to process Board salaries in the UAE corporate tax law for related persons

Before delving into the details of the tax processing of salaries of board members, it is necessary to understand what is meant by the term "connected person" (Connected Person) in accordance with the UAE corporate tax law. Determining whether a board member is a related person is extremely important, since transactions with related persons have special rules aimed at ensuring the application of the neutral price principle (arm's Length Principle) and preventing erosion of the tax base or profit transfer.

In general, the term "related persons" refers to individuals or entities that have an existing relationship with the taxable person that may affect the commercial and financial terms of transactions between them. According to the corporate tax manual issued by the federal tax authority, related persons can include (but are not limited to)the following:

Relatives:

This includes the husband or wife, direct assets and branches (such as parents and children

Grandchildren), brothers and sisters.

Companies :

In which the taxable person or his relatives own a controlling interest, either directly or

Indirectly.

Companies :

In which the taxable person or his relatives are members of the board of directors or occupy

Senior executive positions

Partner

In a partnership, when the Taxable Person is the partnership itself or another partner in the same Partnership.

It is important to refer to the detailed definitions contained in Federal Decree-Law No. 47 of 2022 on corporate and business tax, ministerial decisions and clarifications issued by the federal tax authority to determine whether a person is considered a "related person" in a particular context.

In general, the fees or salaries of board members that they receive for their services as members of the board of directors are considered as income resulting from work or business activity for them as individuals. According to the manual "tax treatment of natural persons under the corporate tax law" issued by the Federal Tax Authority (issued on January 31, 2024), the fees of a board member are not subject to corporate tax at the individual member level, as long as these fees are not related to a business activity practiced by this individual in the country and exceed the annual revenue limit of AED one million.

However, the company paying these salaries or fees should consider the deductibility of these expenses for the purposes of determining its taxable income.

Tax processing of salaries of board members when they are related persons

When a board member is a" related person " of the company, the tax processing of salaries or bonuses paid to him is subject to additional scrutiny under the rules of related persons and transactions with them, in particular the neutral price principle.

The neutral price principle states that transactions between related persons should be carried out on the same terms and conditions as they would have been if the transaction was between independent and unrelated parties. The objective of this principle is to ensure that the pricing of transactions between related persons is not carried out in such a way as to artificially reduce taxable income in the UAE.

In the context of salaries for board members who are related persons, this means that the amount of salary or bonus paid should be proportional to the services provided by the board member, and should be similar to what would have been paid to an unrelated person with the same qualifications and experience performing the same tasks and responsibilities in similar circumstances.

If the federal tax authority determines that the salary paid to the linked board member does not comply with the neutral price principle (for example, if the salary is significantly overstated compared to market prices for similar services), the authority may adjust the taxable income of the company to reflect the neutral price. This means that the part of the salary that is considered incompatible with the neutral price principle may not be deductible as an expense for corporate tax purposes.

In general, expenses are deductible for corporate tax purposes if they are incurred in full and exclusively for the purposes of the Taxable Person's business. As for the salaries of board members, these salaries should be reasonable and commensurate with the services provided.

When it comes to an Associated board member, the company should be especially careful. If the salary paid exceeds what can be considered a neutral price, the excess part may be considered a distribution of profits rather than a deductible operating expense. This has important tax implications, since dividends are generally not taxed at the level of the Distributing Company (subject to certain exceptions and conditions).

Companies that have transactions with related persons, including paying salaries to related board members, are required to maintain appropriate documentation to support that these transactions are carried out according to the neutral price principle. Such documentation may include the following:\

An analysis of the functions performed by the board member, the risks he assumes, the assets used.

Comparisons with salaries of board members in similar companies (Benchmarking studies).

Details of the qualifications and experience of the board member.

Any relevant agreements or contracts

The Federal Tax Authority may request this documentation as part of its tax audits

The nature of the services : it is important to distinguish between the fees paid to a board member for his role as a member of the board, and any other payments he may receive for other services he provides to the company (such as consulting or executive services). These other payments may be subject to different rules

Dual roles:: if a board member also holds an executive position in the company (e.g. CEO), his salary and remuneration should be carefully analyzed to determine the part related to his duties as a board member and the part related to his executive duties, applying appropriate tax rules to each part

Provisions for SMEs : there may be certain simplifications or exemptions to the documentation requirements related to persons associated with SMEs, but you should always refer to the latest directives issued by the Federal Tax Authority

The processing of the salaries of board members, especially when they are related persons, is a delicate aspect of the UAE corporate tax law. Companies should ensure that any payments to The Associated board members comply with the neutral price principle and that they are supported by appropriate documentation. Failure to comply with these rules may result in tax adjustments and possible penalties.

It is highly recommended that companies seek specialized tax advice to ensure full compliance with the requirements of the corporate tax code regarding transactions of related persons and salaries of board members. A clear understanding of these rules and their proper application will help companies avoid tax risks and contribute to a fair and transparent tax environment in the UAE.

Note: this article provides general information only and does not constitute legal or tax advice. Readers should consult official legal texts and consult with specialized consultants for guidance specific to their cases.)