It’s high time that we address the massive corporate roadblock, particularly in regard to UAE’s corporate tax. It’s common for individuals to state that they will increase management remuneration to reduce corporate tax implications on the business. But it’s time for you to note that such statements are not only incorrect but unethical to practice. The only advice as to such false perceptions is to take support from corporate tax consultants in Dubai.
Understanding Managerial Remuneration
Moving ahead, managerial remuneration typically refers to the compensation offered by companies to executives, managers, or even related parties. Such compensation could be in diverse forms, from bonuses, salaries, and stock options to other incentives, which all make for managerial remuneration.
Managerial remuneration entails the amount paid by the company to its,
- Owner or Shareholders
- Directors
- Officers like CEOs, CFOs, Presidents, Vice Presidents, Division Heads, and more
- Related parties holding Senior Management Positions
- Associated or related party companies
Role of Management Remuneration within the Corporate Tax Framework
On one hand, management remuneration is a pivotal element of corporate governance, on the other the potential to abuse managerial remuneration to reduce profits and minimise tax liability has become a critical concern for the UAE government. In the UAE, practices like categorising profits as management fees have been facing scrutiny due to the potential misuse of tax reduction.
However such practices are actively being addressed by Article 33(4) of the corporate tax law. As per this, it has disallowed excessive payments, whilst classifying profit distributions, dividends, and other incentives of similar nature as non-deductible expenditure under corporate tax. Additionally, within the UAE’s corporate taxation structure, calculating acceptable salaries and benefits for partners or shareholders lacks explicit monetary limits. Although, the Federal Decree Law 47 of 2022 offers insights but fails to set specific bounds.
While the salaries of owners are exempt, complexities arise about connected persons, which encompass owners, directors, and their relatives. There are often cases where owners reduce taxable income, and allocate revenue as salaries, which triggers safeguards such as transfer pricing benchmarks and anti-abuse rules. It’s important to note that transfer pricing covers any payment to connected persons, which extends beyond goods and services transactions.
Determining What makes such expenses deductible under Corporate Tax
There are a couple of conditions to be kept in mind in regard to what makes managerial remunerations a deductible expense within corporate tax. Here’s an in-depth guide to the same,
- Need for Service, which basically assesses whether there is or was an actual need for his/her services.
- Receipt of Service is a paper document that demonstrates that the service was indeed provided by executives and also showcases that the associated compensation was provided.
- Resonates with the Market value, this is determined in regards to the amount that would have been paid to any third party for offering the same service received under similar circumstances.
- Business association means that the salary needs to have conclusive evidence of reaching the taxable entity’s objectives, and not the personal ones.
Final Thoughts
At the end of the day, addressing UAE corporate tax complexities, particularly in owner’s remuneration, demands due diligence. It is prudent for owners to stay informed, seek professional advice, and align with the regulations. While the landscape poses challenges, a nuanced approach ensures compliance while optimising financial arrangements within legal boundaries.
Connect with us, the leading corporate tax consultant in Dubai, to stay abreast with the current practices. We can help you adopt transparent and ethical compensation policies, as benchmarking against industry standards is vital for businesses to thrive in the UAE’s competitive market.