Understanding Management Remuneration Deductions under Corporate Tax UAE 2023

Corporate Tax UAE 2023: Can You Claim Management Remuneration?

The United Arab Emirates (UAE) has introduced a corporate tax law on 1^st June 2023. While this is a significant development for the country’s economic growth, it also raises several questions for businesses operating there. One such question pertains to the deductibility of management remuneration for corporate tax purposes.

As per Article 28 of the Federal Decree Law No. 47 of 2022, any expense that is wholly and exclusively incurred for business purposes is allowed as a deductible expense. Thus, the businesses are generally allowed to deduct expenses incurred in the course of generating taxable income. This includes salaries, wages, and other employee benefits. However, for certain expenses such as entertainment & interest, specific provisions are made in the Law to determine the degree of deductibility. In this blog, we will discuss about the deductibility of remuneration given to the management.

What is covered under remuneration to management?

The remuneration to management includes both direct and indirect compensation paid to employees and related parties, such as salaries, incentives, and allowances. It would also include perquisites and bonus awarded to the management. If the remuneration paid to management is incurred in a reasonable and justifiable manner, then such remuneration is deductible.

Key Conditions for Deductibility of Management Remuneration

1. Arm’s Length Principle:

The remuneration paid to management must be at arm’s length. This means that the amount paid should be comparable to what would be paid in a similar transaction between independent parties. Any excessive or unreasonable payments may be disallowed. Any excessive or unreasonable payments may be disallowed, and non-compliance could lead to penalties under the UAE corporate tax law.

2. Documentation:

Businesses must maintain adequate documentation to support the deductibility of management remuneration. This includes employment contracts, salary slips, and any other relevant paperwork.

3. Relationship with the Business:

The management personnel must have a genuine employment relationship with the business. They should not be considered as shareholders or owners who are merely receiving dividends.

The shareholder who actively participates in the management of the company, would be paid remuneration for his service. Please note that, the excessive payments to shareholders may be treated as dividends, which are generally not deductible.

4. Performance-Based Remuneration:

While not mandatory, performance-based remuneration can strengthen the case for deductibility. This is because it demonstrates a direct link between the management’s efforts and the company’s profitability.

5. Need for specific services of Management personnel:

The company needs to explain why it needs the services management is providing. The management team’s services must be clearly aligned with the company’s strategic objectives.

Thus, if a company’s CEO who is a major shareholder draws a remuneration which is excessive compared to the market rate, the tax authorities may treat a portion of it as a dividend & challenge the deductibility of such excessive portion as salary.

Conclusion:

The deductibility of management remuneration for corporate tax purposes in the UAE is generally allowed, subject to certain conditions. Businesses operating in the UAE should ensure that their management remuneration practices comply with the arm’s length principle, documentation requirements, and other relevant criteria. By understanding the rules and guidelines, businesses can optimize their tax positions and minimize their tax liabilities. By understanding the rules and guidelines, businesses can optimize their tax positions and minimize their tax liabilities under the UAE corporate tax.

We, at BCL Globiz, thoroughly examine the structure of the business, compare the qualifications, experience, and compensation of management personnel with that of the similar industries and companies to ensure that management fees are charged at “arm’s length” (a fair market value). This helps us establish a benchmark for industry standards and ensure that the management fees charged are reasonable and competitive. We also provide assistance in documentation, which forms an essential pre-requisite to claim the deductibility of management remuneration.

For a better understanding of how corporate tax applies to businesses, check out this corporate tax guide for common citizens.

Feel free to reach out to us at nikhil@bclglobiz.com if you have any queries relating to Corporate tax/VAT/Accounting.