UAE Business Owners: Be Careful How Much You Pay Yourself
With the new UAE tax environment having come into effect since June this year, a host of new laws have now come into effect. But when considering that there is no tax on an individual’s salaries, every business owner is contemplating paying themselves a good salary from their own company. Yet this carries pitfalls, not least because of the temptation to extract more personal salary in order to reduce the net taxable profits of their companies. However, this is easier said than done.
Paying Yourself A Salary
UAE based business owners need to evaluate if they have an employment contract with their own company. If so, the next step requires to show that the salary paid is remuneration for the owner’s labour. Distinguishing between remuneration for labour and the return on capital (on having created a successful business) requires a thorough economic analysis instead of making wishful arguments.
The UAE Ministry of Finance has indicated that employment requires all, or most of the income being derived from one customer/employer. Drawing salaries from multiple companies owned by the same owner(s), or their immediate relatives, may violate this essential feature.
Business owners holding a Golden Visa would also need to pay attention to these requirements before claiming employment income to plan for tax optimisation.
Any payment to owners, or their relatives, will be subject to a transfer pricing analysis. Benchmarking of salaries paid to owners could take the following approaches to ensure the salaries are not in excess of:
- What would have been paid to a third-party performing similar functions; or
- What the owner would have earned from an independent company for performing similar functions.
Finding a database to undertake the comparative analysis at present is a challenge, although viewing available job vacancies in the media may shed some light. But be careful – considering the varying sizes of different businesses in the UAE, any transfer pricing analysis could become highly subjective when arriving at reasonable benchmarks.
UAE corporate tax has prescribed thresholds for various items such as transfer pricing documentation, Small Business Relief, interest expenses, and so on to ease the tax compliance burden. A similar approach by prescribing a ‘safe harbour’ threshold for owners’ salaries – whether based on amount or on percentage of revenue – could help owners save on compliance costs and mitigate future risks. Additional MoF guidance may address owners’ concerns, however we recommend caution at this present stage.
Self-Employed vs. Business Owners
A self-employed person is subject to UAE Corporate Tax if the total annual turnover derived from his/her businesses or business activities exceeds Dh1 million (about US$272,500).
Contextually, a self-employed person could be performing exactly the same functions that an owner would be performing at his/her companies. If so, could an owner justify a tax exempt salary while a self-employed person be subjected to tax (subject to other reliefs)?
This subtle aspect of the tax laws has often been ignored while advocating business owners to draw salaries from their own companies.
Global transfer pricing guidance relating to inter-company services could also be useful in relation to owners’ salaries. An overseas parent company may opt to supervise its global investments by deputing its employee to specific regions or by having a supervisory board at the head office.
The cost of such deputed employee or supervisory board cannot be charged to – and claimed as an expense – by a UAE subsidiary.
On similar principles, the functions performed by the owners need to be evaluated. To the extent that owners are performing the functions of protecting their investments, the expense cannot be claimed by the company as a business expense.
While planning for corporate tax, business owners should also factor in the anti-abuse rules. Anti-abuse rules cover any transaction or arrangement which is not for a valid commercial/non-fiscal reason reflecting economic reality.
If the main purpose of such a transaction/arrangement is to obtain a corporate tax advantage inconsistent with the tax law, the transaction could be disregarded – and result in tax arrears and penalties. Owners’ salaries would require a 360-degree review to ensure that it does not fall under anti-abuse rules.
Business owners need to ask themselves the right questions to avoid finding themselves under ‘appealing fictions’ at the time of future tax assessments and audits.
Dezan Shira & Associates maintain an office in Dubai and can provide individual income tax clarifications and assessments to business owners in the UAE. The firm has over 30 years’ experience in Asia. Please contact firstname.lastname@example.org for assistance.
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