Compensation offered to executives and related parties in the form of salaries, bonuses, stock options, and other incentives is referred to as managerial remuneration. Management remuneration includes amount paid by the company to its:
1. Owner/ Shareholders
2. Directors
3. Officers (Chief Executive Officer (CEO), Chief Financial Officer (CFO), President, Vice President, Division Heads)
5. Related parties who are in Senior Management Position (Includes Family related within fourth degree of kinship, including by the way of adoption of guardianship)
6. Associated or related party companies
Scope of Management Remuneration under UAE Corporate Tax
Management remuneration is a critical aspect of corporate governance. However, in some cases, remuneration structures might inadvertently lead to profit reduction for tax optimization purposes.
In the past, individuals have withdrawn profits through categorization as management fees or remuneration for management services. This practice now requires meticulous evaluation in light of corporate tax laws as there are incentives for individual owners to erode UAE CT by making excessive payments to themselves in the name of management remuneration to reduce the overall profit of the company and ultimately to reduce overall tax liability.
However, these scenarios are addressed through a designated disallowance as per Article 33(4) of the corporate tax law. Dividends, profit distributions or benefits of a similar nature paid to an owner of the company are classified as Non-deductible Expenditure for corporate tax.
In the context of UAE corporate taxation, the question of how much salary and benefits a Partner or Shareholder can draw is of significant importance. The Federal Decree Law 47 of 2022 on Taxation of Businesses, while shedding light on various aspects, has refrained from specifying any explicit monetary limits for salaries drawn by Partners or Directors. Additionally, as of now, there hasn’t been any Ministerial decision issued to establish specific bounds on remuneration for partners, shareholders, or directors.
Conditions for Deduction of Management Remuneration under Corporate Tax
Financial transactions involving related parties fall under the category of ‘Payment to Connected Persons.’ Article 36 of Decree Law 47 assumes significance in guiding these scenarios, laying down conditions that govern such payments. In line with these stipulations, such payments can qualify for deductions only if they meet two crucial criteria:
1. Need for service:
To qualify management remuneration as an expense deduction, the company must demonstrate a genuine need for the management services provided by the executives. This involves showing that the compensation is directly tied to the roles, responsibilities, and contributions of the executives to the company’s operations, growth, and overall success. Companies should be able to justify that the remuneration is reasonable and necessary for the efficient management and functioning of the business.
2. Receipt of service:
Receipt of management services involves proper documentation that confirms the services were indeed provided by the executives and that the associated compensation was disbursed. This documentation includes CV, employment contracts, job descriptions, performance evaluations, and any other records that outline the scope of work and responsibilities of the Managers. Companies should also maintain accurate financial records that reflect the remuneration paid to managers.
3. Correspondence with Market Value:
The payment or benefit must align with the fair market value of the service, benefit, or contribution offered by the connected person. Market Value is determined having regards to the amount that would have been paid to any third party for providing the same service received in similar circumstances. Management Remuneration can be supported with the market surveys of compensation by leading Human resources consulting firms or other manpower websites.
3. Business-Related Expenditure:
The payment should be wholly and exclusively incurred for the advancement of the taxable entity’s business objectives.
Dealing with the challenge of balancing Compensation and Tax Compliance
Designing proper management remuneration that strikes a balance between competitive compensation, tax compliance, and fairness is a multifaceted task. While avoiding salary limits, organizations can adopt comprehensive strategies to ensure executive pay aligns with performance, industry standards, and legal requirements. This can be achieved using the following methods:
1. Benchmarking and Market Research: Performing extensive market research to gain insights into prevailing industry norms regarding executive compensation. This involves conducting a comparative analysis of the roles, responsibilities, and achievements of the executives in relation to their counterparts in comparable organizations. By adopting this approach, we can mitigate the risk of excessive compensation, while concurrently guaranteeing that executives receive fair recognition for their valuable contributions.
2. Combine all benefits into a single payment structure: This step eliminates the need for individual justification of each payment, thereby avoiding potential disputes. As an illustration, rather than drawing separate payments for children’s school fees, incorporating these expenses into the consolidated remuneration package proves to be a more streamlined strategy.
3. Long-term Incentives: Introduce extended-period rewards, such as vested equity grants or stock options maturing over several years. These incentives align executives with the organization’s enduring goals, discouraging short-term choices that might prioritize tax efficiency over steady expansion.
4. Transparent Compensation Committees: Establishing independent compensation panels consisting of board members or external specialists will possess the capacity to impartially assess and propose executive remuneration, taking into account a range of internal and external variables. Transparent decision-making within these panels acts as a safeguard, promoting impartiality and minimizing potential conflicts of interest
Conclusion
The complex nature of partner or shareholder salaries and benefits within UAE corporate taxation requires careful consideration of various factors. While legislative guidance is not explicit, businesses can adopt benchmarking practices and comprehensive documentation to arrive at reasonable and defensible remuneration figures. Consolidating benefits into remuneration can further enhance transparency and minimize contentious discussions surrounding individual expenses. As the UAE continues to attract international investment and expand its corporate landscape, executives and corporations must navigate the intricate intersection of Manager/owner’s compensation and taxation. Striking the right balance between competitive remuneration, regulatory compliance, and ethical practices will be pivotal in sustaining the UAE’s reputation as a business-friendly environment while upholding its principles of fairness and transparency.
It’s important for businesses to keep up-to-date and use good practices for paying their executives. This includes comparing to industry standards, combining benefits, and making decisions openly. Doing these things will help companies navigate this complex situation with confidence. So, take action now to make sure your company’s payment strategy follows the law and meets industry norms.
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