The conflict in the Middle East is being seen as an opportunity to reinforce the national messaging that the country stays strong and stable under exceptional circumstances, and I’m not suggesting that the relevant authorities offer a tax holiday.
The sums paid by individuals and businesses provide us with the world-class infrastructure that we enjoy and exploit in our daily lives. It has also kept us safe. Everyone who pays their fair share of taxes is part of the fabric of this country that is holding strong together despite cruel and reckless provocation.
While some have chosen to leave the UAE, the overwhelming majority have stayed and go about their daily lives. As a service provider, my conversations with customers and suppliers show that, for the most part, it’s business as usual.
In corporate tax, what happens when the unusual occurs? For example, what is the impact of the departure of a minor shareholder who is also an employee?
Firstly, let’s define what a minor shareholder is. The Federal Tax Authority is only interested in anyone with a 25 per cent or higher holding. The personal details of these people need to be communicated via the FTA portal and updated when they change.
There are penalties for not doing so in a timely manner. Such record-keeping is known as company secretarial duties and all juridical entities are bound to manage these on a continuing basis.
Such a person is entitled to their contracted salary, any benefits and may share in declared dividends depending on their legal nature.
Because a shareholder is a connected party, it needs to be proven that their pay matches their skills and the work they do for the business.
Annual tax returns include a submission that provides sufficient evidence of the same.
You might reason that this includes all money received plus benefits in kind, such as health insurance. This is correct. However, what about the provision for end of service?
It might surprise you to know that this was introduced in the 1980 Labour Law and has evolved greatly over the years, so, there is no excuse for not knowing about it.
All companies should be accruing this cost, preferably in their monthly management accounts, with a more formal review at the end of each fiscal year. As the amount payable changes with the length of an employee’s service, it is imperative that each person’s details are accurate.
In tumultuous times, having to retrench operations, coupled with redundancies, all these costs should already be provided for, which means accrued in the profit and loss account.
It’s enough to deal with downturns without having the compounded headaches of sudden adverse accounting and cash flow events.
Since the end-of-service benefit is only paid out on departure, should this amount form part of a shareholder employee corporate tax declaration? If so, it would only be the amount accrued in the fiscal year being reported.
The rules are clear under International Financial Reporting Standards: these costs must be accounted for and deducted from profits.
Yet it’s not clear that they form part of the connected party declaration. Let me expand. The employee shareholder is not leaving voluntarily. Legal counsel has been retained. Can those costs be offset against profits?
Deductible costs should be wholly and necessarily incurred in the conduct of the business. If you don’t agree, then you might equally argue that the costs of onboarding a new shareholder are also not deductible.
Press further and you might disallow any legal or regulatory costs of any amendment to the shareholder register. A reasonable threshold is needed to exempt publicly listed companies and avoid unnecessary bureaucracy.
The issue with this line of thinking is that you can begin to encroach on the idea that elements of an entity’s formation costs can also be struck out.
But could the final payment differ depending on the nature of an employee’s separation? Yes, although not in law. There was a difference in treatment between monies owed under resignation and redundancy, but this distinction was removed in 2022.
Remember, the law is the baseline, and it cannot be overridden by contract. It can, however, be enhanced, with additional payments in the event of redundancy set out in one’s employment contract.
Given that there are now two potential gratuity amounts, which one should be accrued for? Prudence would suggest the higher. Materiality, with a sufficiently sized workforce, would suggest the lower. Accounting concepts sometimes clash. I’d say either approach is reasonable. This is the healthy conversation your company should be having.
