When is a door not a door? When it’s ajar. I first read that joke on the wooden stick of a finished ice cream as a child. It was an early lesson in how words can carry different meanings depending on the context.
Recently, the UAE’s Federal Tax Authority clarified the terms “director” and “officer” for payments to “connected persons”.
Let’s start with what a connected party is. These are natural persons who may be both shareholders and employees, or freelancers or service providers to a corporate tax-registered entity.
The law is clear that such charges are deductible from your taxable profits, as long as the amount is the same as an independent business would normally charge. This is called arm’s length trading.
There is enough flexibility to recognises that pricing will exist across a value range, but any connected party charge should not stray too far away from this band.
A disclosure is only required should the value in the reporting period, typically one year, exceed Dh500,000 ($136,146). This is completed via a declaration as part of submitting a corporation tax return.
Director title
Let’s move on to directors. These are natural persons who hold a formal position on an entity’s board of directors. The position may be executive, non-executive, temporary or a member of any of its committees.
The title “director” is not a requirement as a person may be considered one based on their remit. Some organisations use alternative terms such as trustees or governors. The law looks through the nomenclature and applies the same legal test, taking into account the organisation’s constitutional documents, including its articles and memorandum of association.
Interestingly, holding the director title does not automatically make a person one for the purposes of tax law. This is because the title has been broadly awarded and its traditional standing greatly diluted in recent decades.
An officer, also a natural person, covers a broader spectrum of roles and responsibilities.
They must satisfy the framework laid out in International Accounting Standard 24 under its Related Party Disclosure section. This includes holding the authority and or responsibility to plan, direct or control an entity’s activities.
Additionally, this individual may execute strategic decision-making in finance and operational or commercial matters.
Finally, they have the right to contractually bind the entity with other entities. If the individual does not have these abilities, they are not considered officers.
Some positions may carry titles that would not at first glance suggest the rank of an officer, but in reality are. The law will recognise these people for what they are and treat them accordingly.
This does raise the question of what happens in the opposite case. In a country with so many owner-led businesses, many positions might carry traditional titles but in all other respects be completely neutered.
Anyone who has worked in the Middle East for a long time is likely to have experienced this first-hand in medium to large enterprises. We must assume that the regulatory authorities will take substance over form, given satisfactory proof.
The organisation
We have looked at differing titles. What about the type of entity?
If the organisation is fiscally opaque for corporate tax purposes, these rules apply. Therefore, you must include unincorporated partnerships, trusts and foundation structures.
What’s missing in this clarification is a clear definition of what constitutes strategic versus tactical. At any level of an organisation these may mean different things. Yes, there are examples, but an application of the “buck stops here” test seems to be missing.
Let’s try to answer this omission by simplifying their meanings. All organisations have only three levels, regardless of the number of grades or employees.
At the top are the executives who wield real power that can move the organisation. Mid-level personnel are empowered to support one or more of these executives in these manoeuvres. Lower-level workers ensure the minutiae of outcomes, any individual failure not critical enough to derail overall functionality.
An organisation's structure divided this way takes the shape of a triangle. Once you understand this dynamic and the requirement to increase, replace or replenish the tier above you, managing an upwardly mobile career becomes a lot easier.
Contractors and temporary staff may be deemed officers, depending on their roles. This means the test is about control and authority, not time served.
