Are Employee Bonuses and Commissions Liable For Individual Income Tax In The UAE?

In the UAE, employers often pay additional bonus and/or commission to incentivise employees. A notion is being created that a company should not pay commission or bonus to its employees as these could be treated as employees’ individual business income.

It has already been clarified that corporate tax will not apply to an individual’s salary, wages and other employment income, which is essentially remuneration for the natural person’s labour. Accordingly, if the commission/bonus income is a remuneration for the individual’s labour, such income should also be treated as an employment income.

Business owners should focus on ensuring this can be demonstrated before the tax authorities at the appropriate time. It is important that any payments to owners, directors and officers (including their relatives) – be it wages, commission or bonus for working as an employee – would be subject to ‘transfer pricing’ benchmarks.

Clarifying Transfer Pricing

The fear of penalties works as a catalyst in encouraging business owners that they should validate whether their usual business transactions are permitted under corporate tax laws or not. Typical examples include:

•      A company cannot undertake inter-company transaction that is not at ‘arm’s length’.
•      A company cannot pay salary to its owners/directors above the arm’s length limit.
•      A company cannot incur entertainment expenditure.

Tax laws are not regulatory in nature. In other words, tax laws neither permit nor prohibit any business transaction. Tax consequences would automatically apply based on the nature of the transactions. In the light of general anti-abuse rules, tax laws have been kept simple and permissive.

To illustrate, just because an inter-company transaction – or salaries paid to owners – is in excess of the arm’s length benchmark, it will not automatically result in penalties. The tax laws essentially require that the taxable profits should be calculated after making appropriate adjustments to accounting profits, wherever required.

Proactive tax planning will assist in administrative and financial optimisation. However, considering tax laws as prohibitive could create inefficiencies in business operations and growth.

Corporate Tax Registration

We have previously highlighted the corporate registration issue for non-residents. Except for certain specific taxpayers – such as qualifying public benefit entities or investment funds – no specific penalties or adverse consequences would apply if the corporate tax registration is not obtained before the start of the financial year.

The UAE Ministry of Finance has clarified that taxpayers are required to register before they file their first corporate tax return, that is 9 months from the end of the first tax period. While there are no specific penalties, it is recommended to obtain the tax registration at the earliest convenience.

Financial Accounting vs Tax Accounting

In many countries (except the UAE), a separate financial statement in accordance with the corresponding tax laws may be required. The reasons could be manifold; for instance, depreciation rates under tax laws may be different from those used for financial accounting.

Under UAE corporate tax rules, the accounting profits are the starting point to determine taxable profits. A robust financial accounting is a pre-requisite for efficient tax compliance. However, a separate tax accounting itself may not be required.

For clarifications, please contact Maria Kotova at Dezan Shira & Associates: dubai@dezshira.com

Related Reading

• Clarifying UAE Individual Income Tax Liabilities & Exemptions For Residents and Non-Residents
• An Introduction to Doing Business in Dubai 2023

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