Business Study: VAT Implications of Salary Reimbursement Between Group Companies in the UAE

• Distinction Between Reimbursement and Disbursement: In the UAE VAT framework, reimbursement is treated as a taxable supply where costs incurred by one entity are recovered from another, while disbursement is a non-taxable transaction involving payment on behalf of another entity. The VAT treatment of salary reimbursements between group companies hinges on factors such as the employer of record, control over the employee, and whether any profit is included in the reimbursement.
• VAT Treatment of Salary Reimbursements: When an employee from Company A works for Company B, the salary recharge may be classified as manpower services subject to 5% VAT if Company A incurs salary expenses. However, if Company A merely facilitates visa sponsorship without controlling the employee, it may qualify as visa facilitation services, where VAT applies only to administrative fees. Cross-border implications can lead to different VAT treatments depending on the residency of the entities involved.
• Key Actions for Compliance: Companies must undertake several actions to ensure proper VAT treatment, including reviewing contracts to determine the nature of the transaction, analyzing work locations for zero-rating eligibility, assessing VAT grouping for intra-group transactions, applying the reverse charge mechanism for foreign secondments, and seeking advance rulings from the FTA if uncertainties arise. This proactive approach helps in navigating the complexities of VAT regulations related to salary reimbursements and employee services.

Source Fintedu

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