How to Structure Salary, Dividends, and Director Fees Under UAE Tax Rules

“Synopsis”

In 2025, UAE businesses must carefully distinguish between salary, dividends, and director remuneration to avoid tax reclassification, disallowances, or compliance penalties. With the introduction of Corporate Tax, the Federal Tax Authority (FTA) now scrutinizes how payments to owners, directors, and connected persons are structured. This blog breaks down the rules, risks, and best practices for each category.

1. Salary: Structuring for Deductibility and Compliance

A salary paid to a shareholder, director, or manager is tax-deductible only if:

• It reflects market value for the role
• There is a genuine business need for the service
• The individual actually performs work for the company
• Documentation includes employment contracts, job descriptions, and performance records

To qualify under Article 36 of the UAE Corporate Tax Law, the salary must be:

• Wholly and exclusively incurred for business purposes
• Supported by benchmarking or HR salary bands
• Paid through proper payroll systems with WPS compliance (if applicable)

Avoid lump-sum payments without contracts—they may be reclassified as non-deductible profit distributions.

2. Dividends: Tax-Free but Not Deductible

Dividends are not subject to UAE Corporate Tax in the hands of the recipient. However:

• They are not deductible for the company
• Must be declared through board resolutions and shareholder approvals
• Should be paid from retained earnings, not disguised as salary or fees

Dividends are ideal for profit extraction but must be kept separate from operational compensation. Mixing dividends with salary can trigger transfer pricing scrutiny.

3. Director Fees: When Are They Deductible?

Director fees are deductible only if:

• The director is actively involved in business operations
• The fee reflects fair market value
• There is clear documentation of services rendered

Passive board members receiving fees without involvement may face deduction denial. The FTA expects:

• Board meeting minutes
• Remuneration committee approvals
• Contracts outlining scope of work

If the fee resembles a profit share, it may be treated as a dividend—and become non-deductible.

4. Common Mistakes to Avoid

• No documentation for salary or fees
• Overpaying owners without benchmarking
• Combining benefits (housing, school fees, travel) without clarity
• Using director fees to extract profits without board oversight
• Ignoring transfer pricing rules for connected persons

These errors can lead to tax disallowance, FTA audits, and penalties.

5. Best Practices for Structuring Compensation

• Use triangle analysis: evaluate the individual, role, and company context
• Benchmark against industry salary data
• Consolidate perks into a single remuneration package
• Maintain contracts, resolutions, and performance records
• Separate salary, dividends, and fees clearly in accounting books
• Apply arm’s length principles for related-party transactions

Conclusion

In 2025, structuring compensation in the UAE is no longer just about payroll—it’s about tax strategy, documentation, and regulatory alignment. Whether you’re a founder, director, or shareholder, separating salary, dividends, and director fees with clarity and compliance is essential.