Dubai Law Overhauls Taxation for Foreign Banks

Dubai has recently implemented Law No. (1) of 2024 on Taxation of Foreign Banks Operating in the Emirate of Dubai (the “Law”), effective from March 8, 2024. This Law, signed by His Highness Sheikh Mohammed Bin Rashid Al Maktoum, replaces and supersedes Regulation No. (2) of 1996 on the Collection of the Tax from The Branches of The Foreign Banks Operating in the Emirate of Dubai (the “Regulation”), marking a significant shift in the taxation framework for foreign banks in the Emirate.

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Scope and Applicability

The new Law applies to all branches of foreign banks operating in Dubai and licensed by the Central Bank of the UAE,?including special development zones and free zones, and excluding those within the Dubai International Financial Centre (DIFC).

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Tax Rate and Credits

Under the Law, foreign banks are subject to a 20% Emirate-level tax on their annual taxable income, similar to the tax rate that was levied under the previous Regulation. Additionally, in accordance with the newly introduced Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (the “Corporate Tax Law”) foreign banks are required to pay an additional 9% Federal corporate tax on top of the aforementioned 20% tax.

Hence, to prevent double taxation and effectively reduce the overall tax rate, the Law now allows foreign banks to offset their federal corporate tax payments against their Dubai level tax liability.

In the past, the Regulation didn't offer this mechanism, and foreign banks in Dubai had to pay both federal corporate tax and Dubai's tax without the option for any tax credits. This ensures an equitable and balanced tax regime, encouraging foreign bank investments in Dubai.

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Voluntary Disclosure

The Law introduces a voluntary disclosure mechanism in the event of underpayment or overpayment, which shall be submitted in accordance with the forms and mechanisms approved by the DOF. This mechanism allows banks the opportunity to rectify errors in the tax returns or assessments. In the event of underpayment, banks have 30 days from the discovery of the error to settle the financial difference. In the event of overpayment, banks can choose between reimbursement or treating the excess as advance payment for the next tax period.

Penalties

The taxable person committing tax evasion shall be punished with a fine equal to twice the amount of the evaded tax.

Without undermining the taxable person's responsibility for tax evasion, if evidence demonstrates that a third party directly engaged in or instigated tax evasion, the identical fine imposed on the taxable person shall be levied on that third party autonomously.

If the taxable entity fails to remit the due tax or fine by the specified payment date as outlined in this Law and its associated regulations, whether in full or in part, a penalty shall be imposed. The penalty will amount to (2%) of the unpaid tax or fine for each month of delay, with any portion of a month considered equivalent to a full month.

Conclusion

Foreign banks operating in Dubai must assess the implications of this Law to ensure compliance. The introduction of tax credits alleviates concerns of double taxation, promoting a favorable environment for foreign bank investments. However, clarity is sought regarding the Law's applicability to tax periods commencing after March 8, 2024. Currently, for banks with a fiscal year ending in December, the initial tax period according to this Law will span from January 1st to December 31st, 2025, with no tax credits applicable for any corporate tax paid in 2024.

Law No. (1) of 2024 signifies Dubai's proactive approach towards modernizing its tax regime, aligning it with international standards while encouraging economic growth and investment in Dubai.