Dubai Issues New Law on 20% Annual Tax on Foreign Banks

Dubai Law No. (1) of 2024 on Taxation of Foreign Banks Operating in the Emirate of Dubai (the “Law”) has come into effect on 8 March 2024. The Law repeals and replaces Regulation No. (2) of 1996, which previously governed the taxation of Foreign Banks (as defined below) in the Emirate of Dubai (“Dubai”).

Under the previous regulation, Foreign Banks were subject to a 20% tax on their annual taxable income at the Emirate level in Dubai. Foreign Banks are now subject to federal corporate income tax pursuant to the recent issuance of Federal Law No. (47) of 2022 (“Corporate Tax Law”). Whilst the new Law maintains the same 20% tax rate on Foreign Banks, it mitigates the risk of double taxation by clarifying that a tax credit will be available with respect to the federal corporate tax paid by the Foreign Bank as a deduction from the 20% tax rate under the Law.

Key Features:

The key features of the Law are as follows:

1. Scope: The Law applies to all branches of foreign banks licensed by the Central Bank of the United Arab Emirates (“UAE”) and operating in Dubai (“Foreign Banks”), except for foreign banks operating in the Dubai International Financial Centre (“DIFC”).
2. Calculation of taxable income: Calculation of the taxable income must adhere to the provisions outlined in the Corporate Tax Law, except in instances where specific rules and regulations authorised by the Director General of the Department of Finance on various aspects, including joint revenues and joint expenses, headquarter and regional expenses and administration expenses, losses and gains unrealized from the taxable income, etc.
3. Submission of tax return and payment of tax: The Foreign Bank is required to submit its tax returns within a time limit set by the Director-General, together with audited financial statements, amount of tax payable, supporting documents and the Federal corporate tax amount paid.
4. Voluntary disclosure: The Law introduces a voluntary disclosure mechanism, which allows Foreign Banks to correct their tax returns within 30 days of becoming aware that the tax return submitted was incorrect and the tax payable was under/overestimated.
5. Tax audit and appeal procedures: Detailed provisions governing the tax audit process, the rights of the Foreign Bank, and objection procedures against the tax or penalties assessment are set out in the Law.
6. Penalties: While details of the applicable fines for violation of the Law will be included in the executive regulations, the Law provides that:
   (a) the fine for administrative violations of the Law is capped at AED 500,000, which may be doubled for repeat cases within two years from the date of committing the previous administrative violation;
   (b) late payments of a tax or fine are subject to a fine of 2% of the value of the unpaid tax or fine for each month of delay, and part of a month shall be calculated as a full month; and
   (c) in case of tax evasion (without prejudice to any severer penalty in other legislation), the person evading the tax would be subject to a fine twice the amount of the tax evaded.

How does it affect you?

If you are a Foreign Bank operating in Dubai or intend to establish a presence in Dubai, it is important to understand the impact of this Law and assess its implications to ensure compliance with the Law. We expect the executive regulations setting out the implementation of the Law in further detail should be published in due course.

How can we help?

Our multiple award-winning Tax team is fully equipped to assist foreign banks in understanding and navigating the implications of the legal developments of the Law. Our team is prepared to offer guidance and support to enable our clients to effectively adapt and ensure compliance with these new regulatory outlooks.