In his role as the Ruler of Dubai, His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE, has enacted Law No. (1) of 2024 concerning the taxation of foreign banks operating within the emirate of Dubai, henceforth referred to as ‘the New Law’. This legislation supersedes Regulation No. (2) of 1996 (‘the Old Law’), which previously governed the taxation of foreign banks in Dubai.
The New Law is applicable to all foreign banks operating in Dubai, encompassing special development zones and free zones. However, foreign banks licensed within the Dubai International Financial Centre (DIFC) are exempt from its provisions concerning income generated from within or through DIFC.
Tax Rate: Foreign banks are subject to an annual tax rate of 20% on their taxable income. Nonetheless, if a foreign bank fulfills its corporate tax obligations as per Federal Law No. (47) of 2022 (‘UAE CT Law’), the amount paid in corporate tax is deductible from its total tax liability.
If a foreign bank is subject to the 20% tax rate, it’s understood that the tax credit for UAE corporate tax may be applied as a deduction from the tax rate (i.e., 20% reduced by 9%).
Calculation of Taxable Income: The New Law delineates regulations for computing taxable income and filing tax returns. It elucidates procedures for tax return submission, voluntary disclosures, penalties, and the duties and processes concerning tax audits.
According to the New Law, the basis for calculating taxable income under the UAE CT Law should consider regulations approved by the Director General (‘DG’) of the Department of Finance regarding various factors such as:
- Calculating shared revenues and expenses
- Head office expenses and regional administration expenses
- Unrealized gains and losses from taxable income
- Profits not reflected in the income statement
- Any other necessary provisions for computing taxable income.
Procedures: Taxpayers can voluntarily declare over or underpaid tax within 30 days of becoming aware of it.
The rules and procedures outlined in the Old Law are applicable to tax periods preceding the enactment of this Law. The DG holds the authority to specify transitional provisions related to the implementation of this law.
While the Old Law stipulated a three-month timeline from the end of a financial year for tax return filing, the New Law lacks a specified timeline, to be determined by the DG.
Key Points:
The New Law eliminates double taxation for branches of foreign banks in Dubai, marking a positive development.
The language indicates that the New Law applies to tax periods commencing after March 8, 2024. For banks with a December year-end, the first tax period under the New Law would likely be from January 1 to December 31, 2025. However, clarity is required regarding the availability of tax credits for corporate tax paid in the fiscal year 2024.
The Emirate of Sharjah introduced a similar law for taxing foreign banks last year, suggesting a trend toward new banking tax legislation across other Emirates.
