Legal Overview on Dubai Introduces New Taxation Law for Foreign Banks

Dubai Introduces New Taxation Law for Foreign Banks

On March 8, 2024, Dubai enacted Law No. (1) of 2024 concerning the taxation of foreign banks operating within the emirate. This new legislation, which repeals Regulation No. (2) of 1996, aims to address concerns regarding potential tax increases following the introduction of the federal corporate tax. Here’s a detailed overview of the new law, its implications, and what foreign banks operating in Dubai need to know.

Under the previous Regulation No. (2) of 1996, foreign banks operating in Dubai were subject to a 20% tax on their annual taxable income. This regulation governed the taxation of foreign banks at the emirate level, without integrating federal tax considerations.

In June 2023, the UAE introduced Federal Law No. (47) of 2022, establishing a federal corporate tax at a rate of 9%. This new federal tax raised questions about the potential for double taxation of foreign banks operating in Dubai, as both the emirate-level and federal taxes could apply.

Introduction of the 2024 Law

To address these concerns and ensure that the tax burden on foreign banks does not exceed previous levels, Dubai introduced Law No. (1) of 2024. This law aligns the taxation framework with the federal tax regime while maintaining a clear structure to avoid double taxation.

Scope of the Law

The 2024 Law applies to all foreign banks licensed by the Central Bank of the UAE and operating in Dubai, with the exception of those operating within the Dubai International Financial Centre (DIFC). The DIFC has its own regulatory framework, which is not affected by this new legislation.

Tax Rate and Calculation

Tax Rate

The law imposes a 20% tax rate on the taxable income of foreign banks. However, it introduces a mechanism to mitigate the risk of double taxation. Specifically, if a foreign bank pays federal corporate tax, the amount paid can be deducted from the 20% tax liability imposed by the 2024 Law.

Taxable Income Calculation

Foreign banks must calculate their taxable income in accordance with the Corporate Tax Law, with additional rules established by the Director General of the Department of Finance. These rules cover aspects such as joint revenues and expenses, headquarters and regional expenses, and unrealized gains and losses.

Tax Return Submission and Payment

Foreign banks are required to submit their tax returns within a timeframe set by the Director-General. This submission must include audited financial statements, details of the tax payable, supporting documents, and proof of federal corporate tax payments.

Voluntary Disclosure

The 2024 Law introduces a voluntary disclosure mechanism, allowing foreign banks to correct any errors in their tax returns within 30 days of discovering the mistake. This provision aims to encourage transparency and accuracy in tax reporting.

Tax Audit and Appeal Procedures

The law outlines detailed procedures for tax audits, including the rights of foreign banks and the processes for objecting to tax assessments or penalties. This structured approach ensures fair treatment and provides a clear avenue for addressing disputes.

Penalties

The 2024 Law stipulates the following penalties for non-compliance:

Administrative Violations

Fines up to AED 500,000, which may double for repeat violations within two years.

Late Payments

A fine of 2% of the unpaid tax or fine for each month of delay.

Tax Evasion

A penalty equal to twice the amount of the evaded tax.

Impact and Implications

For Foreign Banks Operating in Dubai

Foreign banks operating in Dubai will benefit from the 2024 Law’s approach to preventing double taxation. By aligning emirate-level taxation with federal corporate tax and providing a credit mechanism, the law ensures that the overall tax burden remains consistent with previous regulations.

Compliance and Planning

Foreign banks need to review their tax planning and compliance strategies to align with the new law. This includes understanding the calculation of taxable income, adhering to submission deadlines, and leveraging the voluntary disclosure mechanism to correct any errors.

Future Developments

The executive regulations to be issued will provide further details on the implementation of the 2024 Law. Banks should stay updated on these regulations to ensure full compliance and adjust their practices accordingly.

Broader Implications

This legislative change aligns with broader trends in the UAE's tax landscape, including recent reforms and the introduction of federal taxes. Similar updates may be expected in other emirates, reflecting a harmonization of tax policies across the UAE.

Conclusion

Dubai’s new taxation law for foreign banks represents a significant shift in the regulatory landscape, designed to integrate emirate-level taxation with federal corporate tax while preventing double taxation. For foreign banks operating in the emirate, understanding and complying with the new requirements will be crucial to maintaining tax efficiency and avoiding penalties. As the UAE continues to evolve its tax framework, staying informed and adaptable will be key for all stakeholders involved.