Dubai: Foreign banks to pay a 20% annual tax.
Taxation of Foreign Banks Operating in the Emirate of Dubai
As of 8 March 2024, the Taxation of Foreign Banks Operating in the Emirate of Dubai is governed by Dubai Law No. (1) of 2024. This Law supersedes and annuls Regulation No. (2) of 1996, which previously regulated the taxation framework for Foreign Banks in Dubai.
Previously, Foreign Banks operating in Dubai were subjected to a 20% tax on their annual taxable income at the Emirate level. However, with the recent implementation of Federal Law No. (47) of 2022, also referred to as the "Corporate Tax Law," Foreign Banks are now required to pay federal corporate income tax. Although the tax rate remains unchanged at 20%, the new law addresses the issue of double taxation by providing a tax credit option. This tax credit allows Foreign Banks to deduct the amount of federal corporate tax paid from the 20% tax rate specified in the law, thereby mitigating the risk of double taxation.
The Law encompasses the following essential characteristics:
- The Law is applicable to all branches of foreign banks that are licensed by the Central Bank of the United Arab Emirates and operate in Dubai, with the exception of foreign banks operating in the Dubai International Financial Centre
- The calculation of taxable income must comply with the provisions stated in the Corporate Tax Law unless specific rules and regulations authorized by the Director General of the Department of Finance are in place. These rules cover various aspects such as joint revenues and expenses, headquarters and regional expenses, administration expenses, and unrealized gains or losses from taxable income.
- Foreign Banks are required to submit their tax returns within a specified time frame set by the Director-General. Along with the tax returns, audited financial statements, the amount of tax payable, supporting documents, and the Federal corporate tax amount paid must also be provided.
- The Law introduces a voluntary disclosure mechanism that allows Foreign Banks to rectify any errors in their tax returns within 30 days of discovering the incorrect submission and under/overestimation of tax payable.
- The Law outlines detailed provisions governing the tax audit process, the rights of Foreign Banks, and the procedures for objecting to tax assessments or penalties.
- The specific fines for violating the Law will be included in the executive regulations. However, the Law stipulates that administrative violations are subject to a maximum fine of AED 500,000, which may be doubled for repeat offenses within two years. Late payments of taxes or fines will incur a penalty of 2% of the unpaid amount for each month of delay, with part of a month being considered as a full month. In cases of tax evasion, severe penalties may be imposed without prejudice to any other penalties prescribed by law.
