Dubai’s new tax law on foreign banks expected to help lenders avoid double taxation

The new regulation applies to all international banks operating in the city, except for those in the Dubai International Financial Centre

For banks that pay corporate tax, that rate will be deducted from the annual 20 per cent tax. AFP
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Dubai's new law mandating a 20 per cent annual tax on foreign banks operating in the emirate, is expected to be positive for lenders and help them avoid paying double taxes, according to experts.

Under a law announced last week, foreign banks are subject to the tax on their annual taxable income. However, if they pay corporate tax, that rate will be deducted from the annual 20 per cent tax.

The law applies to all foreign banks operating in Dubai, including in special development zones and free zones, except for lenders licensed to operate in the Dubai International Financial Centre.

“There is a lot of misconception in the market around the announcement and, more specifically, whether foreign banks now need to bear an ‘additional’ 20 per cent emirate level corporate tax cost in addition to the recently introduced 9 per cent federal level corporate tax regime,” Vishal Sharma, managing director with Alvarez & Marsal Tax, Dubai told The National.

“However, the reality is that there has been an emirate-level corporate tax regime for foreign banks operating in the mainland for years now in the UAE and all foreign banks operating in such manner have been paying a 20 per cent corporate tax on their profit in the respective emirate they were operating in.”

The new law is “seeking to help these banks by clarifying that they will not be subject to double corporate taxes now that a federal corporate tax has been introduced, by essentially extending a credit of 9 per cent corporate tax they will now have to pay under the federal level corporate tax regime against the 20 per cent they already had to pay under the emirate level corporate tax regime”, he said.

The UAE introduced the federal corporate tax with a standard statutory rate of 9 per cent starting from the financial year beginning on or after June 1.

It brought the income of companies exceeding Dh375,000 ($102,110) within the taxable bracket. Taxable profits below that level will be subject to a tax of zero per cent.

Several exemptions are also offered for businesses operating in strategic sectors.

UAE corporate tax: What you need to know

UAE corporate tax: What you need to know

The new Dubai banking tax regulations “will provide welcome relief to foreign banks operating in Dubai through branches”, Nilesh Ashar, senior managing director and head of tax for Middle East at FTI Consulting, said.

“While under the existing regulation, all foreign bank branches in Dubai were taxed at the rate of 20 per cent on their profits, the recent introduction of corporate tax in the UAE at 9 per cent meant that Dubai-based foreign banks could have ended up paying tax under both the Dubai banking law and the federal corporate tax law at effectively 29 per cent with no ability to offset taxes paid under either legislation.”

The regulation helps lenders operating in Dubai to claim a deduction in respect of any taxes paid under the UAE corporate tax regulation, on a proportionate basis, he added.

Junaid Ansari, director of investment strategy and research at Kamco Invest, said the new regulation will improve the oversight of banks operating in the emirate.

“The financial impact on banks is expected to be minimal as the existing corporate tax would be deducted from the new tax,” he said.

Mr Sharma, however, said that while the announcement is positive for the banks, there are still a lot of questions which would need to be monitored, “such as how the credit regime will work in practice”.

The new law also announces penalties for breaches, including fines up to Dh500,000, the Dubai Media Office said.

The fine will be doubled in case of repeat breaches within two years, up to a maximum of Dh1 million.

Banks will need to consider the compliance requirements under the new law and “ensure they are ready to deal with these alongside the requirements under the corporate tax law”, Rachel Fox, partner at Clyde & Co, said.

Updated: March 10, 2024, 7:01 AM