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The Dubai government has formalized the taxation of foreign banks through Law No. 1 of 2024 and the Administrative Decree No. 107 of 2024. Together, they provide detailed guidance on the application of the 20% annual tax on the taxable income of foreign banks operating in Dubai. They clarify the tax structure, exclusions, and compliance obligations, ensuring alignment with the UAE's Corporate Tax Law.
The move, effective for the financial year starting 1 January 2024, aims to regulate and enhance transparency in Dubai’s financial landscape.
Scope of the Tax
The tax applies to all foreign banks operating in Dubai, including those in special development zones and free zones. However, banks licensed to operate in the Dubai International Financial Center (DIFC) are excluded from taxation on income derived within or through the DIFC.
While imposing the 20% tax, the rules maintain the Emirate's appeal as a financial hub by excluding DIFC-derived income.
Tax Calculation and Deductions
The decree provides a clear formula for determining the tax liability:
20% of taxable income less corporate tax paid as per UAE Corporate Tax Law
The effective tax rate is 11%, as the 9% corporate tax is deducted from the 20% foreign bank tax.
Taxable income is calculated after deducting common expenses, including regional and head office expenses, credit losses, depreciation, and interest. While calculating taxable income, banks adhere to the corporate tax regulations as well as regulations specifically applicable to banks and financial institutions.
Compliance Requirements
The first tax period begins on 1 January 2024, with the following key deadlines:
- Tax Payment: Due within three months after the tax period ends.
- Tax Return Submission: Due within nine months after the tax period ends, along with supporting documents.
The return must be approved by the responsible employee and an external auditor, emphasizing the importance of accuracy and compliance.
Conclusion
The tax liability on foreign banks can be mitigated by claiming benefits under the respective tax treaties. Foreign banks operating in Dubai must consult their advisors to determine the effective tax liability and the possibility of claiming treaty benefits.
Besides, such banks must also adapt to the new rules by ensuring accurate tax calculations, i.e., aligning taxable income and expenses with the decree’s provisions.
Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice
