The Ruler of Dubai, His Highness Sheikh Mohammed bin Rashid Al Maktoum, issued Law No. 1 of 2024 on the taxation of foreign banks in Dubai. The law primarily applies to all foreign banks operating in the Emirate of Dubai, including special development and free zones. However, the law does not apply to foreign banks licensed to operate in the Dubai International Financial Centre (DIFC). This blog discusses key highlights of the taxation of foreign banks in the Emirate of Dubai.
Taxation of Foreign Banks in Dubai
Tax Rate
The new Emirate Law is set to replace the previous Regulation No. 2 of 1996 for the Collection of Tax on Branches of Foreign Banks Operating in the Emirate of Dubai. As per the new Emirate Law, taxes will continue to be imposed on all foreign banks operating through their various branches in the Emirate of Dubai. These banks are licensed by the Central Bank of the UAE (CBUAE). Foreign banks will remain subject to a 20% tax on their annual taxable income under the new Emirate Law. However, this taxation is applicable at the emirate level.
Emirate-Level Tax and Federal-Level Tax
In the United Arab Emirates (UAE), taxation operates at both the emirate level and federal level. At the emirate level, some of the Emirates have implemented certain taxes, such as the Dubai Municipality Fee and the Abu Dhabi Municipality Fee. These taxes are usually specific to a certain Emirate and thus vary in their rates and application. On the other hand, at the federal level, the UAE government has introduced taxes that apply uniformly across all Emirates. For instance, value-added tax and corporate tax. VAT currently stands at a standard rate of 5%, while corporate tax has a 9% rate.
Emirate-level taxes may differ between Emirates, but federal-level taxes like VAT ensure a consistent approach to taxation across the entire UAE. Thus, federal-level taxes contribute to the country’s fiscal framework and support its economic diversification efforts.
Tax Relief Under the New Law: Emirate-Level Tax vs. Federal-Level Tax
The previous law had no provision for an adjustment of federal corporate tax. However, with the introduction of the new Emirate Law, H.H., the Ruler of Dubai, provided much-awaited relief. The branches of foreign banks in Dubai will be able to deduct federal CT from the emirate-level tax. Thus, the deduction of federal-level tax from emirate-level tax will provide relief to the branches of foreign banks.
Avoidance of Double Taxation:
The deduction of corporate tax from the emirate-level tax will avoid the occurrence of double taxation on the same taxable income. However, the mechanism of deduction is not yet available. Therefore, we recommend keeping a close eye on the upcoming developments in this matter.
Penalties:
The new law has provisions for penalties in cases of delay or tax evasion. In cases of tax evasion, there is a penalty for twice the amount of evaded tax. However, if there is a delay in tax payment or penalty, the monthly penalty is 2% of the unpaid amount. Furthermore, the law limits the maximum penalty to AED 500,000 per administrative violation and a maximum of two penalties in the event of a repeated violation in two years.
Other Key Provisions
Some other key provisions introduced in the new law are described below.
Compliance requirements:
The taxpayer must file the tax return with the Director General of the Department of Finance (DG). The format, timelines, and deadlines will be available in due course. In the event of an incorrect tax return, a voluntary disclosure (VD) must be filed for rectification. Furthermore, a VD is necessary when filings follow a tax assessment. The branches must maintain records and documents for 7 years from the end of the relevant tax period.
Tax audits:
There are provisions in the law concerning procedures and timelines for tax audits. For instance, taxpayers can now file complaints against tax due and penalties levied with the Department of Finance. Furthermore, they can appeal against the decision of the higher committee of the Department of Finance before the competent court. As opposed to the Old Law, where the decision of the Director of H.H. the Ruler’s Court was final.
Conclusion:
The new legislation introduces crucial reforms aimed at streamlining taxation procedures and providing relief to branches of foreign banks. By maintaining a 20% tax rate on annual taxable income at the emirate level, the law ensures a consistent framework for taxation. Moreover, the provision allowing the deduction of federal corporate tax from the emirate-level tax offers a welcomed relief. This ultimately avoids the risk of double taxation and promotes a more conducive business environment. However, the deduction and compliance requirements mechanisms are not fully available yet. Therefore, stakeholders should remain vigilant for forthcoming developments. With detailed provisions on compliance, tax audits, and penalties, the law underscores the commitment of Dubai to fostering transparency, fairness, and efficiency in its taxation system. Thus bolstering investor confidence and supporting sustainable economic growth.
Creative Zone Tax & Accounting (CZTA):
Are you looking for expert guidance and support in navigating the landscape of taxation and accounting in the UAE? Look no further than Creative Zone Tax & Accounting (CZTA). Our team of seasoned professionals provides tailored solutions to meet your unique needs, ensuring compliance with the latest regulations. Having difficulty with the taxation of foreign banks in Dubai? CZTA is your trusted partner every step of the way.
Disclaimer:
The information provided might be outdated with time as there is continuous updating of the tax laws and regulations. Therefore, this blog cannot be a reference for tax planning or tax advice. Hence, we strongly advise you to consult a tax consultant or lawyer for all your tax matters.
