March 25th, 2024 Legal Updates

Taxation of Foreign Banks in Dubai: A Continuation of the Status Quo

The core of this update is the clarification provided by the Dubai government regarding the taxation of banking profits. This new decree does not introduce a new tax. On the contrary, the critical takeaway is that this simply reinforces the pre-existing framework established by Dubai Law No. 2 of 1996, whereby foreign banks had already been taxed 20%. The key issue was that there were some uncertainties and doubts surrounding whether foreign banks in Dubai would have had to pay an additional 9% corporate income tax on their profits. Therefore, the Dubai government responded by issuing this law to maintain the existing tax regime rather than as a change to the status quo.

Federal Law No. (47) of 2022 (the Corporate Tax Law) had introduced a 9% corporate income tax – a significant development in the UAE’s federal tax policy. The law applies to corporations and businesses with taxable profits exceeding AED 375,000, with certain exemptions.

For foreign banks, a significant concern has been the potential impact of the newly introduced corporate income tax (CIT) set at a rate of 9%. It is crucial to note that this concern is unfounded. Historically, foreign banks have been subject to a 20% tax rate on profits. The introduction of the 9% CIT at the federal level does not alter this tax burden or increase it. On the contrary, the decree specifies that the 9% CIT paid to the federal government will be credited against the banks’ overall tax liability. Therefore, if a bank’s total tax obligation remains at 20% of gross profits, the 9% paid in CIT will be deducted from this amount. The additional tax payable to the Dubai government will consequently be 11%, ensuring that the total effective tax rate on foreign banks remains unchanged at 20%.

This clarification serves two essential purposes. Firstly, it reassures foreign banks that their tax obligations will not increase because of the introduction of the federal CIT. Secondly, it demonstrates Dubai’s strong commitment to maintaining a stable and competitive banking sector, providing a clear and predictable tax regime that is essential for the long-term planning and operational stability of these international financial institutions.

In conclusion, the legislative update on Dubai’s banking tax law provides essential guidance regarding the taxation of foreign banks’ profits, which explains how the tax regime continues to apply the same tax on foreign banks as it always had done. Therefore, the Government of Dubai is ensuring that the overall tax burden on foreign banks will not exceed the longstanding rate of 20%, thereby upholding Dubai’s attractiveness as a global financial hub and reinforcing its commitment to a transparent and efficient regulatory environment.

Authors: Partner, Yousef Al Amly and Associate, Mohammad Ismail.

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