The United Arab Emirates (the "UAE") has recently introduced Dubai Law No. (1) of 2024 on 'the Tax of Foreign Banks Operating in the Emirate of Dubai' (the "Law").
The Law mandates a 20% tax on the annual taxable income of all foreign banks, including those located in special development zones and free zones. However, foreign banks registered in the Dubai International Financial Centre are exempt from the provisions of the Law. Nevertheless, if the respective foreign banks are currently fulfilling corporate tax obligations as per Federal Law No. (47) of 2022, that specific amount shall be subtracted from the annual 20%.
For example, let's consider a foreign bank with a taxable income of AED 1,000,000 currently subject to a 9% corporate tax. In this case, the bank would be required to pay the difference between the applicable tax rate under the Law and the corporate tax that has already been settled.
The legislation outlines penalties for violations, with a cap set for every violation at AED 500,000. Repeat offenses within a two-year period may result in the doubling of penalties, reaching a maximum of AED 1,000,000.
We see this as a significant step towards the UAE potentially adopting the OECD's BEPS 2 guidelines by 2025. This legislation enables the UAE to effectively address profit shifting and tax avoidance through a range of measures in alignment with global efforts led by the OECD and the G20 Inclusive Framework.
As foreign banks adapt to the changing tax model, careful consideration of compliance requirements under the new law and its interaction with corporate tax regulations will be crucial for sustained operations.
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