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Guide: Tax Law for Foreign Banks in Dubai

On March 7th, Law No. (1) of 2024 was accented by the ruler of Dubai, His Highness Sheikh Mohammed bin Rashid Al Maktoum which focuses on the taxation system for foreign banks in Dubai, was issued, marking an important legal milestone. The latest law was declared to be effective after publication in the state gazette. It is planned to regulate tax periods beginning after March 8, 2024, and will supersede Regulation No. (2) of 1996 and any conflicting laws. 

Principles Governing Taxation On Foreign Banks:-

The Law establishes key principles that govern various aspects of taxation for foreign banks, including taxable income computation, tax filing procedures, payment protocols, audit processes, voluntary disclosure mechanisms, and the associated responsibilities and procedures for tax audits. 

  • Wide Applicability and Exclusion: All foreign banks functioning in Dubai including special development zones and free zones.Exception/exemption and special exclusion is granted to those banks who hold DIFC licenses to do business activities in the Dubai International Financial Centre . 
  • Tax Rate and Credit Provisions: The foreign banks will have to pay a 20% tax on their annual taxable income. Furthermore, credit provisions are provided, allowing for the offset of corporate tax (CT) payments made in line with Federal Law No. (47) of 2022 on the Taxation of Corporations and Businesses and its later revisions, as applicable.

How To Determine Taxable Income Of Foreign Banks in Dubai?

Diverse Factors Considered Taxable income is determined using a complex approach that takes into account several elements defined by the Dubai Department of Finance (DOF), such as legislation governing exempt income, unrealized profits or losses, headquarters expenses, and regional expenses, among others. Furthermore, the requirements of the Corporate Tax (CT) statute and its associated rulings apply to topics not covered by the Dubai Department of Finance (DOF) regulations governing taxable income computation.

What Are The Timelines For Tax Declaration and Essential Documentation? 

The Dubai Department of Finance (DOF) establishes tax declaration schedules and mandates particular papers for submission, including the prescribed tax return, financial statements with necessary disclosures, evidence of tax liabilities, and any taxes paid in accordance with Corporate Tax (CT) law. Audited financial statements are necessary, and any incomplete submissions will be rejected.

What Are The Voluntary Tax Disclosure Procedures And Deadlines? 

Taxpayers have a 30-day opportunity to voluntarily Dubai Department of Finance (DOF) notify any overpaid or underpaid taxes once they become aware of the disparity, with the defining the necessary forms and procedures.

Tax Audit Procedures: Responsibilities and Notice Period:-

The law specifies the obligations and processes that govern tax audits, ensuring that taxpayers are given at least 5 days’ notice before the audit begins. The results of the tax audit must be reported to the Dubai Department of Finance (DOF) within 10 days. After which the Dubai Department of Finance (DOF) has 10 days to issue the final assessment and notify taxpayers of any anomalies in tax dues.

Conditions for Filing Objections:- 

Taxpayers have the opportunity to file objections within 20 days of obtaining the tax audit results, provided they meet the required paperwork and circumstances.

Extensions, Limitation Expiration, Durations:

The time limitation/expiration is 5 years for audit purposes as per law but in the case of tax evasion/ fraud, the limitation may be extended to fifteen years from the conclusion of the financial year in which the matter arises.

What Are The Fines and Penalties Under Taxation Scheme On Dubai Foreign Banks?

The following fines and penalties may be imposed in case of any violation as stated below:-

  • Taxpayers will face fines equal to twice the amount of tax avoided.
  • Tax evasion includes submitting incorrect tax returns or missing voluntary declaration deadlines.
  • Avoiding payment of taxes uncovered during tax audits.
  • Manipulating the taxable income values.
  • Tampering with accounting records or presenting false financial data.
  • Misusing or destroying DOF-issued documentation.
  • Concealing information is required to be retained and delivered.
  • Creating obstacles for auditors during tax audits.
  • Engaging in any other activity that supports tax evasion.
  • Late payment of taxes or penalties will result in a monthly penalty of 2% of the amount owed.
  • Total fines issued should not exceed AED 0.5 million, with penalties doubling for successive offenses within two years and limited at AED 1 million.
  • Third-party involvement in these activities will result in separate sanctions.The Chairman of Dubai’s Executive Council will make decisions on infractions of this law and the accompanying sanctions.

Read More: What expenses are deductible under UAE corporate tax?

Additional Provisions Of Taxation Law For Foreign Banks In Dubai:

The following provisions are also part of latest taxation law regarding foreign banks in Dubai

  • Overseeing Implementation:-

    The General Director of the  Dubai Department of Finance (DOF) will oversee the execution of this Law’s provisions, making the required judgements.

  • CT law regulations’ applicability:- The regulations established in the Corporate Tax (CT) law and its associated regulations, which include rules, conditions, procedures, controls, and timetables relating to the tax period, as well as other relevant matters not addressed in this Law, will remain in effect.
  • Records Retention:- Taxpayers have seven years to preserve all documents and records.
  • Applicability Of Transitional regulations Regulation No. (2) of 1996:- previous guidelines and practices shall be followed for tax periods that started prior to the passage of this law’s provisions.
  • Further Determination:- The DOF’s General Director will determine any extra transitional rules.

International banks doing business in Dubai need to evaluate this law’s potential effects. The current Emirate-level tax on foreign banks is replaced by the Law. Foreign banks in Dubai may enjoy certain benefits for instance there will be no double taxation, and the tax paid under Corporate Tax Law UAE may be adjusted against other taxation liabilities. It’s critical for banks, guided by a tax consultant in Dubai, It would be necessary to take into account how the adjustment would affect any deferred tax amounts resulting from the previous Emirate-level tax.  It is important to note that the law’s literal interpretation indicates that tax periods starting after March 8, 2024, will be impacted. For banks with a December year-end, this means that the first tax period will run from January 1 to December 31, 2025, and there won’t be any tax credits available for any taxes paid in 2024. It is still unclear if this is the actual objective; more information on this subject is needed. It is anticipated that the Dubai Department of Finance (DOF) will provide more details regarding particular provisions of this Law. Given that Dubai has put this into effect, other Emirates might decide to do the same. A similar law has previously been introduced in Sharjah.

Shayan Khan is an experienced Corporate Tax Consultant with over 4 years of expertise. He's skilled in negotiating and investigating taxes with government bodies like the Federal Tax Authority. Shayan excels in reviewing and drafting tax documents and offers strategic advice on complex tax matters. Clients trust his guidance in navigating tax procedures and minimizing liabilities. Read more