New Dubai tax law introduces tax credit for foreign banks operating in Dubai
In recent years, the tax landscape of the United Arab Emirates (UAE) has witnesses substantial changes, with the introduction of several federal taxes, including Excise Tax (2017), Value Added Tax (2018), and Corporate Income Tax (2023). There’s a widespread misconception that, prior to its recent tax reforms, the UAE provided a completely tax-free environment for businesses. While it is accurate that the UAE historically did not impose corporate or personal income taxes on most businesses and individuals at the federal level, the country’s unique federal structure permits each of the seven Emirates to establish their own tax policies. This autonomy has resulted in the issuance of various tax decrees at the Emirate level, imposing corporate taxes on companies operating in the oil and gas sector1 and branches of foreign banks2 operating in the mainland3.
Foreign banks operating in the UAE through branches are required to pay corporate income tax on their profits generated within the country. This tax is levied at the Emirate level, and historically, the rate has been set at 20% in several Emirates, including Dubai and Abu Dhabi.
The Corporate Income Tax (CIT) Law4 incorporates exemptions for both extractive and non-extractive businesses, essentially covering companies engaged in the extraction or distribution of natural resources, like oil and gas, to prevent double taxation at both the federal and Emirates levels. However, the CIT law does not extend a similar exemption to branches of foreign banks. This lack of exemption led to the assumption that branches of foreign banks would be subject to double taxation, facing tax liabilities under both the newly introduced federal CIT and the pre-existing corporate income tax imposed at the Emirates level.
New Dubai tax decree for foreign banks
On 7 March 2024, Dubai Law No. (1) of 2024 on taxation on foreign banks operating within the Emirate of Dubai (New Law) was issued by His Highness Sheikh Mohammed bin Rashid Al Maktoum, in his capacity as the Ruler of Dubai. Under the New Law, foreign banks operating in Dubai will be subject to 20% tax on their annual taxable income. The New Law repeals Dubai Regulation No. (2) of 1996 which previously introduced a 20% tax on foreign banks.
The New Law applies to all foreign banks operating within the emirate of Dubai, including its special development zones and free zones, except those licensed under the Dubai International Financial Centre (DIFC).
Most notably, the New Law will allow foreign banks to credit tax paid under the federal CIT regime from this 20% Emirates based tax. The ability to credit the tax paid under the federal CIT regime against Emirates-based tax liabilities will help foreign banks operating in Dubai to avoid (or reduce) double taxation.
It is worth noting that Sharjah has enacted a similar law, which also provides for a tax credit to offset federal CIT paid against Emirates based tax liabilities5.
Effective date
The New Law was published in the official gazette on 8 March 2024 and will apply to tax periods beginning after 8 March 2024. This would entail that foreign banks with a financial year ending on 31 December may not be eligible to credit CIT paid for financial year 2024, which is the first tax period under the federal CIT regime for many businesses.
Conclusion
The introduction of Dubai’s new tax law, which allows foreign banks to offset federal CIT against Emirates-based tax liabilities, represents a positive development for banking and financial institutions in Dubai. The New Law is designed to avoid double taxation for foreign banks under new federal CIT regime and the pre-existing tax frameworks at the Emirates level.
It is important to note that the law will take effect for tax periods beginning after 8 March 2024. This timing suggests that foreign banks with financial years ending on 31 December 2024 might not be eligible to utilize this tax credit for that financial year.
1See for example the Abu Dhabi Income Tax Decree No. (1) of 1965, the Sharjah Income Tax Decree No. (1) of 1968, and the Dubai Decree No. (1) of 1969 on the Issuance of the Income Tax.
2See for example the Dubai Regulation No. (2) of 1996 on the Collection of the Tax from the Branches of the Foreign Banks in the Emirate of Dubai, and the Fujairah Emiri Decree No. (1) of 1998 on the Issuance of the Regulation of the Collection of Taxes from the Branches of Foreign Banks in the Emirate of Fujairah.
3 Foreign banks licensed in the Dubai International Financial Centre (DIFC) were exempt from the tax.
4 Federal Corporate Income Tax under Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses.
5Sharjah Decree-Law No. (2) of 2023 Regarding the Tax on Foreign Banks Operating in the Emirate of Sharjah.
