Home UAE Dubai Here’s what Dubai’s new 20% tax regime for foreign banks means The new tax regime clarifies that the headline 9 per cent corporate tax will be creditable against the emirate-level tax on foreign banks by Renan Ozturk March 25, 2024 Image courtesy: Deejpilot/ Getty Images The Department of Finance in Dubai released a new law announcing a 20 per cent tax on foreign banks operating in the emirate, except those operating and licensed in Dubai International Financial Centre (DIFC). The emphasis on the word new indicates that foreign banks operating in Dubai already paying a 20 per cent emirate-level tax on their profits in the city. Consequently, the new law should – in principle – not pose a significant change in the tax landscape and should be seen as an update to old pieces of legislation in light of the recently introduced federal corporate tax regime in the UAE. With both Sharjah and Dubai having now released updated laws on foreign banking taxation, Alvarez & Marsal expects an update from the remaining emirates, Abu Dhabi to be specific as the emirate has emerged as a key financial hub in the Middle East. What’s changed? One of the key highlights of the new law is that there is an opportunity for foreign banks to mitigate double taxation in light of the new federal corporate tax that came into effect in the UAE in 2023. The new tax regime clarifies that the headline 9 per cent corporate tax, will be creditable against the emirate-level tax on foreign banks – a question that many banks have been eager to get clarity on. Alvarez & Marsal said that given that this is at the finance department’s discretion, it’s great to see them foregoing tax revenues – paid to the UAE federal government – in the interest of staying business and banking-friendly and maintaining a competitive tax regime for banks across the Middle East. The Dubai credit mechanism currently looks to be a reduction in the 20 per cent emirate-level rate for the 9 per cent, creating an adjusted emirate-level rate of 11 per cent. This differs from the traditional tax cash credit mechanism usually followed to mitigate double taxation, and most importantly differs from Sharjah’s approach that adopted the tax cash credit mechanism in their respective laws. While on face – it may seem to give the same result – it has raised questions among the banks and tax advisors in the region on the impact this could have on historic deferred tax assets and liabilities which are currently being carried at 20 per cent on an emirate-level basis. However, it would potentially need to be restated at 11 per cent. The hope is that, whether this was the intention, or whether the traditional tax cash credit mechanism will be adopted in practice, will hopefully be clarified soon. If this is the intention of the law, analysts at Alvarez & Marsal expect to see transitional provisions to mitigate the significant adverse effect this could have on banks operating in Dubai. This includes a sudden loss of a large proportion of their deferred tax asset value, especially if we consider the challenging years most banks have had during the COVID-19 pandemic by having to report substantial losses during this period. Highlights of Dubai’s tax on foreign banks Meanwhile, other key updates to the law are with respect to a change in the calculation of taxable profits for foreign banks operating in Dubai. The law states it will continue to follow the old rules around some key areas such as unrealised gains and losses, profits not included in the income statement, headquarters and regional expenses, and joint expenses and joint revenues. However, it goes on to state that all other adjustments will follow the UAE federal corporate tax – and associated ministerial and Cabinet decisions). Hence, the tax bases will be more aligned than before the updated rules were released which is a welcomed alignment for the banks. That said, the subtle differences in tax rules do mean that foreign banks operating across multiple emirates will need to undertake multiple (different) calculations for each emirate and their respective federal corporate tax return, as it is clear the adjustments are not completely aligned between the tax laws based on the current operating environment – Sharjah vs Dubai vs UAE. The updated laws are expected to fully align the tax base across each emirate and with the federal tax base. Getting this right and dealing with the potential complexity of allocating any federal tax credit between branches located across the different emirates, as is a common operating model for foreign banks in the region, could prove challenging and maintain the higher administrative burden on foreign banks when compared to their local banking counterparts. Read: Sheikh Mohammed issues law imposing 20% tax on foreign banks in Dubai The author is senior director, Indirect Tax & Middle East FS Tax Leader at Alvarez & Marsal Tags Banking Corporate Tax DIFC Dubai tax UAE You might also like Middle East’s first net-positive mosque launched in Dubai ORO24’s Atif Rahman on elevating Dubai’s real estate game Why AIOKA is shifting into top gear for top-tier global campaigns Emirates Group posts record half-year profit on robust travel demand