Dubai’s New Tax Regulation for the Banking Sector

The emirate of Dubai will require foreign banks operating in its jurisdiction to pay a 20 percent annual tax. We discuss implications and exemptions in this article.

By Abhishek Dey

The Dubai government has unveiled a new legislation requiring foreign banks operating within the emirate to pay a 20 percent annual tax. His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates (UAE), made the announcement, stating that the law is set to take effect for tax periods starting from March 8, 2024.

The new legislation is applicable to all foreign banks operating in Dubai, including special development zones and free zones. However, foreign banks licensed to operate in the Dubai International Financial Center (DIFC) are excluded from its provisions for the income they earn from conducting their business within or through the DIFC center.

The new law provides for an annual tax rate of 20 percent to be imposed on foreign banks on their taxable income. Additionally, it outlines rules for calculating taxable income and filing the tax return. It also details the procedures for tax return submission, voluntary disclosures, penalties, and the responsibilities and processes related to tax auditing.

Foreign banks operating in Dubai will not face an additional tax on top of the UAE’s nationwide corporate tax introduced last year. Instead, the tax imposed on foreign banks in Dubai will be subtracted from the corporate tax they pay under Federal Law No. (47) of 2022. This law mandates a 9 percent tax on taxable profits above AED 375,000 (US$100,000) for corporations and businesses.

The rule states that actions considered to violate this law shall be decided upon by the Chairman of the Executive Council of Dubai, and infractions would result in fines. Penalties should not be in excess of AED 500,000 (US$136,187) in total. If the infraction is repeated within two years, the fine will be doubled, up to a maximum of AED one million (US$272,479).

Given that Dubai is home to more than a dozen foreign banks, the implementation of the new tax is significant.  While the law will not impact major international banks like JP Morgan and Deutsche Bank that are housed in the DIFC and are not subject to the tax, other international banks like HSBC and smaller regional ones like Banque Misr and Arab Bank will have to pay the tax.

The tax could be part of the UAE’s broader efforts to enhance compliance with pre-existing financial regulations. These efforts have been intensified following the country’s inclusion in the Financial Action Task Force’s (FATF) “grey list” in 2022; the country is now removed from the list published in February 2024. In response to the FATF scrutiny, the UAE has increased oversight over financial institutions and issued new guidelines to identify suspicious activities. The introduction of the tax on foreign banks adds another level of government supervision to Dubai’s financial sector.

The UAE government has taken other key reforms against money laundering and terror financing:

• In 2018, the UAE enacted Federal Decree Law No. 20 of 2018, commonly referred to as the AML Law, aimed at improving the effectiveness of the UAE’s legal and institutional frameworks in combating money laundering, financing of terrorism, and illegal organizations. The law had a wide-ranging scope, covering activities conducted within or outside the UAE’s jurisdiction. It also established an independent Financial Information Unit (FIU) tasked with coordinating the reporting of suspicious activities and transactions within the UAE and with similar units globally.
• In 2021, the UAE cabinet approved the establishment of the Executive Office of the Anti-Money Laundering and Countering the Financing of Terrorism, for the purpose of overseeing the oversee implementation of the UAE’s National AML/CFT Strategy and National Action Plan.
• Specialized courts have been established in the emirates of Dubai, Abu Dhabi Ajman, Fujairah, Sharjah, and Umm Al Quwain to hear cases related to money laundering and other financial crimes.
• Reinforcement of pre-existing rules against money laundering, breach of trust, bribery, and fraud with the promulgation of Federal Law No. 31 from January 2, 2022.
• Extensive guidelines from 2021-2022 on best practices regarding anti-money laundering/combating financing of terror, released by the financial services regulators for financial institution, designated non-financial businesses and professions, and virtual asset service providers.

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