Dubai Sets New Financial Regulations Amidst Taxation on Foreign Banks

Finance institutions may adjust their fees to manage profit margins, but the competitive banking sector in Dubai could constrain their flexibility.

Perspectives on the implications of a 20% tax on foreign banks' income in Dubai vary among analysts. While some anticipate that foreign banks might raise fees to offset the tax, passing the additional cost to customers, others suggest that certain banks may opt to absorb the tax themselves to remain competitive.

To avoid double taxation and bring the corporate tax regime at the Emirate level in line with the recently established federal corporate tax code, Dubai has instituted a 20% levy on international banks. With the exception of the Dubai International Financial Centre (DIFC), this tax is applicable to all international banks doing business in the emirate.

According to Renan Ozturk, a tax expert at Alvarez & Marsal Middle East, the new law serves primarily to harmonize the tax landscape and mitigate double taxation. It clarifies that the Federal Corporate Tax rate will be creditable against the Dubai Emirate-level tax, offering relief to affected businesses. The law applies to tax periods beginning after its release, providing clarity for future tax periods.

Vikas Lakhwani, Chief Revenue Officer at CPT Markets, anticipates that foreign financial institutions may raise service fees or interest rates to offset the tax burden. However, the extent of the increase will depend on the competition from domestic banks and their profit margins. Customers could indirectly experience higher service charges, interest rates, and a narrower range of products and services.

Joseph Dahrieh, Managing Principal at Tickmill, suggests that banks may absorb some of the tax costs to maintain competitiveness. The competitive banking environment in Dubai incentivizes reasonable fee structures, with foreign banks potentially choosing to absorb costs rather than pass them on to customers. Despite the tax, foreign banks are expected to maintain strong profitability due to Dubai's robust macroeconomic environment and dynamic business activities.

While the tax may lead to adjustments in fees and charges, it may not deter foreign banks from operating in Dubai, given the city's advantageous business environment and infrastructure.

Read also: Urgent.. The UAE announces 87 nationalities that can enter the country without a visa

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