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Dubai: Will customers pay more after 20% new tax on foreign banks?

While finance houses could revise their fees to manage profit margins, the competitive nature of the banking sector might limit their ability

Analysts hold differing opinions when assessing the impact of the recent announcement of a 20 per cent tax on foreign banks' income in Dubai. Some argue that foreign banks might increase fees in response to the tax, passing the additional cost to customers. On the other hand, there are suggestions that some banks may choose to absorb the tax burden themselves to remain competitive.

Experts said that a 20 per cent tax on foreign banks in Dubai aims to align the ‘old’ Emirate-level Corporate Tax regime with the newly introduced 9 per cent Federal Corporate Tax regime and provides the opportunity to mitigate double taxation.

The recently announced law applies to all foreign banks operating in the emirate, including free zones – except the Dubai International Financial Centre (DIFC).

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There were 61 licensed banks in the UAE, of which 22 were national banks, and 39 were foreign banks in the third quarter of 2023, according to the UAE Central Bank.

“Foreign banks operating in Dubai were already paying a 20 per cent Emirate-level tax on profits, so the new law does not represent a significant change in Dubai’s tax landscape of foreign banks and is more aimed at aligning the ‘old’ Dubai Emirate-level Corporate Tax regime with the newly introduced (9 per cent) Federal Corporate Tax regime, which was the main purpose of the Dubai government,” said Renan Ozturk, senior director for indirect tax and Middle East FS tax leader at Alvarez & Marsal Middle East.

“The new law provides the opportunity to mitigate double taxation in the face of the new Federal Corporate Tax (CT) regime as it clarifies that the headline 9 per cent Federal CT rate announced in 2022 and effective for periods beginning on or after June 1, 2023, will be creditable against the Dubai Emirate-level tax, which is a question that many banks have been eager to understand,” he said.

The law will apply to periods beginning after its official release on March 8, 2024, so it gives affected businesses clear guidance for future tax periods. However, it potentially leaves tax periods between June 1, 2023, and March 7, 2024, open to double taxation under the Emirate level and the Federal CT regime. “Hopefully more detail will be received on this in the coming months,” said Ozturk.

With each emirate able to come up with its own rules in this regard, he said it should come as a relief to foreign banks operating in Dubai that the two regimes are not expected to diverge significantly.

Fees, charges to increase

Vikas Lakhwani, chief revenue officer, CPT Markets, said there is a high likelihood that overseas financial institutions will increase their service fees or interest rates to offset the tax. “Nevertheless, the magnitude of the hike will be contingent upon the level of competition posed by domestic banks and their profit margins,” he said.

Lakhwani added that the customers may experience indirect impacts, including increased service charges and interest rates and a narrower selection of products and services, as they may prioritise profitability over variety.

Absorbing cost

Joseph Dahrieh, managing principal at Tickmill, said banks often take the necessary steps to manage such costs to maintain competitive pricing in a market as dynamic as Dubai.

“While banks could potentially revise their fees to manage profit margins, the competitive nature of the banking sector here might limit their ability. The decision to adjust pricing will be influenced by each bank’s operational efficiency, market strategy, and the need to remain competitive while managing tax liabilities,” added Dahrieh.

He said the competitive banking environment in Dubai plays a significant role in encouraging reasonable fee structure, and foreign banks may choose to absorb some of the tax costs rather than increase prices for their customers.

“This would help them retain customers and remain attractive compared to local banks. Banks are likely to carefully consider their competitive position and customer relationships before making any pricing adjustments,” he added.

Profitability to stay strong

Joseph Dahrieh expects that most foreign banks will continue experiencing strong profitability due to the robust macroeconomic environment in Dubai, alongside the benefits of high-interest rates that typically enhance banks’ profit margins.

“Moreover, the dynamic business and trading activities within Dubai are expected to sustain non-interest income, further cushioning the effect of the tax on banks' earnings.”

Vikas Lakhwani added that foreign banks with higher margins will be better equipped to handle the tax, and banks that operate with greater efficiency may experience less impact.

“Customers may opt for local banks if foreign banks substantially increase their costs,” he said.

Compared to other prominent financial hubs, he added that a 20 per cent tax may not deter foreign banks from operating, especially as the city provides additional advantages such as robust infrastructure or a favourable business environment.

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