Oman's taxation framework accounts for diverse corporate structures

A range of tax regulations exists in Oman and varies according to organisational type and provenance.

Corporate Structure

Foreign companies and individual investors may establish operations in one of the following forms: Limited liability company (LLC): Foreign companies and individuals are generally required to have an Omani partner with a minimum 30% shareholding in order to form an LLC. Minimum share capital of OR150,000 ($388,000) is required to register an LLC with foreign participation. GCC companies that are 100% owned by GCC nationals may establish an LLC without a local partner for approved activities.

An LLC is required to have at least two shareholders. Pursuant to a free trade agreement (FTA) concluded between the US and Oman, US companies may form a subsidiary in Oman without a local partner, provided that all ultimate shareholders of the US entity are also US persons. The minimum share capital for LLCs with local or GCC ownership, or for those qualifying under the US FTA is OR20,000 ($51,800). Joint stock company: Joint stock companies that do not offer their shares for public subscription are known as limited joint stock companies (SAOC). The minimum share capital required for an SAOC is OR500,000 ($1.3m). Alternatively, joint stock companies that offer their shares to the public are called general joint stock companies (SAOG). The minimum share capital required for an SAOG is OR2m ($5.2m). Both forms of joint stock companies are required to have at least three shareholders. The 30% local Omani shareholding requirement must also be observed in establishing a joint stock company. Ownership of stock in SAOGs is through the Muscat Securities Market (MSM) and regulated by the Capital Market Authority. The Central Bank of Oman (CBO) governs foreign investment Branch: A foreign company may register a branch in Oman only to execute a contract with the government or a quasi-governmental body. The branch registration is limited to the duration of the underlying contract. Special dispensation may be given to allow a foreign company to register a branch without a government or semi-governmental contract if the activity to be undertaken by that company is deemed by the Council of Ministers to be of national importance. Commercial agency: Foreign companies without commercial registration in Oman may do business through commercial agents. Agency agreements for this arrangement are formally registered with the Ministry of Commerce and Industry (MoCI) under the Commercial Agency Law. Commercial representative office: A foreign firm may open a commercial representative office in Oman solely for the purpose of marketing and promotion of its products or services. A representative office is not allowed to sell products or services or to engage in other forms of commercial activity. However, it may sponsor and hire employees.

Income Tax Law

The income tax law was promulgated by Royal Decree No. 28/2009 and came into effect on January 1, 2010. It replaces earlier income tax laws promulgated by Royal Decrees No. 47/1981 and No. 77/1989. In January 2012 the Ministry of Finance (MoF) issued executive regulations to accompany the law. These regulations apply to tax years commencing on or after January 1, 2012.

Tax Rates

The rate of tax is uniform for all types of business entities in the country, regardless of how they are configured and whether they are owned by Omani nationals, other GCC nationals, or non-GCC nationals. The income tax law seeks to tax the worldwide income of entities that are formed in Oman and the Oman-source income of branches and other forms of permanent establishments. The income tax rate is such that taxable income for the first OR30,000 ($77,700) earned is 0%, and income above the OR30,000 ($77,700) threshold is then taxable at a flat rate of 12%.

Petroleum Income Tax Rate

The tax rate for taxpayers engaged in petroleum exploration is 55% of the taxable income derived from the sale of petroleum. This rate is applied to income determined under the Exploration and Production Sharing Agreement concluded between the exploration company and the government. Under these agreements, the government effectively pays the exploration company’s tax through amounts withheld from the government’s share of production.

Taxpayers

The law defines the term “taxpayer” as an establishment, an Omani company or a permanent establishment. An establishment is a proprietorship registered with the MoCI, which independently carries out commercial, industrial or professional activities in Oman.

The term “company” includes all commercial, civil and legal companies, regardless of the nationality of the owners, the purpose of incorporation, or the nature of activities. The term “permanent establishment” refers to a fixed place of business in Oman where a foreign person, either directly or through a dependent agent, wholly or partly carries out business. The definition of a permanent establishment includes especially:

• A place of sale, place of management, branch, office, factory or workshop;
• A mine, quarry or other place of extraction of natural resources; and
• A building site, a construction place or an assembly project. Additionally, a foreign person who provides “consultancy or other services” for a period or periods totalling 90 days or more in any 12-month period will create a permanent establishment, regardless of whether the services are rendered through a fixed place of business.

The law, however, excludes a fixed place of business from creating a permanent establishment if it is used solely for:

• Storage or display or delivery of goods or merchandise belonging to the foreign person;
• Maintenance of a stock of goods belonging to the foreign person for the purpose of storage, display or delivery, or processing by another person;
• Purchase of goods, merchandise, or collection of information for the business; and
• A combination of any of the activities mentioned above, provided that the overall activity of the fixed place of business resulting from the combination is of a preparatory or auxiliary character.

Taxable Income

The law defines income as income of any type, in particular:

• Profit from any business;
• Consideration for carrying out research and development;
• Consideration for the use of or right to use computer software;
• Rent for the use of real estate, machinery or other moveable or immoveable property;
• Profit resulting from granting any person a usufruct or right to estate, machinery or any other moveable or immoveable property;
• Dividends, interest, discounts received; and
• Royalties or management fees. This means that an Omani company is liable to tax on its worldwide income, although it is entitled to claim appropriate credit for taxes paid to foreign jurisdictions on income that is also taxed in Oman. The law defines taxable income as income accrued after deducting any expenses and allowing for any deductions, offsets or exemptions.

Moreover, in determining taxable income for a given year, actual expenses incurred wholly and exclusively for generating gross income are allowed for tax purposes.

Deductible Expenses

Expenses are treated as deductible only if they are actually incurred, relate to the business of the taxpayer, are necessary for the production of gross income, and are supported by documentary evidence.

The law has specifically allowed for the following expenses:

• Expenditures incurred before the commencement of business or registration (subject to limitation);
• Amounts paid to fulfil the dues of employees in accordance with the labour law;
• Social insurance contributions paid to the Public Authority for Social Insurance;
• Approved pension fund contributions;
• Bad debts written off;
• Incidental costs incurred in the acquisition or disposal of tangible or intangible assets;
• Depreciation of capital assets;
• Sponsorship fees (for branches and other permanent establishments), where the maximum deduction allowed is 5% of taxable income, calculated before deducting the sponsorship fees and after deducting carried forward losses;
• Donations paid to approved organisations ( limited to 5% of gross income); and
• Audit fees. Additional deductions are allowed for the banking and insurance sectors. Banks are entitled to deduct provisions for loan losses on the basis of recommendations by the CBO.

Insurance companies can deduct provisions for unexpired risks and unsettled claims, as well as sums paid to the insurance emergency fund.

The executive regulations specify rules for deduction of the following expenses:

• Remuneration paid to the chairman and board of directors of a joint stock company;
• Salaries and similar remuneration paid to a proprietor or to a shareholder of an Omani company;
• Rent paid to a proprietor for the use of real property owned by him or her;
• Head office charges of a permanent establishment;
• Bad debts written off; and
• Sponsorship fees paid by a branch of a foreign company. The following expenses are not deductible under Oman’s tax legislation:
• Any capital expenditure unless specifically allowed by the income tax law;
• Any expense incurred if considered not commensurate to services rendered/consideration given;
• Income tax paid or payable in Oman (however, a tax credit may be available for foreign tax paid);
• Any loss where the cost was recovered or compensated (e.g., under an insurance policy);
• Loss from disposal of securities on the MSM; and
• Expenses incurred in earning tax-exempt income.

Tax Exemptions

The following sources of income are exempted from tax:

• Dividends received by a taxpayer from shares, allotments or shareholdings in the capital of any Omani company; and
• Profits or gains from the disposal of securities listed on the MSM. Additionally, a number of income-generating activities may be exempted from tax, including:
• Income accruing to any establishment owned by an Omani individual or Omani company from carrying on activity in the field of shipping;
• Income from air transport or shipping by non-Omani carriers provided there is a reciprocal treatment in the juristic person’s home country for the same activity; and
• Income from the following activities in accordance with specific laws relating to each activity is exempt for a period of five years and may be extended for a further five years.

Exemptions and extensions are not automatic and will be granted only after specified procedures are followed and approval granted. In accordance with the existing tax regulations, exemptions for these activities are available only to Omani companies and do not apply to “project” work in the following areas:

• Industry;
• Mining;
• Fishing, fish processing, farming and breeding;
• Promotion of tourism including the operation of hotels and tourist villages;
• Farming and processing of farm products including animal and agriculture products;
• Export of locally manufactured products or processed products;
• University, college or higher institutes, private schools, nurseries or training colleges; and
• Medical care by establishing a private hospital.

Carryover Of Tax Losses

Tax losses may be carried forward by a taxpayer for a maximum of five years and offset against future taxable income, however they may not be carried back. Net aggregate losses incurred during any tax-exempt period may be carried forward indefinitely for set off against future profits. Losses incurred by a permanent establishment of a foreign company may also be carried forward, but these must be aggregated against income from any other permanent establishments owned by the same foreign company in order to qualify.

Tax Depreciation

Depreciation on capital expenditures is divided into two main categories. The first of these is the depreciation for buildings, ships, aircraft and intangible assets, which is calculated under a straight line method. The rates are as follows:

• Buildings constructed with specific material: 4%;
• Quays, jetties, pipelines, roads and railways: 10%;
• Temporary or prefabricated buildings: 15%;
• Ships or aircraft used for business: 15%; and
• Buildings used for hospitals or educational institutions (the taxpayer can choose to depreciate like any other buildings above): 100%. The above rates may be doubled if buildings are used for industrial purposes, excluding buildings used for storage, offices, or accommodation for workers or commercial purposes.

Depreciation of intangible assets acquired and used in the business shall be calculated by dividing capital expenditure by the useful life of the asset as estimated by the secretary general.

Depreciation of any other asset class is determined on a declining balance or written down value method. A “pooling” concept also applies, where assets subject to the same rate of depreciation are pooled together in calculating the depreciation expense.

Withholding Tax

A 10% withholding tax at source applies to the following categories of income paid to foreign persons, provided the income is not attributed to a permanent establishment of the foreign person in Oman:

• Royalties;
• Management fees;
• Consideration for research and development; and
• Consideration for the use of or right to use computer software. Companies and establishments that make such payments are required to deduct 10% of the invoice amount and remit it to the tax authorities within 14 days from the end of the month following the month in which the payment is made or credited to the account of the foreign person.

The term “royalty” includes consideration for the use of intellectual property, including computer software, cinematographic films, tapes, discs or other media, patents, trademarks, drawings, etc. The term also includes consideration for the use of industrial, commercial, or scientific equipment; consideration for information concerning industrial, commercial, or scientific experience; and consideration for granting rights to exploit mining or other natural resources. Oman does not impose withholding tax on payments of dividends or interest to foreign persons.

Tax Administration

The tax year is the calendar year, unless permission is granted to use another year.

However, a taxpayer’s initial year may be less than 12 months, or more than 12 months – up to a maximum of 18 months.

Tax Returns

A provisional return of income must be submitted in the prescribed form within three months from the end of the tax year. Any tax estimated to be due is remitted with this return.

An annual return of income must be submitted in the prescribed format within six months from the end of the tax year. Any unpaid balance of tax is due along with the annual return. Failure to pay taxes by the required date attracts interest at the rate of 1% per month until the tax owed is paid.

Tax return forms require detailed information to be provided by the taxpayer at the time of filing returns. Taxpayers are required to provide information on remuneration of chairmen and members of the board of directors, profits or losses from disposal of securities listed in the MSM, income earned but not recorded in the accounts, profits or losses derived from disposal of fixed assets, unrealised losses recorded, and others.

In the case of companies having a paid-up capital in excess of OR20,000 ($51,800), the annual return of income should be accompanied by audited financial statements that are signed by an auditor licensed in Oman.

The law requires accounts to be drawn up in accordance with International Financial Reporting Standards consistently applied. It specifically provides for accrual accounting unless prior permission of the Secretary General of Tax (Secretary General) has been obtained. The accounts must be submitted in local currency unless prior approval of the Secretary General has been granted to submit them in another currency.

Delay or failure in submitting the provisional or annual returns may attract a penalty of not less than OR100 ($259) and not more than OR1000 ($2590). Failure to file the provisional or annual returns of income may result in an estimated profit assessment by the Secretary General.

Failure to submit audited financial statements as required under the law is deemed to result in an incomplete annual return of income and may attract an estimated profit assessment.

However, establishments or companies satisfying the following requirements may be exempted from filing tax returns for any accounting period related to a tax year:

• The capital of the establishment or company at the end of the accounting period as recorded in the commercial register should not exceed OR20,000 ($51,800);
• The gross income realised by the establishment or company during such accounting period should not exceed OR100,000 ($259,000);
• The number of employees during the relevant accounting period should not be more than eight persons; and
• The conditions above must be satisfied during that period and during the two accounting periods ended upon the expiry of the two tax years prior to that period.

The Secretary General may exclude companies and establishments that have not been exempted from submitting returns as set out according to the above conditions from submitting audited accounts prepared for any accounting period related to a tax year provided that the following conditions are satisfied:

• The capital of the establishment or company at the end of the accounting period as recorded in the commercial register should not exceed OR50,000 ($129,000);
• The gross income realised by the establishment or company during such accounting period should not exceed OR300,000 ($777,000); and
• The number of employees during the relevant accounting period should not be more than 10 persons.

Assessments

All annual returns of income are subject to assessment by Oman’s tax authority. The statutory deadline for assessment of a particular tax year is five years from the end of the tax year during which the return for that tax year is submitted. In cases of fraud or deception, the time limit for assessment is extended to 10 years. Similarly, if no return is submitted, the time limit for making the assessment is 10 years from the end of the year for which the return is due. A taxpayer has the right to object to any assessment that is issued by the Secretary General. The objection document must be prepared in writing and filed with the office of the Secretary General within 45 calendar days from the date of assessment.

The Secretary General is then required to decide the objection within five months (and extendable by a further five months at the Secretary General’s discretion) from the date of receiving the objection. The tax demanded may be kept in abeyance upon request while the objection is pending. No additional tax is payable until the Secretary General issues a decision.

The taxpayer has the right to file a petition against the judgment of the Secretary General with the Tax Committee at the MoF within 45 days of the date of judgment. The petition should be in Arabic. However, before filing the petition, the taxpayer must pay the tax demanded or include a request to be granted dispensation from paying the additional tax demanded in the judgment.

The Tax Committee may, when the taxpayer furnishes a bank guarantee, grant such dispensation. In practice, the Tax Committee takes one to two years to issue its judgment. The taxpayer has the right to appeal against the judgment given by the Tax Committee within 45 days of the date of the judgment date. The appeal is to be filed with the Court of First Instance.

The appeal should be in Arabic, and the taxpayer must be represented by an authorised lawyer. Before filing the appeal, the taxpayer must pay a fee to the Secretariat of the Court. The final judicial authority is the Supreme Court, and the petition can be filed with this court upon receiving decisions from the Court of First Instance. All proceedings in the above courts are in Arabic.

Maintenance Of Records

The law requires accounting records and supporting documentation to be maintained for 10 years after the end of the accounting period to which records relate.

Related Parties & Transfer Pricing

The law does not provide detailed transfer pricing regulations or guidance on acceptable methods for determining an arm’s length price. The law provides that where related persons enter into transactions that result in a lower taxable income or higher taxable loss than would have been the case had the transactions occurred between unrelated persons, the terms of such transactions shall be ignored in computing the taxable income and the tax authority may adjust the terms.

Thin Capitalisation

If in the case of related-party debt the debt-to-equity ratio exceeds 2:1, interest on the excess debt is not deductible for tax purposes. This rule does not apply to banks and insurance companies, permanent establishments of foreign companies, or proprietary ( Omani-owned) establishments.

Double Taxation

Oman has in force or awaits ratification of double taxation agreements with more than 30 countries, including Canada, China, France, India, Italy, Singapore and the UK. There is no clearly defined procedure for applying double taxation agreements. A taxpayer seeking to apply an agreement must approach the Omani authorities for advance permission. The authorities may request a residency certificate for the foreign person, copies of underlying agreements and other documentation before deciding on the request.

US-Oman FTA

The US-Oman FTA came into force on January 1, 2009. Under the agreement, US investors and their investments in non-restricted sectors are granted “national treatment” and “most-favoured-nation treatment” (MFNT) in Oman. National treatment means that, in similar circumstances, US investors and their investments are afforded no less favourable treatment than that afforded to Omani nationals. MFNT means that, in similar circumstances, US investors and their investments are afforded no less favourable treatment than that afforded to nationals of any other country in Oman. In the case of companies incorporated in Oman, the application of national treatment under the FTA increases the allowed US shareholding to 100% and reduces the minimum capital requirement to OR20,000 ($51,800).

GCC & Singapore FTA

Singapore and the GCC have signed a FTA that entered into force as of September 1, 2013. Under the FTA, goods originating from Singapore enjoy comprehensive Customs duty relief when entering into GCC countries. Reciprocal treatment is also granted to goods originating from the GCC that enter into Singapore.

The FTA gives a preferential treatment to Singapore citizens, permanent residents, companies or foreign companies based in Singapore in professional services such as legal, accounting and engineering services, and business services including construction and distribution services. This includes allowance of 100% foreign ownership in the designated service provision businesses.

Other Taxes

Oman does not currently have value-added tax or sales tax. Other taxes applicable are Customs duty and the following taxes:

• Municipal tax of 5% on hotel and restaurant bills;
• Tourism tax of 4% on hotel and restaurant bills;
• Municipal tax of 3% on property rental payable by the landlord; and
• Labour tax of OR200 ($518) per expatriate employee per annum payable bi-annually by the employer.

Custom Duties

A Customs duty of 5% of the cost, insurance and freight value applies to most non-GCC source goods. Exemptions apply for certain foodstuffs, medical supplies, and other specified items. Higher Customs duty rates apply to certain goods, such as wine and spirits.

Stamp Duty

Stamp duty is applicable on transfer of land and property at 3% of the value.

Social Security Contributions

A 17.5% social security contribution is applicable to staff who are Omani nationals, but not to expatriate employees. The employee pays a contribution of 7% of salary, with the employer paying the balance of 10.5%. The employer is also required to contribute towards insurance for work-related injuries totalling an amount of 1% of the salary of the employee. This brings the total monthly social security and insurance contributions to be made by the employer to 11.5%.

Knowledge Oasis Muscat

Knowledge Oasis Muscat (KOM) is a business zone dedicated and reserved to technology- and knowledge-based businesses. Businesses that may be registered with KOM include design, development and application of telecommunications, IT, web, new media, e-learning, e-security, animation, environment, IT training, engineering, high level technical support or consultancy and call centres.

Enterprises that register with KOM may enjoy certain benefits including 100% foreign ownership, minimum initial capital to set up an entity of OR20,000 ($51,800), minimum Omanisation requirement of 25% and highly competitive telecommunications rates.

Special Economic Zones

Alongside KOM, Oman currently has three free economic zones – Sohar, Salalah and Al Mazunah – as well as a special economic zone in Duqm.

Currency Exchange Control

Oman’s currency, the rial, is freely traded and is pegged to the US dollar at a rate of OR1: $2.60. Oman does not impose exchange controls and investors are permitted to bring rials in and out of the country, as well as any equity, debt capital or rewards such as dividends, interest and royalties.