Clear guidelines: New tax regulations were issued at the start of 2012

Foreign firms and individual investors can set up business in Oman using one of the following forms:

Limited Liability Company

Foreign companies and individuals are required to have a local partner with 30% minimum shareholding to form a limited liability company (LLC) in Oman. GCC companies that are 100% owned by GCC nations and GCC nationals themselves can set up companies without requiring a local partner for approved activities. Minimum share capital of OR150,000 ($390,908) is required to register a company with foreign participation. Pursuant to a free trade agreement (FTA) between the US and Oman, US companies can set up a subsidiary in Oman without requiring a local partner. Where a capital project is above OR500,000 ($1.3m) and is in the interest of the national economy, a special dispensation could be given to allow foreign investment to increase up to 100%.

Public Or Closed Joint Stock Company

Joint stock companies that do not offer their shares for public subscription are known as closed joint stock companies. The minimum share capital required for a closed company is OR500,000 ($1.3m), and foreign investors are able to own up to 49% of this capital. Alternatively, joint stock companies that offer their shares to the public are called public joint stock companies. Minimum share capital required for the public company is OR2m ($5.2m). Ownership of stock in public companies is through Muscat Securities Market (MSM) trading and regulated by the Capital Market Authority. Foreign investment in banks and other types of financial institutions is governed by the Central Bank of Oman (CBO).

Branch Of A Foreign Company

The sultanate does not encourage setting up foreign investment in the form of a branch of a foreign company. Branches are considered a form of temporary business, and are only available to foreign companies with a government or semi-government contract. The branch registration is limited to the duration of such contract.

Commercial Agency 

Foreign companies without commercial registration in Oman may do business through commercial agents. In some circumstances, clients in Oman – both private sector and government organisations – may insist that a foreign principal or contractor employ an agent in Oman when executing a contract. Agency agreements are formally registered with the Ministry of Commerce and Industry under the Commercial Agency Law.

Foreign Commercial Representative Office 

undefined A foreign firm may open a commercial representative office in Oman solely for the purpose of marketing and for the promotion of its products or services. The representative office is not allowed to sell its products or services directly to consumers in Oman. However, it can hire employees to run the office in Oman.

Taxation

The income tax law was promulgated by Royal Decree No. 28/2009 and went into effect on January 1, 2010. There have not been any changes to the law since its introduction. The long awaited executive regulations (ERs) accompanying the law were issued by the Tax Authority in January 2012 and will apply from tax year 2012 onwards.

TAX RATES: All taxpayers are on a level playing field and are taxed at the following rates:

• First OR30,000 ($78,182) of taxable income: 0%;

• More than OR30,000 ($78,182): 12%. The law defines a taxpayer as any business establishment, Omani company or permanent establishment. A business establishment primarily refers to sole proprietorships registered with the Ministry of Commerce and Industry, which independently carry on commercial, industrial or professional activities in Oman.

The term “company” shall include all commercial, civil or any other legal form of a company, regardless of the nationality of its partners, the purpose of its incorporation or the nature of activities exercised.

Permanent Establishment (PE)

This term refers to a fixed place of business through which business is wholly or partly carried out in Oman by a foreign person, either directly or through an agent. The law has clarified the definition of a PE by providing the following specific examples:

• A place of sale, place of management, branch office, factory or workshop;

• A mine, a quarry or other place of extraction of the resources of natural wealth; and

• A building site, a construction place or an assembly project. The law also provides a definition for the minimum qualifying period for which the PE can be deemed to have been established in the country. A PE is described as any foreign person that performs consultancy services or any other kind of services in Oman for a period or periods of not less than 90 days in aggregate in any 12-month period, whether direct or through employees designated to perform these services.

Taxable Income

The law defines income as income of any type, whether in cash or in kind, in particular:

• Profit from any business;

• Consideration for carrying out research and development;

• For use 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 and fees in return for management; and

• Royalties. This means that under the law a taxpayer will be liable to tax on worldwide income, although the taxpayer will be entitled to claim appropriate credit for taxes paid on its overseas income.

The law defines taxable income to mean the income accrued by any taxpayer after deducting any expenses and allowing for any deductions, offsets or exemptions. In determining taxable income for a taxpayer for a given tax year, actual expenses incurred wholly and exclusively for generating gross income are allowed for tax purposes.

Deductible Expenses

The ERs state that expenses shall be deductible only if they are actually incurred, relate to business and are necessary for production of gross income, and are supported by documentary evidence. The following expenses are specifically allowed by the law:

• Expenditure incurred before the commencement of business or registration will be deductible from the first year of business operations in which income is generated;

• Contribution in the welfare of employees;

• Approved pension fund contribution;

• Bad debts written off. As per the ERs, to qualify for write off the debt shall have arisen due to business transactions which were necessary for production of gross income. The ERs also outline legal methods for debt recovery which must be completed before a debt can be considered a bad debt;

• Social insurance contributions paid to the Public Authority for Social Insurance (PASI);

• Incidental costs incurred in acquisition or disposal of tangible or intangible assets;

• Depreciation of capital assets or balancing allowance on disposal of such assets;

• Audit fees incurred in the tax year;

• Sponsorship fees. The ERs require sponsorship agreements to be in writing and registered. The allowable fee shall be the lower of actual commission paid or 5% of taxable income; and

• Donations paid to approved organisations; the ERs state that the eligible deduction shall be restricted to 5% of the taxable gross income. Additional deductions are allowed for the banking and insurance sectors. Banks can deduct provisions for loan losses on the basis of recommendation by the CBO. Insurance companies can deduct provision for unexpired risks and provision for unsettled claims, as well as sums paid to the insurance emergency fund. The ERs specify rules for deduction of the following expenses:

• Remuneration payable to the chairman and the board of directors of a joint stock company;

• Salaries and similar remuneration payable to a proprietor or to a partner of an Omani company;

• Rent paid to a proprietor for the use of real estate property owned by him; and

• Head office charges of PE such as technical consultancy, research and development, data processing and general administration costs. The following expenses are not deductible:

• Any capital expenditure unless specifically allowed by the tax law;

• Any expenses incurred if considered not commensurate to service rendered/consideration given;

• Income tax paid or payable in Oman or overseas;

• Any loss where the cost was recovered or compensated (e.g. under an insurance policy); and

• Loss from the disposal of securities listed in the MSM (gain is not taxable either). The ERs clarify deductions for interest on loans taken by establishments, Omani companies and PEs. They also elaborate on the treatment of leasing contracts, including both finance and operating leases.

Tax Exemption

The following sources of income are exempted from tax:

• Dividends received by a taxpayer from shares, allotment or shareholding in an Omani firm;

• Income from investment funds; and

• Profit or gains from the disposal of securities listed in MSM. Additionally, a number of income-generating activities are exempted from tax:

• Income 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 (other than management and project contract) in accordance with the specific laws relating to each activity will be exempted from tax for a period of five years from the production date or commencement of commercial activities. The exemption can be extended for another five years on application. a) Industry; b) Mining; c) Fishing, fish processing, farming and breeding; debt write-offs; d) Promotion of tourism including the operation of hotels and tourist villages; e) Farming and processing of farm products including animal and agriculture products; f) Export of locally manufactured products or processed products; g) University, college or higher institutes, private schools, nurseries or training colleges; and h) Medical care by establishing a private hospital. The indefinite exemption for educational institutions and hospitals has now been lifted and the ERs provide guidelines on their future exemption rules.

The law is silent on tax exemption for public utility projects. Prior to the ERs, these projects were automatically tax-exempt but now the ERs have set stringent conditions for renewal of such exemptions.

Losses Releif

Under the new law, tax losses may still be carried forward by a taxpayer for a maximum of five years and offset against future taxable income, but they may not be carried back. Losses incurred during a tax-exempt period may not be available for offset against future taxable income. This rule doesn’t apply to companies exempted from taxes on the basis of carrying out their principal business in areas that preclude a tax payment for the first five years of commercial activities. The net loss sustained during the mandatory exemption years may be carried forward indefinitely until they are fully exhausted.

Carrying the loss forward is not allowed in the case of a change of ownership resulting in a different commercial form. However, under the new law, a change from proprietorship to an LLC as a result of the death of a proprietor will not be construed as change of ownership. Relief for conglomerates is not available as individual taxable entities are taxed separately. However, the new law introduced a provision whereby a foreign person doing business through more than one PE can only carry forward the loss of any of those PEs for a tax year after it has been reduced by the taxable income for that tax year from other PEs owned by the same foreign person.

Tax Filing Requirements

There have been no significant changes in the tax filing procedures from the old tax law. Provisional and annual returns of income are still required to be filed by the due date.

A 12-month period must be used to prepare financial statements for tax purposes. This is usually the calendar year. For the first accounting period, however, a taxpayer may elect to a period of up to a maximum of 18 months.

Within three months after the end of the accounting period, a provisional return of income must be filed in a specified format. This return should state the estimated taxable income and be accompanied by a cheque for the total amount of tax due. The annual return of income, also in a specified format, must be filed within six months after the end of the accounting period. This annual return must be accompanied by audited financial statements.

The new law includes a provision to exempt certain business establishments and Omani firms from submitting accounts. The ERs have now specified the following two additional categories of exemption:

• Establishments and Omani companies with a capital not exceeding OR20,000 ($52,161), gross income not exceeding OR100,000 ($260,605) and an average of eight employees, shall be exempted from filing income tax returns.

• Establishments and Omani companies with a capital not exceeding OR50,000 ($130,303), gross income not exceeding OR300,000 ($781.815) and an average of 10 employees, shall be exempted from filing audited financial statements. The International Financial Reporting Standards must be followed in preparing accounts and International Standards on Auditing must be followed for auditing. The financial statements must be audited by a locally registered and approved auditor. Books of accounts are required to be kept on file for a period of 10 years. Taxpayers may maintain accounting records in a foreign currency only after obtaining permission from the secretary-general for taxation.

Tax Depreciation

The new law divided depreciation on capital expenditure into two main categories:

• Depreciation for buildings, ships, aircraft and intangible assets is depreciated in a straight line method: a) Buildings constructed with specific material: 4%; b) Quays, jetties, pipelines, roads and railways: 10%; c) Temporary or prefabricated buildings: 15%; d) Buildings used for hospitals or educational institutions (the taxpayer can choose to depreciate like any other buildings above): 100%; and e) Ships or aircraft used for business purposes: 15%. The above rates can be doubled if buildings are used for industrial purposes, excluding buildings used for storage, office, accommodation for workers or commercial purposes. Depreciation of intangible assets acquired and used for the business shall be calculated by dividing capital expenditure by the useful life of that asset as estimated by the secretary-general.

• Plant and machinery have been allocated in three pools and the depreciation on each pool is calculated on a reducing balance method. To calculate depreciation for the year, an opening written down value plus addition of assets minus sale proceeds of disposals of assets is taken as the asset base of that pool and the depreciation rate is applied to it. The new rates are: a) Tractors, cranes and heavy machinery: 33.3%; b) Drilling rigs: 10%; and c) Any other plant and machinery: 15%. In addition to the above, the ERs explain rules on depreciation of finance leases as well.

WIithholding Tax

In respect to foreign companies that have no PE in Oman and received income from royalties, consideration for research and development, right to use computer software or receive management fees, a withholding tax at the rate of 10% of the gross income shall be deducted at source. Firms and establishments making such payments are required to deduct 10% of the invoice value and pay it to the tax authorities within 14 days from the end of the month following the month in which payment is made. The definition of the term “royalty” has been substantially expanded by the new law to also include equipment rentals and consideration paid for information concerning industrial, commercial or scientific experience. The term “royalty” includes payments for the use of or right to use computer programmes, intellectual property rights, patents, trademarks, drawings and formulae. Concessions involving minerals also attract withholding tax.

Double Tax Treaties

Oman already has or awaits ratification of double taxation treaties with more than 20 countries. Under a treaty, income continues to be taxable in both countries and credit is given in the taxpayer’s country of residence for tax imposed on the same income in the source country. The law recognises the importance of tax treaties to Oman by including appropriate provisions dealing with the taxation of companies, PEs, and incomes and expenses intended to avoid double taxation.

Related Parties & Transfer Pricing 

The tax law requires that where related persons enter into transactions that result in a lower taxable income or higher losses than would have been the case if it was between independent persons, the actual terms of such transactions shall be ignored in computing the taxable income. When goods and services are exchanged between related parties, the tax authorities will compare the prices of similar goods or services exchanged between independent parties to assess whether the price is at arms’ length. It is uncertain for now how the tax authorities propose to achieve this assessment or what benchmark will be used.

Principal Officer

The law now defines who is regarded as principal officer for a business establishment, Omani company and PE. The list of principal officers includes an agent of permanent establishment that carries on business through an agent. A principal officer shall not be absent from Oman for more than 90 days in a tax year.

Oman & The US FTA

The signing of an FTA between Oman and the US has opened opportunities for US companies to operate in Oman without requiring them to find a local partner. Coupled with the tax law changes outlined above the US companies are at an advantage over other foreign companies, which have to take a minimum of 30% local shareholding to establish a company in Oman.

Other Taxes

Oman does not have personal income tax, and a foreign individual working in Oman can be assured to receive their remuneration gross. The following indirect taxes, however, are levied:

• 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 OR100 ($261) per expatriate employee per annum payable by the employer.

Value-Added Tax

Presently, Oman does not have value-added tax (VAT). Studies were undertaken in 2009 to introduce an integrated GCC-wide VAT regime but there is yet no official assumption as to when this system will be implemented. Some analysts say it is unlikely that VAT will be introduced before 2013.

Social Security & End Of Service Benefit

undefined Companies are required to register their Omani employees with the PASI in accordance with the Social Security Law (Royal Decree No. 72 of 1991). Under the law, employers must make monthly contributions to PASI at a rate of 9.5% of each Omani employee’s monthly basic salary. The employer must also collect from the Omani employees 6.5% of their monthly basic salary. Employers are also required to contribute an additional 1% of each Omani employee’s monthly basic salary, against occupational injuries and hazards.

Non-Omani employees receive an end of service benefit (ESB) in accordance with the Labour Law (2003). The ESB is calculated on an employee’s final wage and paid according to the following:

• For the first three years of service, ESB is calculated based on half the basic salary of each year;

• For each subsequent year, it is based on one month’s basic pay.

Custom Duties

Generally, goods imported into Oman are subject to Customs duty at 5% on pro forma invoice cost. Certain commodities, such as foodstuffs, are exempted from Customs duty. However, alcohol and tobacco are taxed at a much higher rate.

Certain material imported for contracts with government or semi-government organisations are exempted from Customs duty. Pursuant to the GCC Customs Union, goods produced in any of the GCC states shall be accorded national treatment and are allowed to move freely among the member states under the respective national invoices and the single Customs declaration. The Oman-US FTA, which came into force on January 1, 2009, also lifts two-way tariff barriers on consumer and industrial products.

Free Zones

Knowledge Oasis Muscat (KOM) is a public-private sector initiative to make Oman a knowledge-driven economy. It aims to attract call centre and research and development activities by blue-chip firms and knowledge-driven small and medium-sized enterprises. Dedicated to providing support for technology-oriented businesses, KOM brings together many diverse enterprises from niches such as mobile commerce, e-security, software development and international airline call centres.

Free Trade Zones In Oman

At the moment three free trade zones (FTZs) exist: Salalah, Sohar and Al Mazunah. The large free zones in Salalah and Sohar are important features of the Omani economic landscape, while the smaller FTZ Al Mazunah near the Oman-Yemen border has recently captured headlines.

Ftz Salalah

Salalah free zone is being developed in multiple phases over an area of 2000 ha. It offers industrial, manufacturing, warehousing, logistics, distribution, research and development, office facilities, retail outlets, resort and residential space.

Phase one, which is now completed and occupied, provides 200 ha of distribution, logistics, freight forwarding and manufacturing facilities. Once completed, phase two will provide about 400 ha of facilities similar to phase one but with a focus on light- and medium-sized industrial units.

Ftz Sohar

The Sohar free zone was built on an area of approximately 4500 ha and its first phase of development began in 2010, using a cluster approach. There are three major clusters in the Sohar Port area, namely the hydrocarbons or petrochemicals sector, the metals and minerals sector, and logistics with international terminal operators.

Ftz Al Mazunah

The Al Mazunah free zone started operations in 2010. To assist with development, the government signed an agreement with the Kuwaiti-based company Golden Hala Trading to establish the infrastructure. An investment of an estimated OR680m ($1.8bn) in the project is pledged over the next five years. Focus areas for the free zone’s growth plans are processing, storage and shipment of products from the Dhofari agricultural heartland, along with the automobile and industrial vehicles trade.

Exchange Control

Oman’s currency, the Omani rial, is freely traded and is pegged to the dollar at a rate of OR1:$2.6. Oman does not impose exchange controls and investors are permitted to bring rials in and out of Oman, as well as any equity, debt capital or rewards such as dividends, interest and royalties.

OBG would like to thank Abu Timam Grant Thorton for its contribution to THE REPORT Oman 2013