Overview Of The Legal Framework
The Basic Statute of the State – Royal Decree (RD) No. 101/1996, as amended – serves as Oman’s constitution and is the bedrock of all laws. Recent amendments to the Basic Statute empower the legislature with extensive legislative powers. All primary legislation is issued by RD and published in the bi-monthly Official Gazette. Secondary legislation, such as Ministerial Decisions and Circulars, may be issued by government bodies to provide detailed guidance on specific aspects of law contained in RDs, and are also published in the Official Gazette.
All laws take effect on the date of their publication unless specified otherwise. The sultanate’s court system is three-tiered and is comprised of the Primary Courts, the Appeals Courts and the Supreme Court. As Oman is a civil law jurisdiction, the principle of stare decisis (precedent) is not well established and higher court decisions do not carry much precedential value. However, the objective of the Supreme Court is to issue judgments which, thereafter, should not be contradicted by the lower courts.
The Commercial Companies Law (RD 4/1974, as amended), the Law of Commerce (RD 55/1990), the Foreign Capital Investment Law (RD 102/1994, as amended) and, for publicly listed companies, the Capital Market Law (RD 80/1998, as amended) and its associated executive regulations (Ministerial Decision No. 1/2009) are the primary corporate laws of Oman. These statutes are complemented by an array of other RDs, Ministerial Decisions and circulars, including a number of sector-specific laws (e.g., for banking, insurance, mining, professional consultancies and telecommunications).
The Commercial Companies Law is broad in scope and regulates all facets of commercial companies in Oman from capitalisation to corporate governance to liquidation. The law also provides for three main types of legal structures that companies may adopt– limited liability companies (LLCs), closed joint-stock companies (SAOCs), and public joint-stock companies (SAOGs). Other alternative commercial structures are available such as branches and commercial representative offices, but they do not constitute independent legal entities in Oman and thus remain corporate extensions of their parent companies.
An Omani commercial company may be wholly Omani-owned, or partly owned by a foreign entity. The foreign ownership of Omani companies may not exceed 70% of share capital, as a minimum of 30% of the capital must be Omani-owned. However, the Foreign Capital Investment Law permits 100% foreign ownership for projects that contribute to the development of the national economy upon the approval of the Development Council following a recommendation from the Ministry of Commerce and Industry. Other exceptions to the requirement for having 30% Omani shareholding in Omani companies are those firms formed pursuant to treaties and free trade agreements with other countries, for example the US.
Types Of Omani Companies
The following outlines the structure of the three types of companies allowed to operate in Oman.
LLC: Omani LLCs with foreign ownership are required to have a higher minimum share capitalisation (OR150,000, $390,000) than wholly Omani-owned LLCs, which must have OR20,000 ($52,000).
An Omani LLC must have a minimum of two partners, who are usually referred to as shareholders. The shares in an Omani LLC cannot be pledged, as they cannot be represented by negotiable instruments. An LLC has a two-tier management structure comprising the shareholders and the authorised manager(s), e.g., general manager(s), CEO and CFO. Corporate governance is carried out by its shareholders, who give legal effect to their decisions by passing shareholders resolutions which are implemented by the authorised managers. Omani LLCs are subject to the regulations of the Ministry of Commerce and Industry and the Commercial Companies Law.
SAOC: SAOCs require a significantly higher minimum share capitalisation of OR500,000 ($1.3m) and must have a minimum of three shareholders. Some larger, non-listed companies choose to form an SAOC rather than an LLC because joint-stock company shares can be pledged. An Omani company that requires the ability to pledge its shares as collateral to obtain bank financing, for instance, might choose to incorporate as an SAOC rather than as an LLC.
Some companies also incorporate as SAOCs due to Omani legal requirements that certain kinds of business activities – such as banking, insurance, maritime companies and commercial air transportation – may be carried out only by joint-stock companies. An Omani SAOC has a board of directors that manage the company, and only a limited number of issues need to be referred to the shareholders of the company. SAOCs are subject to a greater degree of supervision and regulation by the Ministry of Commerce and Industry and the Commercial Companies Law.
SAOG: The minimum share capital for an Omani SAOG is the highest of the three at OR2m ($5.2m). An SAOG is authorised to issue shares to the public and is subject to the regulations of the Capital Market Authority. An SAOG has a board of directors which operates in the same way as that of an SAOC. However, an SAOG is subject to more rigorous corporate governance through the oversight of the Capital Markets Authority as well as the Ministry of Commerce and Industry. Omani SAOGs are subject to the Capital Market Law and the associated executive regulations, as well as the Commercial Companies Law.
In addition to the three types of commercial companies as described above, there are also several other categories of business vehicles – including Omani branches, commercial agency relationships and commercial representative offices – that are specifically designed to allow foreigners to carry out their activities in sultanate without actually having their own Omani company. Foreigners who own these businesses must maintain some form of “local presence” to operate in Oman.
A local branch is a legal structure contemplated under the Foreign Capital Investment Law that is specifically intended for foreign companies that have a limited business mandate in the form of a government or quasi-government contract to perform in Oman. A foreign company may establish an Omani branch office for the purpose of performing such a contract. The tenure of the branch office is restricted to the term of the contract and may be extended for additional terms if the contract is extended or if the company enters into more such contracts. The business scope of a branch is restricted to servicing the government only and may not service private sector entities.
A commercial agency is a business model that allows foreign companies to sell their products or services in the sultanate by engaging a local commercial agent, without having their own Omani company or branch. Under this approach, the foreign manufacturer or supplier establishes a local presence in Oman by appointing an Omani commercial agent to sell, promote or distribute its products or to provide its services.
The Law on Commercial Agencies (RD 26/1977) does not draw any distinction based on whether the agent is designated as an agent, representative, distributor or any other intermediary; all such arrangements are deemed to be commercial agency relationships. The agent must be either (i) an Omani national resident in Oman, or (ii) an Omani company (with at least 30% Omani shareholding) that has “commercial agency” as one of its approved business objects. The agency agreement must be in writing and the onus is on the agent to register the agreement with the Commercial Agency Register at the Ministry of Commerce and Industry.
Commercial Representative Offices
Commercial representative offices are used less frequently than the other legal structures mentioned above, as the scope of a representative office is limited to marketing and promotion of products or services of the foreign parent company. A commercial representative office may not engage directly in sales, import or export activities or contract with end-user customers. A representative office is only permitted to market the principal’s business to retailers.
Free Trade Agreements
Oman has entered into free trade agreements with certain countries which, as an exception to the general rules described above, afford companies and individuals from those countries the right to wholly own an Omani company as well as being afforded “national treatment” in respect of LLC minimum share capitalisation requirements.
The sultanate’s two most significant free trade agreements to date are (i) the Economic Treaty of the GCC states, which allows citizens of other GCC countries to wholly own Omani companies, and (ii) the US-Oman Free Trade Agreement, which allows American firms and citizens to wholly own Omani companies, except in certain business sectors which are excluded from the treaty, e.g., real estate brokerage, manpower agencies, printing and publishing.
In a recent development, the US Embassy and the Ministry of Commerce and Industry affirmed their commitment to extend local Omani treatment to American companies as stipulated in the free trade agreement, together with their commitment to monitor application of the agreement vigorously to ensure that such benefits are granted only to bona fide American companies and not to third-party nationals with no substantial business activities in the US.
With no personal income tax and a flat corporate income tax rate of 12% on annual profits above OR30,000 ($78,000), Oman has a well-deserved reputation as a business-friendly jurisdiction from a tax perspective. Pursuant to the Companies Income Tax Law issued by RD 28/2009, income tax was standardised to the rate of 12% for all types of companies and branches. The definition of “company” was broadened to include all commercial, civil or other forms of legal structure considered to be a company under any Omani legislation.
Further, an earlier tax law specified that only income arising or deemed to have arisen in Oman was taxable, but this source test has since been removed, and taxation is now levied on any type of income without geographical restriction. There are provisions to prevent double taxation by allowing tax relief up to the limit of the Omani tax rate on profits which have already been subject to tax overseas.
Any entity having a permanent establishment in Oman is subject to Omani tax. Any firm providing consultancy services for 90 days or more within a 12-month period in the sultanate is deemed to have a permanent establishment in Oman. Related party transactions that are deemed to have potential tax avoidance purpose may be subject to tax.
Customs duty is normally a flat rate of 5% of the value of the goods being imported. For businesses that import significant quantities of goods or high-value goods into Oman, Customs duty could add up to a high operational cost and significantly reduce profit margins. Companies could reduce their exposure to Customs duties in various ways. One potential method is to arrange, by contract, for customers to reimburse the company for the Omani Customs duty it pays to bring in the goods or equipment necessary to carry out the work it is contracted to undertake for the customers.
The second way that a company could reduce its Customs duty exposure is to secure temporary duty-free importation permission from the Royal Oman Police-Directorate General for Customs. This is a limited category of exemption – it applies only to machinery and heavy equipment to be used for government or investment projects and it is valid only for a temporary period (six months at a time, renewable consecutively for a total period up to three years).
The third route that companies could pursue is to apply for a Customs duty exemption pursuant to the Foreign Capital Investment Law. This exemption, which is granted at the discretion of the Ministry of Commerce and Industry and the Ministry of Finance, is not an easy one to secure – it tends to be granted only for key industrial and infrastructure projects for national economic development – however it is an option that companies can pursue.
The Labour Law (RD 35/2003, as amended) prescribes minimum benefits which must be accorded to all employees, although the employer naturally may provide greater benefits. All employment relationships in Oman must be enshrined in a written labour contract, which must include details such as the name of employer and employee, job description, salary and termination notice period.
A labour contract may be for either a fixed term or an indefinite term. If the labour contract does not specify the duration of service, it is deemed to be for an indefinite term. Although fixed-term labour contracts are permitted, the company may use only one fixed-term contract per employee and may not extend fixed-term labour contracts in succession. If the company wishes to retain the employee after the expiration of his original fixed-term labour contract, the employer must enter into a labour contract of indefinite duration with the employee.
If the second contract is stated to be a fixed-term contract, the courts would disregard this wording and treat the second contract as being of unlimited duration. Any labour contract, whether fixed-term or indefinite term, may require new employees to serve a probationary period, provided that (i) the probationary period may not exceed three months and (ii) no employee may be required to serve more than one probationary period with the same employer.
For Omani employees only, both the employer and the employee are required to make contributions to the Public Authority for Social Insurance national insurance scheme during the entire term of the employee’s employment with the company. Recently the accrued pension for Omani nationals has been increased by 5% for those whose monthly pension is not less than OR202.500 ($524). This amendment has been brought about by RD 60/2013.
For expatriate employees only, when the employees leaves the company after more than one year of continuous service, the employer must pay the employee an end of service benefit, calculated on the employee’s final basic salary, equal to half a month’s basic salary for each year of the employee’s first three years of continuous service plus one month’s basic salary for each year of the employee’s continuous service thereafter.
The Labour Law provides for companies to employ Omanis to the maximum extent possible. Local employee quotas known as “Omanisation” requirements set the percentage of Omani nationals that Omani companies must employ. This varies by business sector and by job description category, and is subject to revision by the Ministry of Manpower.
To employ a foreigner, the employer must obtain a prior labour clearance from the Ministry of Manpower, which is subject to conditions such as: (a) qualified Omanis are not available for the relevant post; and (b) the employer has achieved the minimum sector-specific Omanisation target.
In a development of importance to private sector employers and employees throughout the sultanate, the Ministry of Manpower recently issued Ministerial Decision 541/2013, which provides for a mandatory annual increase in the basic salaries of Omani nationals working in private sector establishments of at least 3%.
The decision provides that, each year, every Omani employee who has been working for his employer for at least six months as of January 1 of such year shall be entitled to receive an annual increase to his basic salary for such year equal to at least 3% of his previous year’s basic salary, with effect from January 1 of such year. However, employees who have been rated as underperforming in their annual appraisal for the previous year may not be eligible to receive such an annual salary increase for the new year. Ministerial Decision 541/2013 sets 3% as the minimum threshold for an employee’s annual salary rise, and is without prejudice to any terms more favourable to the employee stated in his employment contract.
Further, pursuant to Ministerial Decision 222/2013 issued in July 2013, the minimum gross salary of Omani employees working in the private sector has been increased to OR325 ($840) comprising OR225 ($580) towards basic salary and OR100 ($260) towards allowance. Omani employees working in the private sector will continue to be entitled to other increments mandated by law and as per their employer’s internal work regulations approved by the Ministry of Manpower. Therefore, in line with Ministerial Decision 541/2013, mandating at least 3% increase in the basic salary every year, henceforth, there will be at least 3% annual rise in the minimum basic salary payable to Omani employees.
A few important points of Omani labour law are as follows:
• A worker cannot be accused of a violation after the expiry of 15 days from the discovery thereof and no disciplinary penalty may be imposed on a worker after 30 days have elapsed from the date a violation is proven;
• The approach of the Omani courts is to only allow one fixed-term contract per worker. Subsequent contracts, even if stated to be fixed term, will in fact be treated as contracts of unlimited duration;
• Terminating a worker for non-performance is difficult but not impossible. Specific labour law advice needs to be taken in every instance as the facts of the scenario are all-important. A major issue is that the worker must sign to acknowledge receipt of any warning letters. If the worker refuses to sign, two Omani male witnesses should sign on a copy of the letter to state that they witnessed the worker’s refusal;
• The Supreme Court has held that it is a justified, fair dismissal if an expatriate employee is replaced with an Omani national;
• On certain occasions, the Omani courts have held that it is justified for a company to lay off workers if the company is suffering heavy losses. The courts will always want to see audited corporate financials in these situations.
The Land Law issued by RD 5/1980, which is the primary real estate legislation of Oman, recognises two types of real estate ownership, i.e. individual and corporate. The Land Law requires that all private ownership of property must be registered with the land registry at the Ministry of Housing.
A series of real estate laws issued over the last decade have substantially liberalised property ownership rights in Oman. These laws have further categorised land ownership into Omani, non-Omani GCC (other GCC) and foreign individual and corporate ownership, each with its own set of regulations.
Omanis are entitled to freehold rights and may own property anywhere in the sultanate. Individuals from other GCC nations and non-GCC foreign individuals have restricted rights to own real estate. Only companies that are wholly Omani (or other GCC) owned or joint stock companies with at least 30% Omani shareholding are permitted to own real estate in the sultanate. Corporate ownership of real estate is restricted and is only permitted for the limited purpose of complementing the company’s business objectives, such as use for administrative office, warehouse or staff residence. However, companies with real estate development business objects are authorised to use land for construction and resale.
There are varying degrees of restrictions on other GCC and foreign ownership of property. Other GCC individuals and companies are entitled to freehold rights, but there are statutory restrictions on such rights. For example, the ownership of a vacant plot of land by other GCC nationals is subject to a requirement that the development of the plot occur within four years from the date of acquisition.
Foreign individuals and companies may own property only within areas designated as integrated tourist complexes (ITCs). The law regulating these areas (RD 12/2006, as amended) paved the way for foreign individual and corporate ownership of property in ITCs.
Typically, ITCs are required to have residential, commercial and tourist components in land development. Foreign individuals and companies may own both residential and commercial units ITCs and register ownership with the Ministry of Housing. Foreigners who own ITC units and their first-degree relatives are entitled to Omani residence visas, subject to conditions and succession to ITC properties would be in accordance with the applicable inheritance laws in the native country of the foreign owner.
Treaties & Conventions
Oman is a signatory to a number of international treaties and conventions. Oman joined the World Trade Organisation (WTO) in 2000 and is committed to discharging its obligations to liberalise the Omani market. The sultanate is also a party to double taxation treaties and investment protection agreements with many countries.
As a signatory of the New York Convention on Enforcement and Recognition of Foreign Arbitral Awards of 1958 (ratified by RD 36/98), foreign arbitral awards passed in other member countries are enforceable in Oman pursuant to writs issued by the competent Omani courts.
Oman has a body of intellectual property (IP) laws consistent with its commitments to IP organisations, such as the WTO, TRIPs and TRIMs to regulate copyrights, trademarks, industrial secrets, geographical indications and integrated circuits.
Some treaties to which Oman is a signatory include:
• International Centre for Settlement of Investment Disputes 1965;
• 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards;
• Convention on Elimination of All Forms of Discrimination Against Women 1979;
• Convention on Eradication of Racial Discrimination;
• UN Agreement on Registration of Ships;
• Paris Convention for Protection of Industrial Property;
• Berne Convention for Protection of Literary and Artistic Works 1971 and 1979;
• International Convention for the Prevention of Pollution from Ships, 1973, as modified by Protocol of 1978;
• Conventions of the World Intellectual Property Organisation AN OVERVIEW OF ISLAMIC BANKING: The Islamic Banking Law issued by RD 69/2012, by way of an amendment to the existing Banking Law (RD 114/2000) (the Amendment), together with Circular IB issued by the Central Bank of Oman (CBO) adopting the relevant Islamic banking regulations, known as the Islamic Banking Framework, lays down the foundation for the evolution of Islamic banking services in the sultanate.
While the Amendment introduces a new chapter to the Banking Law entitled “Islamic Banking”, which comprises only six articles, it is anticipated that the changes the Amendment enables will be a watershed as Oman embarks upon the age of Islamic banking, finance and investment. The Islamic Banking Framework runs to 589 pages and provides extensive details.
The Islamic Banking Law specifically addresses four critical substantive structural elements, as well as a few procedural elements of the transactional structure of Islamic banking in Oman. The four substantive structural elements are: (i) the transactional base of Islamic banking in the sultanate, and some fundamental requirements pertaining to it; (ii) the status of Islamic banking and Islamic banking transactions in terms of taxation, land law constraints and the provisions of other areas of substantive law; and (iii) two matters pertaining to sharia supervisory boards, one at the level of the individual banks and one at some higher level.
The procedural matters pertain to: (a) the obligation of the Board of Governors of the CBO to issue the Islamic Banking Framework; (b) the obligation of the CBO to license Islamic banks and Islamic windows at conventional banks; and (c) interpretation of the Islamic Banking Law, particularly as its provisions may conflict with other laws, rules, regulations and RDs. As is so often the case, a great deal of the impact of a substantive law is embedded within the procedural provisions of said legislation.
Transactional Base Of Islamic Banking
The Islamic Banking Law is expansive in authorising Islamic banks to make use of essentially all sharia-complaint contracts and structures in Islamic banking transactions. It mandates that Islamic banks perform those transactions in a manner that does not contradict sharia law. By way of example, and not by way of exclusive itemisation, the law affords special attention to four types of sharia-compliant transactions.
• First, Islamic banks are authorised to accept deposits and manage restricted and unrestricted investment accounts, whether they are operating on the basis of charges, profits or otherwise;
• Second, Islamic banks are authorised to finance and invest through a full range of sharia-compliant contracts and structures;
• Third, Islamic banks are authorised to issue asset-supported or project-supported sukuk (Islamic bond) and invest in asset-supported and project-supported sukuk; and
• Fourth, Islamic banks are authorised to deal in real estate and movables, including by way of selling, purchasing, investing in, renting and leasing real estate and movables, and this authorisation is expressly stated to be an exception to and from restrictions in the laws referenced in the Amendment and related laws and RDs. This is a monumental modification of the laws that goes to the heart of Islamic banking and the use of sharia-compliant structures.
Civil Transaction Law
Oman’s Civil Transaction Law issued in May 2013 by RD 29/2013 (the Civil Code) is a compendium of core areas of private law and defines the individual legal status. The Civil Code is designed to be the base plate of Omani civil law and its provisions will apply both where there is no specific law to address a civil law matter, and where specific legislation is silent on the matters in question. The Civil Code requires its construction and interpretation to be in accordance with Islamic jurisprudence and further states that in matters where the generic code and a specific law are silent, the principles of sharia will apply.
The Civil Code is structured to deal with all aspects of legal relationships between individuals and their consequent rights and obligations. The code has four main chapters dealing with personal rights and obligations; nominate contracts; rights in rem; and personal guarantees and insurances.
The Civil Code took effect on August 6, 2013 and comprises 1086 articles making it the largest piece of Omani legislation to date.
Oman has vast mineral resources which could provide project opportunities for both foreign companies and Omani individuals and companies. The sultanate’s mineral resources include chromite, copper, dolomite, zinc, limestone, marble, gypsum, silicon, gold, cobalt and iron.
The government has long laid emphasis on diversification and increasing the role for the non-hydrocarbons sectors in the national economy. This has led to renewed focus on the mining industry, which is widely viewed as having significant potential for development. In this respect, the government is recently reported to have taken the stand that mining companies operating in the sultanate should undertake value addition of the extracted minerals within the country before exporting such minerals.
The rationale for the emphasis on value addition is clearly to increase industrialisation in the country and to create new job opportunities. Given the recent renewed interest of government stakeholders in the mining industry, it is possible that Oman will undertake to draft a new Mining Law in early 2014, which could address issues such as the value-addition criteria for mineral exports. It is possible that a draft of this potential new law/regulation will be made available to private sector players and other stakeholders for consultation before it is finalised.
It is also possible that any value-addition requirement could be minimal to start and be ratcheted up over a period of time, to give the existing mining companies the time to comply with any new requirements. To this end, it is also possible that any value-addition requirement would be made effective only after an initial grace period.
Meanwhile, the Ministry of Commerce and Industry has recently been taking a conservative approach towards renewal of existing exploration and mining licences and has been reluctant to renew licences in respect of which no significant exploration work has been undertaken in the recent past. This approach is in line with the government’s policy to revitalise the mining industry and discourage licence holders that have not made significant investments or committed resources to explore the licence area by denying them renewal of their licences.
Consequently, the licence holders that have failed to undertake sufficient exploration activities (or failed to follow the work programme submitted to the Ministry of Commerce and Industry) during the last licence period could lose their rights. The new law on the anvil may require licence holders to adhere to their work programme. It may also require licence holders to optimise the extent of value addition with respect to the minerals and metals mined. The investors in the mining industry in Oman will have high stakes in ensuring that any new law/regulation in respect of value-addition requirements serves the intended purpose of further encouraging and developing the mining industry in Oman. PUBLIC AUTHORITY FOR THE DEVELOPMENT OF SMALL & MEDIUM ENTERPRISES: RD 36/2013 establishing the public authority for the development of small and medium-sized enterprises (SMEs) was issued in 2013. One important provision included as part of the sultanate’s initiative to grow SMEs is that small businesses are exempted from many of the registration and filing requirements set out under the sultanate’s tax laws.
The Omani government has recently showcased an increasing interest in the development and support of SMEs operating in the economy. The initiative is in compliance with His Majesty, Sultan Qaboos bin Said Al Said’s directive to support and develop SME as “the future engines for the growth of Oman’s economy”. The RD issued on May 31, 2013 establishes a separate entity in charge of SMEs – the Public Authority for Small and Medium Enterprises.
The law terminates the Directorate General for SMEs in the Ministry of Commerce and Industry and creates a new governmental body with powers and duties allocated for the development and growth of SMEs. The newly established public authority is a subsidiary of the Ministry of Commerce and Industry and all competencies, jurisdictions and even employees of the directorate general for SMEs will be transferred to the public authority.
Aims Of The Public Authority
The main aim inferred from the RD in relation to the goals and objectives of the public authority is the development and support of the growth of SMEs in line with His Majesty the Sultan’s directives.
The public authority aims to achieve overall development of SMEs, to strengthen the role of SMEs in providing more employment opportunities, reinforcing competition between established SMEs as well as assisting SMEs in adding value to the economy and participating in Oman’s economic diversification.
Public Authority’s Powers
The new RD gives various powers and prerogatives to the Public Authority, most importantly:
• Providing financial, technical, administrative and legal consultations and assistance;
• Assisting in licensing and approvals processes;
• Marketing products and services of SMEs through holding exhibitions inside and outside of Oman;
• Establishing a full electronic database and a call centre enabling SMEs to obtain support to conduct their business activities; and
• Providing a specialised mechanism in association with the Tender Board to allocate a percentage of tenders to SMEs. The executive regulations to RD 36/2013 are due to be issued soon and are expected to provide more detail on how such prerogatives are to be utilised.