Understanding the tax framework

Tax is a key component of Oman’s effort to move forward with its development. 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 a LLC. Minimum share capital of OR150,000 ($388,410) is required to register an LLC with foreign participation. GCC companies that are 100% owned by GCC nationals, or GCC nationals themselves, 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 ($51,790).
• 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 ($1.29m). Alternatively, joint stock companies that offer their shares to the public are called general joint stock companies (SAOG). Minimum share capital required for an SAOG is OR2m ($5.18m). 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 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: A foreign company may register a branch in Oman only to execute a contract with the government or a quasi-government 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-government contract if the activity 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 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 executive regulations accompanying the law were issued by the Ministry of Finance (MoF). 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 as follows:

• First OR30,000 ($77,680) of taxable income: 0%;
• Above OR30,000 ($77,680): 12%.

Petroleum 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 on 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 through which business is wholly or partly carried on in Oman by a foreign person, either directly or through an agent. 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, whether or not 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, whether in cash or in kind, 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. In determining taxable income for a given tax year, actual expenses incurred wholly and exclusively for generating gross income are allowed for tax purposes.

Deductable 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 following expenses are specifically allowed by the law:

• 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;
• Audit fees;
• Sponsorship fees: the allowed deduction is 5% of taxable income, calculated before deducting the sponsorship fees and after deducting carried forward losses (sponsorship fees are deductible only by branches); and
• Donations paid to approved organisations ( limited to 5% of gross income).

Additional deductions are allowed for the banking and insurance sectors. Banks can 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 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:
• 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 or elsewhere;
• Any loss where the cost was recovered or compensated (e.g., under an insurance policy);
• Loss from the disposal of securities listed 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:

• 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 are granted only after specified procedures are followed. Additionally, exemptions for these activities are available only to Omani companies and do not apply to “project” work in the following areas:

a) Industry;
b) Mining;
c) Fishing, fish processing, farming and breeding;
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.

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, but they may not be carried back. Net aggregate losses incurred during a 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 be carried forward but must be aggregated against income from any other permanent establishments owned by the same foreign company.

Tax Depreciation

Depreciation on capital expenditures is divided into two main categories:

Depreciation for buildings, ships, aircraft and intangible assets is calculated under 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) Ships or aircraft used for business purposes: 15%; and 
e) 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 of Tax (Secretary General).

Depreciation of the below-listed asset classes is determined on a declining balance or written down value method. A “pooling” concept also applies, whereby assets subject to the same rate of depreciation are pooled together in calculating 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 who 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 with the annual return. Failure to pay taxes by the due date attracts interest at the rate of 1% per month until the tax is actually 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 ($51,790), 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 has been obtained.

The accounts must be submitted in local currency unless the prior approval of the Secretary General has been obtained 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 ($2589).

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.

Exception from filing tax returns and audited financial statements: 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 ($51,790);
• The gross income realised by the establishment or company during such accounting period should not exceed OR100,000 ($258,900);
• 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 of Tax may exclude companies and establishments which have not been exempted from submitting returns as set out above 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 ($129,500);
• The gross income realised by the establishment or company during such accounting period should not exceed OR300,000 ($776,800); 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 the 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.

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. Objections and appeals: 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 of Tax within 45 calendar days from the date of assessment.

The Secretary General is required to decide the objection within five months (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 on 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 of Tax 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. 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. However, 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 these 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 Capitalization

If the debt-to-equity ratio exceeds 2:1 in the case of related party debt, 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 Agreements

Oman has in force or awaits ratification of double taxation agreements with more than 30 countries, including Canada, China, France, Italy, India, Singapore, the UK, South Africa, China and Italy.

There is no clearly defined procedure for applying double taxation agreements. In practice, a taxpayer seeking to apply an agreement must approach the Omani authorities for advance permission.

The authorities may then 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”, as well as “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 ($51,790). GCC & Singapore FTA: Singapore and the GCC have entered into a FTA which 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 which enter into Singapore.

The FTA also gives a preferential treatment to Singapore citizens, permanent residents, companies or foreign companies based in Singapore in professional services such as legal services, accounting services and engineering services, and business services such as construction services, distribution services and hospital services.

Preferential treatment includes allowance of 100% foreign ownership in the designated service provision businesses.

Other Taxes

Oman does not 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 OR100 ($259) per expatriate employee per annum payable by the employer.

Custom Duties

Customs duty of 5% of cost, insurance and freight (CIF) value applies to most non-GCC source goods. Exemptions apply for certain food items, medical supplies, etc. and higher 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 employees who are Omani nationals, but not to expatriate employees. The employee pays a contribution of 7% of salary, and the employer pays the balance of 10.5%. The employer is also required to contribute for insurance for work-related injuries in the 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 & SEZs

Knowledge Oasis Muscat (KOM) is a business zone dedicated and reserved to technology- and knowledge-based businesses.

Businesses which may be registered with KOM include design, development and application of telecommunication, IT, web, new media, e-learning, e-security, animation, environment, IT training, engineering, high level technical support or consultancy and call centre.

Enterprises which register with KOM may enjoy certain benefits including 100% foreign ownership, minimum initial capital to set up an entity (OR20,000, $51,790), minimum Omanisation requirement (25%) and highly competitive telecommunication rates.

Currently, Oman has three FZs (Sohar, Salalah and Al Mazunah), as well as a special economic zone in Duqm (see analysis).

Currrency Exchange Control

Oman’s currency, the rial, is freely traded and is pegged to the US dollar at a rate of OR1:$2.59.

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.