Taxation in Oman is the responsibility of the Ministry of Finance (MoF) and the Secretariat General for Taxation. The framework is mainly governed by the following laws:
• The Income Tax Law, promulgated by Royal Decree No. 28 of 2009, as amended, including by Royal Decree No. 9 of 2017;
• The Commercial Companies Law, promulgated by Royal Decree No. 4 of 1974, as amended;
• The Foreign Capital Investment Law, promulgated by Royal Decree No. 102 of 1994, as amended;
• The Law for the Organisation and Encouragement of Industry, promulgated by Royal Decree No. 1 of 1979, as amended;
• The Social Securities Law, promulgated by Royal Decree No. 72 of 1991, as amended; and
• The Law for Unified Industrial Organisation of GCC Countries. In addition to domestic legislation, Oman has various international laws and tax treaties in force, including 34 double taxation agreements.
Generally, the tax year for corporate entities in Oman runs from January 1 to December 31. There are some exceptions to this, including when an alternative tax year is specified in the constitutional documents of the company filed with the Ministry of Commerce and Industry (MoCI), and when it is consistently followed. Depending on the time of year a particular company is established and when its tax year is stated to run, it might be possible to operate for up to 18 months before needing to file an initial tax return. Companies must file a provisional tax return within three months of the end of the respective accounting year and make a payment of estimated tax. Within six months of the end of the applicable accounting year, companies must file audited financial accounts and a full annual income tax return, and pay any tax due. Failure to meet these deadlines can result in penalties being imposed.
Taxable income is defined as gross income for the respective tax year following deductions for allowable expenses and adjustments for any relevant exemptions. For the purposes of the calculation, company losses may be carried forward and set against taxable income for up to five years afterwards.
Omani companies are subject to tax on worldwide income, however, they are granted tax credits for taxes paid overseas. Any dividends received by an Omani company from another Omani firm are liable to tax, and dividends by an Omani company received from a foreign business are subject to tax. Conversely, for foreign companies that elect to create a permanent establishment in Oman, they are only liable to pay tax on the income that is generated in the country.
Related Party Transactions
Related party transactions must be disclosed in the respective tax return and any transfer pricing between related entities must be on arm’s length terms. In addition, in order for interest to be deductible on borrowings between related parties, the thin capitalisation rules stipulate that the debt-to-equity ratio should not exceed 2:1. Furthermore, if any related party transactions result in higher costs or lower income than otherwise would be the case if the transactions had been conducted on purely arm’s length terms, then the tax authority has the power to deem the transactions unrelated.
The amended Income Tax Law permits donations in kind as a deduction if certain conditions are met. The Income Tax Law also provides a methodology for determining the value of property donated.
Residence & Permanent Establishments
While residence is not defined for the purposes of taxation in Oman, a foreign company will be deemed to have a permanent establishment if it has a dependent agent in Oman and/or provides consultancy and/or other services for 90 days or more within any 12-month period. Previously, the definition of a permanent establishment meant a building site, place of construction or assembly project, with ambiguity as to precisely what that meant. Following the amendments introduced at the beginning of 2017, a permanent establishment with regards to a building site, place of construction or assembly project now only arises where such activity carries on for more than 90 days.
Tax Return Filing
It is a legal requirement in the sultanate that each company files its own tax returns, which means consolidated tax returns are not permitted. However, foreign companies with multiple permanent establishments in Oman should note that they are obliged to file a tax return that covers all permanent establishments based on aggregate taxable income.
Tax returns are now required to be filed electronically, and the period for assessment runs until the third year following the year in which a return is submitted. Any error or omissions must be corrected and the tax payer must submit revised returns. These revised returns must be filed within 30 days of the error or omission being found in the original return and in any event before the government’s right to collect any tax expires – currently seven years from the date the taxes become due and payable. The time limit for the Secretariat General assessing non-submissions or returns that are deceptive or fraudulent is currently five years.
All financial statements accompanying income tax returns must be produced in line with International Financial Reporting Standards.
Most of the recent literature on taxation in the country has centred around amendments introduced by Royal Decree No. 9 of 2017, which has brought in wide-ranging changes to the taxation system. The principal rationale behind these changes is to increase tax revenue and improve overall tax administration. It is estimated that while approximately 250,000 to 300,000 companies are registered with the MoCI, less than 10% currently file tax returns.
The main amendments become effective for the financial/tax years starting on or after January 1, 2017. Given their relatively recent introduction, it is yet to be seen if they will have the desired effect on the economy. However, immediate effects have included increasing the cost of doing business in the sultanate and reducing return on investment for foreign investors. Key highlights of the changes are as follows:
• Removal of the tax-free threshold of OR30,000 ($77,900), so that now all net profits are liable to tax at the flat rate;
• An increase in the corporate tax rate from 12% to 15%, though very small taxpayers are entitled to pay corporate tax of just 3% if certain conditions are met;
• Extending withholding tax to dividends on shares, interest – which could have the effect of increasing borrowing costs – and payments for the provision of services earned by any foreign person (natural or legal persons who are carrying on activities in Oman but not through a permanent establishment);
• Removal of previous tax exemptions for industries such as hotels, mining, education, locally manufactured goods, agriculture, animal produce, fishing and medical care;
• A reduction in the length of tax exemption for manufacturing companies to five years;
• The requirement to obtain a tax card which must be used and clearly displayed on all contracts, correspondence and invoices;
• A focus on self-assessment, with only a sample of tax returns being assessed;
• Strengthening of penalties and punishments for failing to comply with the law; and
• The right to inspect documents and records at the tax payer’s premises.
For all tax years beginning on or after January 1, 2017, the standard rate of income tax is 15%, which is, comparatively, one of the lowest rates in the world. There is also a lower rate of tax of just 3% for small Omani companies akin to sole proprietorships, which are only capable of ownership by Omani nationals. However, they must fulfil the following criteria:
• Trading activities do not include banking, financial services, transport (whether by sea or air), public utilities, extraction of natural resources, insurance or such other activities designated by the MoF;
• Registered share capital does not exceed OR50,000 ($130,000) at the start of the applicable tax year;
• Gross income does not exceed OR100,000 ($260,000) per tax year; and
• The average number of employees during the tax year is 15 or less, irrespective of the type, place, nature or duration of work assigned. To qualify for the 3% rate applied to declared taxable income, the Omani establishment must file an income tax return, together with a simplified income statement prepared on the cash basis of accounting.
Any capital gains derived from the sale of fixed assets, investments and acquired intangible assets will be taxed at the same rate as ordinary income.
There is currently no personal income tax in Oman, no real property tax, no inheritance or estate tax and no personal capital gains tax; however, there is stamp duty for the acquisition of real estate, which is calculated at the rate of 3% of the sale value.
Pursuant to the Social Security Law, with regards to Omani nationals only, an employer is required to make contributions to the Public Authority for Social Insurance (PASI). Contributions made to PASI must be made on the basis of the actual wage drawn by the employee in question. The employer is required to contribute a total of 11.5% of each Omani worker’s gross salary, while the employee is required to contribute an amount equal to 7% of his or her gross salary. As part of the company registration process, each entity will have online access to the PASI system. In January of each year, PASI automatically updates the amount to be paid by a minimum 3% increment to the gross salary.
One of the key developments of the 2017 amendments to tax regulation is the expansion of withholding tax to dividend payments, interest payments and payment for services, whereas it was previously only levied on management fees, royalty payments (which includes use of, or the right to use, intellectual property rights, drawings and equipment rentals), licence or service fees for computer software, and research and development. The current rate of withholding tax is 10% for entities without a permanent establishment in Oman. These changes came into effect on payments made on or after February 27, 2017.
Deduction of withholding tax is made at the source by the tax payer and then remitted to the tax authority. The obligation to deduct has also been placed on ministries, public bodies and other state administrative entities. The overall effect of withholding tax can be reduced if there is a double taxation agreement in place between the country of repatriation and Oman. It is recommended that a taxpayer seek advice on whether or not there is an applicable double taxation agreement in place, and if so, whether or not that allows withholding tax to be reduced or excluded.
Before the changes introduced in 2017, the law allowed for tax exemptions for a maximum period of 10 years on income realised from mining; exports of locally manufactured or processed goods; agricultural produce, animal produce, fishing and fish processing, farming and breeding; industry; the operation of hotels and tourist villages; medical care provided by private hospitals; and certain educational services. Now, the only permitted exemption is for manufacturing or industry, with the period of tax exemption limited to five years.
In order to incentivise compliance with the Income Tax Law, the recent amendments have introduced stricter penalties for non-compliance. The key maximum penalties are as follows:
• OR2000 ($5190) for failure to file returns by the requisite date;
• OR2000 ($5190) for failure to notify the tax authority within 30 days of any notifiable changes in particulars of a company;
• OR3000 ($7790) for failure to comply with an administrative decision or executive regulation;
• OR5000 ($13,000) for failure to comply with tax card provisions under the law;
• OR5000 ($13,000) for failure to submit the required information when requested by the tax authority or to attend scheduled hearings;
• Imprisonment for a period of one to six months and/ or a fine of OR500-20,000 ($1300-51,900) for a first refusal to submit tax returns or other requested information;
• Imprisonment for a period of three to 12 months and a fine of OR2000-30,000 ($5190-77,900) for a second offence within two years; and
• Imprisonment for a period of six months to three years and/or a fine of OR5000-50,000 ($13, 000-130,000) for the intentional failure to submit accurate tax returns or the intentional destruction or concealment of documents and records. Previously, the Secretariat General for Taxation had to refund taxes following a final decision in a tax suit filed with the commercial courts within a maximum period of 120 days, but this has now been reduced to 90 days; and rule on an objection filed by a tax payer within a maximum period of 10 months, with this now reduced to eight months.
The amended tax law introduces the use of a tax card, which is valid for a set period and must be renewed upon expiry. When registering a company, the applicant is required to notify the tax authority of its registration within 60 days from the date of incorporation or commencement of commercial activity. Along with this notification, the applicant must also submit a request for a tax card. The tax card number is legally required to be used and clearly displayed on all business contracts, correspondence and invoices. Ministries, public bodies and other government administrative entities are legally obliged to obtain a copy of the tax card before dealing with any tax payer, and must notify the tax authority of any instances of non-compliance.