Friday, December 11, 2009

Omani Courts: Case Summary

Oman's Law of Commercial Agencies states that the Oman Courts will not hear any case as regards an agency agreement which has not been registered with Oman's Ministry of Commerce and Industry. An Omani agent relied on this provision in 2005 when its foreign principal sought payment for goods shipped to the agent. The Primary Court found in favour of the agent, but the Supreme Court ultimately ruled in the principal's favour, saying it would be unjust enrichment if the agent could avoid paying for the goods it had received from the principal. In other words, the Supreme Court was not willing to allow the agent to get goods free of charge on the pretext that the agency agreement was unregistered. The agent was ordered to pay the principal for the goods in question.

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Wednesday, December 9, 2009

Funding the Capital Requirements for Companies in Oman: Payment in Kind

It is legally permissible to make a contribution in-kind to the share capital of a locally organized company. The contribution can be a non-cash input, such as goods, commodities, services, machinery and property rights, whose value can be determined. A debt owed to a shareholder that is represented by a negotiable instrument also can be used for capitalising a company. A contribution of property rights will be deemed to include a guarantee of a marketable title to the property.

The value of a contribution in-kind must be confirmed by one or more Government appraisers who are legally obliged to submit their reports within thirty days of an application being made by the shareholders. If the appraiser finds the value to be less than the valuation initially made by the shareholders of the company, then the contributing shareholder must pay the difference.

If the General Meeting rejects a proposed contribution in-kind, then the corresponding shares may be subscribed for in cash, or the company may reduce its capital to the extent of the rejected contribution provided that the capital does not fall below the minimum stipulated by the law. The resolutions relating to contribution in-kind must be passed by shareholders representing at least two-thirds of the capital with the abstention of the subscriber seeking to pay capital in-kind. The subscriber must transfer the ownership of the evaluated contribution in-kind to the company soon after the approval of the shareholders.

Given the high borrowing rates prevailing in the market, entrepreneurs may feel encouraged to offer non-cash contributions to the capital of start-up businesses over borrowed monies. However, as the evaluation of an in-kind contribution must precede the incorporation of a company, there are potential pitfalls of which shareholders should be aware. Valuation formalities can be time-consuming, and an appraiser’s disagreement with a value estimation could lead to delay in getting the business up and running.

Another potential issue relates to obstacles to successfully importing the in-kind contribution. Foreign shareholders wishing to contribute in-kind will have to rely on the local partner or a third party to assist with the importation of equipment or machinery until the company is registered. This extra layer of complexity can result in customs clearance and security issues. Any third party who is not the owner or registered agent or user will have to establish his interest in the equipment for customs clearance.

Lastly, issues may arise if the business plan is shelved before the company is registered but after the contribution has been imported. Consequently, a business-specific cost benefit analysis should be undertaken in order to ensure the advisability of making a contribution in-kind.

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Friday, December 4, 2009

Oman Petrochemical Producers Targeted by Protectionism

In early December 2009, members of the Gulf Petroleum & Chemicals Association (GPCA) will convene in Dubai for the organization’s Fourth Annual GPCA Forum. Recent dumping accusations made by Asian and European petrochemical producers against GCC companies likely will rank highly among topics for discussion.

China, India and the E.U. each have complained of dumping by GCC producers in recent months, in some cases leveling tariffs on GCC products. “Dumping” is the term used when a producer sells its product on the international market at a price lower than either the cost of production or the price on the local market.

In June, China launched an anti-dumping investigation into Saudi methanol exports, placing a provisional tariff on Saudi methanol. In August, India levied tariffs on exports of poly-propylene from Oman and Saudi Arabia ranging between one and eight times production costs. In September, the EU launched an anti-dumping investigation against the UAE and Iran relating to exports of poly-propylene tripthalate, the substance used to make plastic bottles.

With the exception of Iran, all of the countries involved in these claims are members of the World Trade Organization (WTO). The WTO allows member states to take action against dumping when it causes material injury to the competing domestic industry. Prior to taking such action, members are required to show that dumping is taking place, calculate how much lower the export price is compared to the exporter’s home market price, and show that the dumping causes or threatens to cause harm.

The complaints raised by China, India, and the E.U. accuse GCC countries of subsidizing natural gas, a crucial input in the production of plastics and other petrochemicals. The low price of feedstock is said to reduce the prices of goods produced in the region to unfairly low levels compared with the international market.

In an interview with Abu Dhabi’s The National, the GPCA rebutted the subsidy allegation, emphasizing that the natural gas used in the production of petrochemicals is a by-product of crude oil production. In the words of the organization’s secretary general Dr. Abdulwahab Al Saadoun, “It is not a subsidy, because there is no cost incurred.

According to the GPCA, Asian and European claims of dumping mask growing protectionism. In an October 2009 statement, the organization stated “the GCC industry and our governments will not accept the application of anti-dumping regulations against exports of petrochemicals and chemicals from the Gulf. We have seen a surge in protectionist actions brought by countries to block imports. These cases are baseless and violate international rules.

A surge of protectionism would come as no surprise to the GPCA. The global financial crisis has affected the petrochemical industry worldwide, restricting credit, causing economic contraction and substantial declines in demand for petrochemical products. According to the GPCA, GCC producers have been the least affected by the crisis, making them ripe targets for protectionist policies. “During downturns,” Dr. Al Saadoun remarked in an interview with Arabian Oil & Gas, “there are moves toward protectionism and this is a key challenge we want to address through the collective efforts of all the members.

Unless settled by the governments of the involved countries, the WTO Dispute Settlement Body may hear disputes between WTO members. History provides some indication as to how the WTO may rule on any cases brought before it. At the time of Saudi Arabia’s accession to the organization in 2006, Saudi negotiators successfully persuaded WTO member states that the country’s low domestic costs of feedstock were justified when compared against the additional costs associated with export. Experts believe that the WTO’s acceptance of this position will undercut European or Asian anti-dumping measures in any hearing before the WTO.

While the anti-dumping duties can exact a cost on regional producers during the time it takes to resolve these disputes, there may be an unexpected benefit for the members of the GPCA. As a result of these challenges, Dr. Al Saadoun has pledged that the “GPCA will strengthen coordination with GCC governments to ensure that exports of petrochemicals and chemicals from the Gulf region are not restricted by antidumping regulations and other trade restrictions.” To that end, the young organization has established an advocacy committee that will create a mechanism to alert its members about anti-dumping cases.

As a result of the anti-dumping challenges, GCC producers seem to have gained a new advocate eager to meet its aims of speaking on behalf of the industry and developing a range of tools and resources available to all of the region’s producers.

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Tuesday, December 1, 2009

What Fund Offering Terms Should Omani Institutional Investors Negotiate? Part II:
Hedge Funds

Institutional investors’ appetite for hedge fund investments has grown substantially in the last decade, propelled by the promise of reduced volatility and risk coupled with capital preservation and the delivery of positive returns under all market conditions. As a result of mushrooming investor appetite, the number of hedge funds increased to more than 8,000, with approximately US$1.9 trillion in assets under management, by the end of 2007. However, since then the industry has undergone a massive contraction, with assets under management shrinking to an estimated US$1.4 trillion by the end of 2008, and below US$1 trillion by the current date. This contraction was caused by weaknesses in risk management and due diligence processes amplified by the adverse effects of substantial leverage, liquidity and counterparty risks in the global recession.

In this article we briefly examine certain key terms that Omani institutional investors (e.g., pension and other government funds, private financial institutions and banks) should consider negotiating for in relation to their investments in hedge funds.

  • MFN Clause: The most-favoured-nation clause generally guarantees the institutional investor treatment no less favourable than that accorded, in the past or future, to any other investor in the fund. Any such preferential treatment must be disclosed to the institutional investor, together with the option to elect to receive such treatment itself.

  • Fees: Management fees should be calculated as a per annum percentage of the fund’s net asset value, and performance fees should be subject to a high water mark. In addition, any early redemption fees should be payable only during the applicable lock-up period, and no placement, organizational or other fees should be chargeable to the institutional investor’s account unless otherwise agreed and disclosed on an item-by-item basis. The calculation of all fees should be confirmed by an independent audit to provide transparency to the institutional investor, and all fees should be commercially reasonable.

  • Change of Control, Key Person and Strategy Disclosure: Notice of any change in control of the fund manager, any variations in its key persons’ involvement in the investment activities of the fund and any material change to the fund’s overall investment objective should be promptly given to the institutional investor and trigger a right of withdrawal from the fund, without application of any early redemption fees.

  • Redemption Intervals and Notices; Gating: Hedge funds generally allow periodic redemptions of fund interests (e.g., monthly, quarterly, semi-annually), subject to substantial prior notice from the redeeming investor and the potential imposition of a gate (i.e., a limitation on the total amount of redemptions permitted on a given redemption date, usually set at 10% of fund net asset value). Institutional investors should negotiate preferential redemption terms (e.g., in the form of shorter notice periods and diminished gating thresholds) to guarantee sufficient liquidity of their investments.

  • Compulsory Redemptions: The right of the fund to compulsorily redeem an institutional investor’s fund interest should be limited to cases in which an independent counsel’s opinion confirms potentially adverse legal or regulatory consequences to the fund should the institutional investor continue to hold its fund interest.

  • In-kind Distributions: An institutional investor should ensure its right to receive all redemption amounts and other distributions from the fund in cash, unless it specifically agrees to receive in-kind distributions, in which case it should request the right to establish a liquidating trust to receive the in-kind distributions.

  • Transparency: An institutional investor should ensure the right to receive monthly capital account statements and regular risk profile reports, together with quarterly (unaudited) and annual (audited) capital account statements.

  • Transferability of Fund Interest: An institutional investor should seek a carve-out to any transfer restrictions imposed on its fund interest to permit transfers to its affiliates (e.g., when the institutional investor is undergoing a reorganization) without requiring the fund’s consent.

  • Valuation: The fund’s asset valuation procedures should be fully disclosed, including any methods used to value hard-to-value assets. As a general matter, illiquid or special situation assets should be valued by an independent valuator and not at the fund manager’s discretion.

  • Alternative Investment Vehicle: Where the fund elects to establish an alternative investment vehicle to pursue a particular investment opportunity, the institutional investor should have the right to “opt out” of the vehicle upon prior notice.

  • Soft Dollars: The fund manager should confirm to an institutional investor that any “soft dollar” credits derived from brokerage transactions effected for its capital account will only be used to obtain investment research and brokerage services for the benefit of its account.

  • Liability: An institutional investor should ensure that its liability for the fund’s debts and obligations is limited to the investor’s contributed capital and that, following its withdrawal from the fund, it will have no further liability.

  • Privileges and Immunities: Certain institutional investors may, under Omani laws, benefit from immunity from certain domestic and international laws which would otherwise be applicable to them. No provision of any fund document should prejudice such immunity unless deliberately waived by the institutional investor.

  • Forum Selection: Omani courts should have exclusive jurisdiction in respect of any legal action brought against an institutional investor relating to its investment in the fund.

  • Fund and Manager Representations: Each of the fund and its manager should represent to the investor that no action is being threatened against them and that any information provided to the investor is true and complete and no material fact has been omitted.

  • Controlling Nature of Side Letter: An institutional investor entering into a side letter arrangement with the fund should ensure that, as a contractual matter, where any inconsistency or contradiction between the fund’s agreements and the provisions of the side letter arises, the side letter will control in all respects.
Investing in hedge funds continues to present an attractive option for institutional investors which offers a broad range of investment strategies and considerable portfolio diversification opportunities within a flexible and sophisticated structure. Nonetheless, the liquidity and operating failures experienced by many hedge funds during the financial crisis have highlighted inherent weaknesses within industry practice which investors must guard against going forward.

It is crucial therefore, for Omani institutional investors to seek preferential side letter terms such as those described above before investing to minimize investment risk, ensure high levels of transparency and better align the fund’s investment strategy with the investor’s investment objectives and portfolio diversification and regulatory requirements.

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Monday, November 30, 2009

Tendering in Oman: Practical Issues

Foreign companies wishing to tender in Oman need to understand a wide range of matters such as legal procedures, applicable government policies, the procurement guidelines, approvals required, and the implications of policy and law changes.

In this article, we highlight some issues which may impact on tendering in Oman.

  • The Tender Board: Article 3 of the Tender Law provides that contracts for the supply or execution of works or transport or offers of services, consultancy studies, technical works, and purchase and lease of real estate shall be through public tenders. Certain types of contracts such as security and defence units do not go through the Tender Board; rather, these are carried out through other ministries.

  • Registration: Before a foreign company may submit a bid to the Tender Board, it must register with the Tender Board. The criteria for registration depends on whether the project is for construction, supply, consultancy, or training.

  • Local Representation: It is not necessary for the foreign company to have a local presence in Oman at the time of bid submission. Article 23 of the Tender Law provides that foreign companies, however, must form a local entity within 30 working days of winning the bid. Some quasigovernmental entities require foreign companies to submit their tenders through a local Omani agent, but there is no such requirement with the Tender Board.

  • Standard Government Contract: Companies should be aware that the contract entered into with the government is the Omani Standard Forms and Conditions, which is based on the FIDIC standard form.

  • Applicable Laws: In addition to the Tender Law, companies also should be aware of other relevant laws such as the Law of Engineering Consultancy Offices and the Foreign Capital Investment Law.

  • International Treaties: The U.S.-Oman FTA and the GCC-Singapore FTA each include a dedicated chapter on government procurement.

  • Oil and Gas Projects: There are additional requirements for companies wishing to bid on oil and gas projects. For example, some tenders require Oman Society for Petroleum Services (OPAL) certification.

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Monday, November 16, 2009

The Use of Post-Dated Cheques in Commercial Transactions

Post-dated cheques are often used in Oman in business transactions to make payments in series, such as in construction contracts or rental agreements or car purchases or to discharge any large indebtedness. The use of this common instrument in Oman can sometimes result in problems for both the recipient of the cheques and the entity bound to make the payment by cheque (the “drawee”).

For example, the recipient of the cheque may seek to obtain payment under the cheque and find that there is a hold on the cheque or lack of funds in the account. In such an instance the bearer of the cheque has the option of lodging a criminal complaint with the Royal Oman Police (ROP). The ROP will conduct an investigation, and if appropriate refer the matter to the public prosecutor. Thereafter, the matter would be handled by the criminal courts of Oman.

There are two major circumstances in which the failure of a cheque will not suffice to form the basis of a criminal case in Oman. First, the failure of the cheque must be the result of bad faith in order for a criminal case to result. If the failure of the cheque is the result of a good faith claim regarding the payment, for example, if the drawee puts a hold on the cheque because the product or service provided is deficient or not delivered, this failure will either mean the file is closed before it reaches the courts, or else it could lead to the collapse of the criminal case.

Second, if the cheque was issued as a method for guaranteeing payment, and not as the actual basis for making the payment, then the failure of the cheque cannot form the basis of a criminal case. Post-dated cheques issued for guaranteeing payment often have the words “guarantee” written on them. If such cheques bounce, the drawer will have difficulties as Omani law says that these cheques were not intended as the primary mode of payment.

Those receiving payments by post-dated cheque should make sure the cheque does not include the words “guarantee” if the cheque is the intended method of payment and any underlying settlement agreement should make it clear that the post-dated cheques in question are the primary, intended mode of payment. In addition, if a cheque fails, the bearer of the cheque should be sure to lodge the complaint with the ROP within three months.

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Thursday, November 12, 2009

Engineering Consultancy Partners

The Engineering Consultancy Law, Royal Decree 120 of 1994, requires foreign companies to engage a local Omani engineer partner in order to execute engineering work in Oman. The Engineering Consultancy Law specifies the requirements that apply to the Omani engineer partner, including the required education, experience, and reputation.

One issue facing foreign engineering companies in evaluating Omani engineer partner candidates is whether the Omani engineer must be educated and experienced in any particular engineering discipline. For example, if the company plans to engage in civil engineering work in Oman, must the Omani engineer partner be educated and experienced in civil engineering as well, or is another engineering discipline acceptable?

The Engineering Consultancy Law does not specify the answer to this question, but the Ministry of Commerce and Industry (MOCI), which is responsible for reviewing and approving engineering licenses, has clarified the matter in informal statements. Specifically, MOCI requires the Omani engineer partner to be educated and experienced in an engineering discipline that is related to the type of engineering work to be completed in Oman. For example, an architectural engineer in Oman cannot fulfill the local partner requirement for an engineering consultancy that plans to engage in petroleum engineering work because architecture and petroleum are not sufficiently related.

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Monday, November 9, 2009

GCC Interconnection Grid

The vision of an interconnected power system for the states of the Gulf Cooperation Council (GCC) is nearly as old as the 27-year old organization itself. The introduction of the concept in 1982 has, in recent years, proven extraordinarily prescient. Today, the GCC Interconnection project is nearing completion just as electricity demand projections appear set to take off.

The countries of the GCC have experienced increases in demand driven by population growth, urbanization and industrialization. According to some sources, demand for electricity in Oman has been growing at 6-7% per year. Demand growth is forecasted at 15% annually until 2020

The GCC Interconnection Grid is a crucial element of the GCC’s plans to meet the growth in demand. The linking up of electricity systems between Gulf states will reduce long term investment costs for generation by reducing required levels of reserves, adding efficiencies and creating opportunities in energy trading.

Phase I of the interconnection was completed in July 2009, linking Bahrain, Saudi Arabia, Qatar and Kuwait in what is referred to as the GCC North Grid. Phase II of the plan, also complete, involves the internal connection of the electricity grids in the UAE and Oman, known as the GCC South Grid. Phase III will bring the project to completion with the linking of the North and South grids. The final of the three phases of the USD 1.407 billion interconnection project is scheduled for completion in 2011.

According to GCC Interconnection Authority (GCCIA), the body responsible for constructing, operating and maintaining the interconnection, each GCCIA member state will be capable of importing up to the value of its interconnection size. In Oman’s case, potential imports amount to 400MW. As a result, operational reserves in the region are expected to fall.

Additionally, lower operating and management costs to consumers will be achieved by using energy from the most economic generation unit available for dispatch in the interconnected system.

Further, available spinning reserves will be shared to cover emergency conditions and provide emergency support to any system experiencing a blackout.

The benefits of interconnection, however, could stretch far beyond cost savings. If all goes according to plan, the Interconnection Grid will enable the export of power to the Mediterranean basin and to Europe.

Legal Framework for Interconnection
Just as crucial as the technology behind the GCC Interconnection Grid are the legal arrangements making interconnection possible. In the words of GCCIA spokesman Hassan Al-Asaad, “legal agreements are the basis for the entire project – without them there we have no interconnection.”

The members of the GCC Water & Ministerial Committee have undertaken to sign the General Agreement of Power Interconnection Grid with the GCCIA. The General Agreement lays out the fundamental agreement between member states with regard to use of the interconnection. The General Agreement includes provisions relating to connection fees, rights of interconnection, performance, defaults, termination, and governing law, as well as the regulatory principles committed to by the parties.

Regulation of use of the interconnection will initially be carried out by the GCCIA Board. At a later stage, authority will be transferred to a Regulatory & Advisory Committee that will ensure compliance with regulatory principles and performance standards. Finally, when member states take the step of forming a regional energy regulator, permanent authority will vest in that body.

In addition to the General Agreement, state utilities must enter into a Power Exchange and Trading Agreement (PETA) which sets out the terms on which the parties may connect and have access to the grid and the terms by which parties may schedule transfers of power. The PETA is made up of three separate components:

  1. the Trading Agreement, which sets out the terms on which the parties may use the interconnection for scheduling transfers of power;

  2. the Interconnection and Use of System Agreement, which sets out the terms on which the parties will connect and have access to the interconnection; and

  3. the Transmission Code which sets out the technical rules that govern connection and access to the grid.

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Friday, November 6, 2009

Legal Issues in Retention of Employee Passports by Employers

The practice of employers retaining their employees’ passports has been justified on the grounds of “safekeeping” and as a foolproof method of ensuring that an employee does not leave the country without the prior knowledge of the employer. Some employers are also known to deny free access to their employees to use their passports or to travel freely.

A passport is a formal government document that certifies one’s identity and citizenship and permits a citizen to travel abroad. As a matter of fact, most governments prefer that their citizens exercise caution in agreeing to handover their passports to employers or to any other persons. In most countries, retaining the passport of a person without appropriate judicial authorisation is not permissible.

The courts in many GCC countries have consistently held in cases filed by aggrieved employees that passports should not be retained by employers. Further, retention of passports may also be an infringement of the Forced Labour Convention of the International Labour Organisation (ILO) which requires member-states ratifying the Convention to undertake to suppress the use of forced or compulsory labour in all its forms within the shortest possible period. Forced or compulsory labour is defined as all work or service which is extracted from a person under the menace of any penalty and for which the person has not offered voluntarily.

In the UAE, government circulars have been issued periodically proscribing the practice of retaining employees’ passports.

A similar circular was issued in November 2006 in Oman by the Ministry of Manpower upholding the right to retain one’s passport but without prescribing a penalty [or private right of suit] for its infringement. Consequently, enforcement is no easy task.

The ostensible justification that employers hold forth is that their employees may be controlling substantial parts of their assets and withholding their passports gives them the leverage to counter any attempt to misuse the authority vested in the employees. But this is a restraint on the right to free movement and could give undue advantage to the employer in a dispute. Further, the Supreme Court has ruled that foreign workers are no longer required to obtain the permission of their employers to seek new employment in Oman. The impact of this ruling could remain largely illusory if the employer retains the passport of the employee seeking new employment.

Retention of the employees’ passports may be an efficacious means to exercise control over the employees but it is clearly not a legal option available to employers. This underscores the need for employers and governments to devise a legally enforceable mechanism to remove the uneven bargaining power between parties.

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Wednesday, November 4, 2009

Signing of Documents by the Government

All contracts and obligations in the name of the Government of the Sultanate of Oman or on its behalf must be signed in accordance with Royal Decree 48/76 (as amended by Royal Decrees 80/94 and 23/97) or approved by a special decision of H.M. The Sultan.

Any contracts or obligations with the Government for RO 250,000 or more must be signed by two signatories, namely:

  • (i) the competent Minister, (ii) head of the Government Unit, (iii) the Chairman of the Organisation/ General Organisation/ public corporation, or (iv) by the person specifically authorised by any of them in writing; and

  • (i) the Minister supervising the Ministry of Finance or by the person he authorises in writing where the contracts or obligations are for RO 500,000 or more; or (ii) the Undersecretary of the Ministry of Finance for Financial Affairs or by the person he authorises in writing where the contracts or obligations are for RO 250,000 or more but less than RO 500,000.
If the contracts or obligations amount to less than RO 250,000, then the Royal Decree sets out the relevant signing requirements for contracts or obligations for (i) RO 100,000 or more but less than RO 250,000, (ii) RO 50,000 or more but less than RO 100,000, and (iii) less than RO 50,000.

There are also separate signing requirements for contracts and obligations in the name of H.M. Sultan or in the name of the Government and which provide that the Government or any of The Ministries/ the Government Units/ Organisations/ General Organisation undertake any investments or provide a third party with a loan or a grant to obtain a loan from such third party or issue bonds or any debenture loan or undertake any security or other financial dealings.

In the event that these signing requirements and the other conditions set out in the Royal Decree (as amended) are not met, then such contracts or obligations with the Government shall not be recognised and shall have no legal effect in Oman.

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Monday, November 2, 2009

What Fund Offering Terms Should Omani Institutional Investors Negotiate? Part 1:
Private Equity

Private equity funds are broadly accepted as an established asset class among institutional, sovereign and other sophisticated investors. As a general matter, the performance of private equity funds does not closely correlate with that of the public equity markets, thereby providing an excellent risk diversification tool for investors seeking to make a passive, long-term commitment of their capital. In this article, we briefly examine certain key terms that Omani institutional investors (e.g., sovereign wealth funds, pension and other government funds, private financial institutions, and banks) should consider negotiating for in relation to their capital commitment to private equity funds.

  • MFN Clause: The most-favoured-nation clause guarantees the institutional investor treatment no less favourable than that accorded, in the past or future, to any other investor in the fund. Any preferential treatment must be disclosed to the institutional investor, with the option to elect to receive such treatment itself.

  • Fees: Generally, management fees should be determined in relation to a fund’s aggregate capital commitments during the investment period and in relation to its declining invested balance thereafter. The carried interest, moreover, should only be paid if a hurdle rate is achieved (generally either 8% or 12% return, depending on the fund’s investment strategy), calculated on a “funds-as-a-whole” basis and subject to a guaranteed clawback. Further, no placement, organizational or other fees should be chargeable unless otherwise agreed with the institutional investor and disclosed on an item-by-item basis. The calculation of all fees and carried interest distributions should be confirmed by an independent audit to provide transparency to the institutional investor, and all fees should be commercially reasonable and in line with market rates.

  • Excusal Rights: Under the Executive Regulations and Instructions issued by the Ministry of Finance of Oman, certain institutional investors (such as sovereign wealth funds) may be statutorily forbidden from investing and/or maintaining more than a set percentage of their aggregate assets in investments outside of Oman. In such case, the institutional investor should require the fund to provide it with prior notice of any prospective investment to allow time to consider the permissibility of the investment and to elect not to participate.

  • In-kind Distributions: An institutional investor should ensure that all distributions of fund assets are made in cash, unless it specifically agrees to in-kind distributions, in which case it should request the right to establish a liquidating trust to receive the in-kind distribution.

  • Transferability: An institutional investor should request a carve-out to the fund’s transfer restrictions to permit affiliated-party transfers (for example, where the institutional investor is undergoing a reorganization) without requiring the fund’s consent.

  • Allocations of Carried Interest/Change of Control Disclosure: The fund manager should disclose the allocation of carried interest amongst its personnel and any changes to such allocations. Further, any changes of control of the fund manager should be disclosed to the institutional investor and trigger a suspension on commitment drawdowns.

  • Privileges and Immunities: Certain institutional investors may, under Omani law, benefit from immunity from certain domestic and international laws which would otherwise be applicable to them. No provision of any fund document should prejudice such immunity unless deliberately waived by the institutional investor.

  • Alternative Investment Vehicle: Where the fund elects to establish an alternative investment vehicle to pursue a particular investment opportunity, the institutional investor should have the right to “opt out” of the vehicle upon sufficient prior notice.

  • Forum Selection: Omani courts should have exclusive jurisdiction in respect of any legal action brought against an institutional investor relating to its investment in the fund.
Investing in private equity entails a long-term capital commitment by the investor (up to 12 years), coupled with little or no influence on the decision- making process of a fund. It is, therefore, crucial for Omani institutional investors to negotiate the inclusion of terms, such as the above, in a side letter agreement with the fund manager before investing to ensure high levels of transparency and oversight of the fund manager’s decision-making process, and the alignment of the fund’s investment strategy with the investor’s portfolio diversification and regulatory requirements.

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Tuesday, October 27, 2009

Agents and Defense Contracts

In April 2001, the Omani Ministry of Defense ("MOD") issued a circular to overseas defense manufacturers, stating that the Ministry would not allow such entities to have an Omani agent, except in exceptional circumstances approved by the Ministry.

However, in 2003, both Oman's Appeal and Supreme Courts ruled that the MOD letter had no legal effect, as it was not a promulgated Omani statute. These Courts stated that Oman's Law of Commercial Agencies still applied.

Then, in 2005, the Law of Commercial Agencies was amended by Royal Decree. The wording of the amendment stated that contracts for the purchase of weapons or ammunition or all types of military equipment could be entered into directly between the MOD and the overseas defense manufacturer.

However, the amendment to the law did not prohibit an overseas defense manufacturer from having an Omani agent. The true construction of the relevant sentence shows that the law is simply saying that an agent is no longer mandatory for defense contracts.

Nonetheless, regardless of the law, the practical truth is that, unless the MOD agrees in advance, it prefers agents not be involved in such transactions.

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Monday, October 26, 2009

Enforcement of Court Judgments and Arbitral Awards

There is often a lot of confusion about the effects of Oman Court judgments and Oman arbitral awards rendered in Oman. This post should provide some clarity.

First, there is a distinction between court judgments and arbitral awards.

A final, non-appealable Oman Court judgment should be automatically enforced in any of the other GCC states, by virtue of the 1996 Treaty for the Enforcement of Judgments, Judicial Delegation, and Courts Summons between the Arab Gulf Countries Cooperative Council (AGCC).

Outside the GCC, it is unlikely that a final Omani court judgment would be automatically enforceable. Almost certainly, the case would have to be heard again by the courts of that country.

Second, there are two relevant types of arbitral awards in Oman. The first type is an arbitral award rendered in Oman. This award should be automatically enforced in any country which, like Oman, has signed the 1958 New York Convention on the Enforcement of Foreign Arbitral Awards (the “NY Convention”). Under the requirements of the NY Convention, any country that is a member of the convention is required to give effect to private agreements to arbitrate disputes. In addition, member countries are required to recognize and enforce arbitration awards made in another contracting country. Oman signed the NY Convention in 1999 and currently there are 144 member countries worldwide.

A second type of arbitral award involves those awards rendered in a fellow member state of the NY Convention. If the respondent to the claim fails to pay the award, the claimant may seek to enforce the award in an Omani court.

This particular scenario has not yet been tested in Omani courts, but the terms of the NY Convention would require the Omani court to enforce the arbitral award, just as the courts of all signatories to the NY Convention.

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Monday, October 19, 2009

H1N1 Workplace Readiness Plans

Globally, businesses are preparing plans for dealing with outbreaks of H1N1 at work. Businesses in Oman should also consider implementing readiness plans for dealing with an outbreak and for complying with the Omani Labour Law.

Article 87 of the Labour Law requires employers to provide a clean and safe workplace. H1N1 readiness plans for companies may include:

  • A communicable disease policy, that requires sick employees to stay home from work without fear of losing their jobs;

  • Employee education regarding the spread of flu and how to recognize symptoms;

  • Other methods for reducing the spread of disease, including air ventilation and purifying systems, hand sanitizers, etc.;

  • Work arrangements such as telecommuting which reduce personal contact, as well as other limitations on non-essential travel;

  • A plan for how essential business operations will continue if there is an increase in employee absence.

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Wednesday, October 14, 2009

Corporate Ownership of Real Estate

Companies in Oman seeking to own land are subject to a number of restrictions under Omani law. The land or real property owned by a company in Oman must be used only for the limited purpose of furthering the objects of the company such as for building the administrative office, warehouse, staff residences, etc. An exception has been made in relation to wholly owned Omani companies whose business objects include owning, developing, and disposing of real property. Additionally, certain wholly owned GCC companies with real estate development objects have also been exempted from this legal stipulation for restricted use of land.

Corporate ownership of real estate is subject to the following restrictions:

  • The land must be used for furthering the company's objects;
  • Prior governmental approval must be obtained for its usage; and
  • The owner may not dispose of the land before the completion of the legally stipulated number of years from the time of acquiring title to it.
One option available to non-GCC companies in Oman that are interested in real estate development is to obtain usufruct rights over the land. Usufruct is a right in land acquired from the owner of the land to exploit and benefit from the land. Usufruct can be obtained for a maximum initial term of fifty years extendable for further terms. The owner of the land must obtain the mandatory governmental approvals before granting usufruct rights. A company can obtain rights to beneficial use of the land by entering into a usufruct agreement with the owner which is subject to government approvals for the usufruct and for the development plans.

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Monday, October 12, 2009

Liability Period for Engineering Work

An important consideration for companies seeking to undertake construction or engineering projects in Oman is potential liability for that work. The Law on Engineering Consultancy Offices (Royal Decree 120 of 1994) states that engineering consultancies in Oman shall be jointly responsible with the contractor who executes the work for flaws in the project for ten years from the handover date.

Design defect vs. construction defects
The law does include a limitation on this joint responsibility, stating that if the engineering consultant performs design work only, without supervision or execution, the design office will be responsible only for the design defects.

Oman's Standard Documents for Building and Civil Engineering Works are also useful in clarifying the scope of liability for engineering designers and contractors. The standard construction contracts which are used in government projects, state in Article 62(4), that the entity executing the construction will be liable for 10 years as regards "unsound construction, other than design defects". In other words, the normal standard contract would appear to exclude any liability falling upon the construction entity for design flaws.

For companies planning to complete projects by dividing engineering design and construction work, one option for limiting the liability of the constructing entity to construction flaws only is to procure a back to back indemnity from the designer on the project. The indemnity would state that the designer will indemnify the construction company for any design defects.

What is engineering work?
The law does not define what constitutes engineering work. The law suggests that the design and construction of buildings and structures constitute engineering work, but this should not be narrowly construed as there are many aspects to engineering services in Oman, from feasibility studies through to architectural services and civil works which may be captured by this law.

Insurance issues
It is sometimes not practical to obtain insurance cover for such work for the entire ten years. Some reasons for not obtaining the insurance for ten years are that:

  • It is not always possible to agree to insurance that matches such a long liability period in instances where the work is a non critical item in the project;
  • It is too expensive to maintain insurance for the ten years; and
  • It makes little sense when the reports produced will be superseded by subsequent developments.
In such instances, it ultimately depends on the commercial arrangements between the parties.

Another insurance issue is the type of insurance policy which needs to be obtained. The Insurance Law (Royal Decree 12 of 1979) stipulates that except for life insurance, contracts of insurance shall not be effected with foreign insurance companies which operate outside Oman. Companies taking out insurance policies for their engineering work need to ensure that the insurance company they contract with has a corporate presence in Oman which can receive and respond to any claims.

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Tuesday, October 6, 2009

Authorised Managers and Signatories

The Commercial Registration Certificate of an Omani company (such as a limited liability company and a joint stock company) is available from the Ministry of Commerce and Industry for a small fee. It sets out certain information on the company including the names of the authorised managers and signatories of the company.

The Commercial Registration Certificate specifies the type of authorisation for the authorised managers and signatories - the options are full, financial, technical and/or administrative. The authorisation can be for one person to act individually or jointly with another person. It can also include an authorisation limit for financial matters which can be a set monetary amount or unlimited.

Under Article 153 (Binding effects of manager’s acts) of the Commercial Companies Law, a limited liability company shall be bound by all acts performed by its managers acting in the company’s name and within the scope of their authority. Any bona fide third party shall be entitled to assume that any act done by the managers of the company in the course of its business comes within the scope of the manager’s authority, and the company shall be bound thereby unless the limitation of the manager’s authority is registered in the Commercial Registration Certificate. Article 104 (Binding effect of acts of the company) of the Commercial Companies Law sets out a similar requirement for joint stock companies for the board of directors, chairman, and managing directors of the company.

Therefore when doing business with an Omani company, the most prudent course of action is to ensure that all documents signed by that company are signed by an authorised signatory or signatories with the relevant authority as set out in the Commercial Registration Certificate. This will avoid the situation where the authority of the signatory or signatories signing on behalf of the company may be challenged at a later date.

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Thursday, October 1, 2009

International Projects Update: IWPP Finance in Oman and the GCC

After years of remarkable expansion followed by a precipitous decline in the wake of the global financial crisis, the credit market for international water and power projects (IWPPs) in Oman and the GCC appears poised for a recovery.

While 2008 saw a project volume in the Middle East of about US$50 billion, nearly six months passed before the GCC saw its first IWPP financing of 2009. Bahrain’s Addur IWPP closed on 29 June, raising US$2.1 billion and bringing the overall project volume for the region to US$6.7 billion for the year.

The financial crisis forced project lenders to write down the value of project debt, driving up the cost of borrowing. Further, it wiped out the secondary market for project loans as banks shunned the formerly popular practice of packaging debt in off-balance sheet vehicles.

The capital that commercial banks were willing to lend came at a higher cost and decreased tenor. Whereas tenors running from 15 to 20 years at 100 bps over Libor were once common, the Addur project received debt at a tenor of eight years at 350 bps over Libor. Today, the cost of capital averages at 250 bps over Libor.

The revival of IWPPs in the region has been driven by loosening credit conditions linked to new trends in IWPP finance. Specifically, banks are making increasing use of hard or soft mini-perm structures. In a hard mini-perm, debt is offered at a short tenor, in the range of seven years, requiring early refinancing. In a soft mini-perm, a longer tenor is used, but incentives are used to encourage the lender to refinance well before maturity.

Another key trend has been the rising profile of export credit agencies and international development banks. Export credit bodies provide access to large amounts of relatively inexpensive capital and offer added confidence to commercial banks. Development banks have also played a key role by providing an additional source of capital and a backstop for project debt.

Finally, banks have been favoring government supported projects. For instance, an IWPP with a concession or off-take agreement is a stronger candidate for financing given its relatively secure future cash flows. Additionally, governments may guarantee the obligations of state-owned parties entering into such agreements.

Increasing electricity and water demand has led the government of Saudi Arabia to tender projects in form of engineering, procurement, construction (EPC) contracts, rather than build, own, operate (BOO) or build, own, transfer (BOT) contracts.

Oman aims to avoid such a measure. Continuing on its program of privatization, Oman expects to see the close of a club financing of an IWPP in Salalah this year. RFPs have been released for projects at Barka, Sohar, Duqum, and Ghubrah, with another for an IWPP in Mirbat on the way. Additional projects are being studied, including a solar plant in the south of the country.

In past projects, the Oman Power & Water Procurement Company (OPWP) has entered into off-take agreements. In the case of the Barka and Sohar IPPs, the OPWC will purchase the output under a 15-year agreement.

IWPP finance and execution in Oman implicates a range of complex legal issues, including:

  • Licensing – procurement of generation and desalination licenses and exemptions from the Authority of Electricity Regulation;
  • Financing – the creation and registration of security interests in Oman, as well as review of loan and facilities agreements;
  • Land Issues – entering into a concession agreement with the Government and or any usufruct agreements as may be required;
  • Environmental – Compliance with the Environmental laws of Oman in coordination with the environmental authorities;
  • Labor and Employment – Fulfilling the Omanisation requirements during the life of the project.
In addition, it is often necessary to put in place all the project agreements in order to obtain IWPP finance. Depending on the project, these agreements may include:
  • Power and/or Water Purchase Agreement;
  • Electrical Connection Agreement;
  • Water Connection Agreement; and
  • Gas Supply Agreement.
As the credit market revives -- and as the oil prices rebound -- Oman grows increasingly likely to meet its goal of increasing output through an ambitious program of privatization.

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Friday, September 11, 2009

Labor Law Alert: Omanisation

Earlier Omanisation policy aimed at reducing the reliance on foreign workers prescribes sector-wise Omanisation targets for the private-sector employers to achieve with a target of 90% for the revenue-rich sectors of oil and gas, banking and travel and tourism and 100% for marketing. The policy makes it mandatory for employers to employ Omani nationals for certain administrative posts such as receptionist and security officer. In addition, certain jobs have also been Omanised area-wise, limiting expatriate employment to certain regions.

The employers in the private sector are required to file their Omanisation plans annually with the Ministry of Manpower.

The implementation of the policy is two-pronged: (i) incentivising companies exceeding the prescribed target; and (ii) restricting foreign labour clearances for employers failing to meet the target. Private- sector companies exceeding their Omanisation targets and meeting other labour-related criteria are entitled to a ‘green card’ which guarantees preferential treatment in some Ministries and other government agencies.

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Wednesday, September 9, 2009

Doing Business in Oman: Potential Changes to the Marker Disruption Clause from a Borrower's Perspective

Following on from last month’s article on market disruption clauses, we consider here how the market disruption clause could be negotiated from a borrower’s perspective in a new loan agreement or amended in existing loan documentation. We are using the English style Loan Market Association syndicated loan agreement as the starting point for this discussion. However, even if a different starting point is used, many of the points will be equally applicable.

From a borrower’s perspective, the main aim will be to tighten the wording of the market disruption clause. Clearly, lenders and the agent will try and resist many of these changes and will emphasis that anything that is different from the standard in this clause will make it harder to syndicate and close the transaction.

Issues that could be raised on the market disruption clause by the borrower include:

  • consultation: currently there is no requirement for consultation between the lenders and the borrower when the lenders determine their actual cost of funds. The only requirement on a lender is to provide the costs of funds from “whatever source it may reasonably select”. A borrower would want to know that a lender had considered a broad range of funding options and selected the cheapest. In addition, the borrower may want to request a certificate from each lender certifying its source and costs of funds.
  • reasonableness: a borrower may seek to impose an obligation of reasonableness on the lenders in triggering this clause, such as a requirement that a lender’s actual cost of funding exceed an agreed amount above the relevant screen rate for LIBOR (London Interbank Offer Rate) – current wording merely refers to it being “in excess of LIBOR”. A further requirement could include an obligation on the lenders to negotiate in good faith in relation to agreeing on a substitute basis of interest and to use reasonable efforts to minimize their actual cost of funds.
  • increase the trigger threshold: the threshold for triggering this clause is a set percentage (usually between 25% and 50%) of participations in the loan. The threshold could be increased to make it harder for one or two lenders to trigger it.
  • reference banks: a borrower might seek to use the average funding costs of a number of reference banks (including some of the syndicate lenders) as the basis for calculating the interest rate payable as opposed to the relevant screen rate for LIBOR. This would be a move back to the previous market practice before the use of LIBOR was introduced.
  • interest periods: a borrower might seek the right to invoke shorter interest periods than the typically one-, three- or six-month periods, such as one week interest periods to assist the affected lenders in minimizing the actual costs of funds. However, this will create additional work for the agent and has potential cash flow implications for the borrower as interest is payable at the end of each interest period.

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Monday, September 7, 2009

Focus On: Clause 67 Still Causing Issues in Engineering Sector

It is over 28 years since the Standard Documents for Building and Civil Engineering Works (Third Edition) were introduced - and yet, after all these years, they still create legal issues which necessitate analysis and discussion.

For parties who have differences of opinion in respect of a contract governed by the Third Edition, it is inevitably clause 67 which is scrutinized.

Clause 67 states that any issue shall be referred to the Engineer who must give a written decision to the Employer and Contractor within 90 days of being requested to do so by either party. The Engineer's written decision is final if the aggrieved party fails, within 90 days from receipt of the Engineer's decision, to state in writing (to the Engineer and the other party) that it requires arbitration.

Moreover, if the Engineer fails to render his written decision within 90 days of being requested to do so, the aggrieved party must write to the Engineer and the other party in the 90 days following the expiry of the first 90-day period, stating that arbitration is required.

The above sounds straightforward but - in reality - things move less smoothly.

Before writing to the Engineer for a decision, the aggrieved party should draft in detail all the arguments for its position, and the request should be very precise and state exactly that which is sought from the Engineer. A failure in this regard would make it all too easy for an Engineer to make a decision refusing the request, especially as clause 67 does not require the Engineer to give reasons for his decision.

It should also be noted that clause 67 does not give room for maneuver, or for friendly talks between the parties. Basically, once you request an Engineer's decision, you are under the auspices of the procedural machinery set out in clause 67. You really have no option but to adhere to that contractual machinery.

Having said that, there is nothing to stop an aggrieved party from trying to find an amicable settlement after having rendered a notice requiring arbitration. Clause 67 does not specify any time-frames beyond the time when the aggrieved party renders its written notice requiring arbitration, although of course the aggrieved party cannot delay indefinitely. This scenario inevitably gives a window of opportunity for the parties to negotiate after the arbitral notice has come into existence.

In essence, an aggrieved party invoking clause 67 should remember the following:


a) do not violate any of the time periods stated in clause 67,

b) make sure that the requests to the Engineer give all the detailed reasoning and documents underpinning the request,

c) the requests themselves must be precise and very well-drafted, and

d) the time to hold friendly talks is only after you have rendered an arbitral notice.

In all of the above, lawyers can give cost-effective advice as the chances of avoiding a full-blown arbitration are much higher if legal input is obtained (behind the scenes, without the other party's knowledge) right from the start of the clause 67 process. The friendly talks after the arbitration notice of course also can take place without involvement of lawyers.

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Thursday, September 3, 2009

New Law Alert: Abolishment of Legalisation

A new royal decree has been issued this month abolishing the requirement of legalisation for foreign public documents. Royal Decree No. 47/2009 approves the Sultanate of Oman joining the 1961 Hague Convention, and replaces the existing system for legalising documents with a certificate known as an Apostille. The Apostille allows specific types of foreign public documents to be freely circulated in all nations that have approved the Hague Convention. Examples include patents, court rulings and notarial attestations of signatures, but do not include diplomatic documents and administrative documents dealing directly with commercial or customs operations.

Apostilles can only be issued by an authority designated by the country from which the public document originates and the Convention applies to public documents that have been executed in one signatory State and which have to be produced in another signatory State. For example, if a company in Oman wanted to use a notarized copy of the Memorandum and Articles of Association of a company based in England, it would only need to procure the England & Wales Apostille relating to that document, and affix it to the extract from Companies House.

The details of Royal Decree 47/2009 are emerging still and information has not yet been made public about how the Convention's provisions will be implemented under Omani law. However, companies in Oman will greatly benefit from the new decree as it will simplify the existing system and make it easier to do business with foreign companies. It is worth noting that Apostilles do not relate to the content of the underlying foreign public document; they only certify the authenticity of the signature, seal or stamp the document bears.

Each designated authority will maintain a Register recording all the Apostilles it has issued. The Registers, which can be accessed by any interested party, are designed to combat fraud and assess the origin of an Apostille in case of doubt.

For an updated list of signatory States to the Convention, see the “Status table of the Apostille Convention” under the “Apostille Section” of the Hague Convention website (http://www.hcch.net). You also can find a list of each State's designated authorities.

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Wednesday, September 2, 2009

Focus On: Mining in Oman

Oman has vast mineral resources which could provide project opportunities for both foreign companies and Omani companies and individuals. Specifically, Oman’s mineral resources include chromite, copper, dolomite, zinc, limestone, marble, gypsum, silicon, gold, cobalt and iron.

There are several projects either planned or already underway in the mineral sector, including plans to establish a “Minerals-City” to serve as a hub for a number of minerals based downstream processing projects. The Minerals City is planned by Takamul Investment Company, a majority Omani government-owned investment vehicle having Oman Oil Company as the majority shareholder. The projects will include a US$450 million salt/soda ash project in partnership with the Tata group, an Indian business conglomerate. The Minerals City will also include a silicon carbide processing facility at a cost of US $40 million, in partnership with SNAM Abrasives of India.

In addition, Brazil-based Vale International has established a subsidiary in Oman that is constructing a pelletizing plant in Sohar. The plant will produce high grade iron ore pellets that will supply the direct reduction facilities of the steel industry in MENA. Vale is also performing exploration studies in Oman to determine what minerals are suitable for potential development.

Several studies in the mining sector are also underway, including an economic feasibility study on silica and another on the exploitation of gold and copper ores in the Ghaizeen area. Gold in particular has tremendous potential in Oman, which is the only Gulf country with substantial gold reserves other than Saudi Arabia. In fact, the United States Geological Survey estimates that gold production in the Middle East will more than triple in 2009 from 2006 levels.

For those seeking to engage in mining activities in Oman, there is a comprehensive legal framework laid out in Oman’s Mining Law (Royal Decree 27 of 2003). The mining law includes provisions relating to the issuance of mining licenses, dispute resolution in the mining sector and environmental protection.

Joint ventures may be a good option for those seeking to get involved in the mining sector, as local license holders can partner with foreign investors to get the benefit of their technology and resources. In such a case, the Ministry of Commerce and Industry may issue a mining concession or license to an Omani company or individual for a particular site. If the license holder lacks the technology and resources to fully exploit the site, a foreign company can bridge that gap. The parties will enter into a mine exploitation agreement, in which the foreign company will assist with or execute mining operations under the local partner’s license. At a minimum, the Mining Law requires any mine exploitation agreement to include: (i) provisions relating to the payment of fees and taxes, and other financial matters; (ii) provisions relating to environmental conservation; and (iii) a dispute resolution mechanism that complies with the provisions of the Mining Law.

In addition to these minimum provisions, the parties also may consider the inclusion of market disruption clauses that provide for the consequences of any substantial changes in the market for the mining product. This is essential as prices for different minerals can change dramatically over the term of an agreement.

Further, the Mining Law requires that any dispute arising regarding a mining concession or license, or in relation to the drilling or exploitation of a mine, be resolved through arbitration rather than through the courts of Oman or another jurisdiction. The mine exploitation agreement should specify the location, language, governing law and applicable rules of the arbitration.

Oman’s mineral resources are expected to be a large source of revenue and growth for the Omani economy outside the oil and gas sector, presenting a wide array of project opportunities for investors.

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Monday, August 24, 2009

Renewable Energy Update: Carbon Finance

On June 29, 2009, the newly created International Renewable Energy Agency (IRENA) announced that its headquarters would be located in Abu Dhabi’s Masdar City, marking a high point in the Gulf Cooperation Council’s (GCC) embrace of a future in renewable energy.

In late July, the Sultanate of Oman led the GCC further, announcing the creation of a Designated National Authority (DNA) pursuant to its commitment as a ‘non-Annex B’ party to the Kyoto Protocol.

The creation of a DNA is a crucial step that will ultimately allow Oman to host projects, including renewable energy and clean technology projects, that reduce greenhouse gases under the Kyoto Protocol. These projects can provide an additional revenue stream to Oman from emissions credits sales in developing international carbon markets.

The Growing Market for Carbon Allowances

Many experts believe that the environmental and economic costs of climate change will trigger a reordering of financial and industrial resources on a global scale. In order to prevent widespread environmental disruption, regulatory intervention aimed at promoting innovation will be required on national, regional and international levels.

The need for innovation is not limited to the development of new technologies. The drive for creative solutions to global warming has resulted in the creation of new financial products and markets aimed at managing and transferring the risks and costs of global warming. The so-called ‘cap-and-trade’ system is a key element of the Kyoto Protocol, an international agreement implementing the United Nations Framework Convention on Climate Change.

Under Kyoto’s cap-and-trade regime, certain member states (Annex B nations) are limited in the level of carbon or greenhouse gases they emit into the atmosphere. Each member is issued emission allowances, one unit of which corresponds to one ton of greenhouse gas and indexed to the global warming potential of carbon dioxide (CO2). Under Kyoto, emissions allowances are freely tradeable between Annex B members.

Also under Kyoto, non-Annex B members, primarily developing countries free from Kyoto’s carbon emission limits, are permitted to monetise investments in carbon reduction projects by developing projects under the Protocol's Clean Development Mechanism (CDM). Projects under the CDM program are accredited by the CDM Executive Board, an implementing body of the Protocol, and result in reductions in carbon emissions, the implementation of which will earn emissions reduction credits (CERs) which can be sold on the open market to emitters in Annex B member nations.

Projects in Oman developed under the CDM must be approved by both the Oman DNA and comply with requirements established by the CDM Executive Board.

According to the World Bank, the overall carbon market was valued at US$126 billion at the close of 2008, more than double its value in 2007. The secondary market for CERs saw a five-fold increase in both volume and value over the prior year. Despite the uncertainty created by the expiration of the Kyoto Protocol in 2012, project developers are still reviewing and investing in credible projects in certain markets.

Opportunities in Renewable Energy

The Sultanate’s decision to establish a DNA also will present businesses in Oman with new opportunities in the renewable energy space. While wind, biogas, geothermal and wave energy pose strong opportunities for Oman, the greatest promise is held by solar energy. According to the Omani Authority for Electricity Regulations (AER) May 2009 report, Oman is the beneficiary of some of the highest levels of solar density in the world. If harnessed, solar energy could provide for all of Oman’s electricity needs.

Work to achieve this goal is underway. In May, the Public Authority for Electricity and Water (PAEW) of the Sultanate announced a tender for the first large-scale solar power plant in Oman on a build, own and operate basis.

The sale of CERs could facilitate the benefits posed by solar energy by helping finance such projects. According to AER, Oman’s origination of CERs could save anywhere from three to 18 percent of the operational and capital costs of solar and wind grids.

Legal Issues Related to CDMs

Firms seeking to participate in CDMs will face a number of unique legal issues. Specifically, firms will need to comply with CDM rules in order to ensure that CERs are properly issued. CERs must be validated, registered, verified and certified by the proper national and international authorities and independent auditors before issuance. When selling CERs, parties must carefully negotiate and adequately record the agreement, identifying responsibilities, establishing rights and allocating risk with an eye to the unique aspects of the asset and the particular risks that may arise. Risks include the classification of the CER property right in both the host and purchasing country, the tax treatment of CER revenue and the use of national and international emissions reduction registries to track and record CERs.

While it remains to be seen exactly how Oman’s DNA will be implemented, it is clear that any potential CDM projects must adhere to Omani law, as well as CDM rules.

Certainly some time is needed before the details of these policies come into focus, but it is clear that Oman is taking seriously opportunities in renewable energy and that many firms in Oman stand to benefit from this initiative.

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Wednesday, August 12, 2009

Labor Law Update: Omanisation Percentages Announced

Earlier this month the Ministry of Manpower issued a Ministerial Decision increasing Omanisation levels for a number of fields for the 2009-2010 period.

The Omanisation target for the engineering sector is set at 50%, with targets of 70% for technicians and 80% in the category of skilled workers.

In the oil and gas sector, the Omanisation level will remain at 90% for production and operation companies in 2010 and 82% for direct service companies.

For the accounting field, the Omanisation target in 2010 will be 29% for managers, 55% for specialists, and 66% for technicians. For clerical positions the Omanisation level is 100%.

In the industrial sector, the Omanisation target is set at 35%. For banking, the new target is 90%, and for financing and insurance the new targets are set at 45%.

The Ministerial Decision included an August 15 deadline for private companies to submit proposals on how they will achieve the new targets.

In practice, companies seeking to obtain residence and employment visas for foreign employees may have difficulty obtaining Ministry approval if the company is not achieving the Omanisation targets. In addition, the Ministry may impose certain penalties.

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Monday, August 10, 2009

Renewable Energy Update: Carbon Credits

Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air, and are openly traded in many countries. Currently, Oman is taking steps to enable the Sultanate to be a potential player in the international market and to promote renewable energy investment in Oman through the establishment of a new governmental authority.

The Oman Ministry of Environment and Climate Affairs announced that it is in the process of setting up a new authority for administering “clean development mechanisms” (“CDMs”) in Oman. CDMs are part of the Kyoto Protocol, which is an international agreement linked to the United Nations Framework Convention on Climate Change. The Kyoto Protocol sets binding targets for the reduction of greenhouse gas emissions. Oman became a member of the Kyoto Protocol in January of 2005.

CDMs are one of the Kyoto Protocol’s three flexibility mechanisms designed to assist countries to meet their greenhouse gas emission reduction targets. CDMs allow an industrialized country with an emission-limitation commitment to implement an emission-reduction project in a developing country. The implementation of a CDM project, e.g., a rural electrification project using solar energy, can earn saleable certified emission reduction credits or carbon credits which can be counted towards meeting Kyoto targets.

A developing country like Oman could host CDM projects that would attract investments from foreign companies seeking to earn carbon credits. These carbon credits can then be sold and traded on the open market.

In Oman, these CDM projects will be regulated by the Designated National Authority (“DNA”). The DNA will determine what CDM projects that it wishes to propose to the CDM Executive Board for accreditation. The process of establishing the DNA also coincides with the overwhelming response generated for the government’s recent solar energy initiatives in the power sector.

In accordance with the substantial national interest in renewable energy, it is hoped that the DNA will develop rules for audit and certification of CDMs so that Omani companies, as well as foreign companies, can fully participate in the creation of CDMs and the chance to sell carbon credits in the open market. Omani companies should be aware that CDMs present a potential revenue source, as carbon credits are traded internationally. The constitution of the DNA is the first step towards the establishment of clear mechanisms for companies to participate in such programs.

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Wednesday, August 5, 2009

FAQ: When is a Contract Formed?

When entering into contracts in Oman, complications may arise when the parties begin performing the obligations under a “contract” while the final terms are still being negotiated. What happens under Omani law when a dispute arises over the incomplete “contract”? When does a contract become a contract that is binding on both parties?

In some cases, the Oman Court (or arbitrator, if there is an arbitration clause) will be willing to impute the existence of a contract even when the parties do not have a signed agreement. For example, if an employer in Oman does not sign a written contract with his employee, the Oman Courts would still impute a contractual relationship based on evidence such as pay slips, or transfers made regularly to the employee's bank account by the employer.

In a more standard commercial context where two parties have a substantially negotiated but unsigned agreement, or even a verbal agreement that is never fully formalized in writing, the answer is not as clear. In these cases, the Oman Courts will most likely look to any documentation pertaining to the deal in deciding whether there is a contract. This is in accordance with Oman’s Commercial Code which states that contracts “may be proven by all means of so doing...”, and not only through a signed agreement.

The Oman Courts may recognize the existence of a contract, even though there is no final written agreement signed by both parties. The Court should recognize the contract based on exchange of letters, or on verbal offer and acceptance, or on the mutual trading conduct of the parties.

The ability of an Oman Court to recognize a contract is supported by Article 89 of Egypt’s Civil Code, which states that a contract is created from the moment that two persons have exchanged two concordant intentions. Article 90 of Egypt’s Civil Code adds that an intention may be declared verbally, in writing, or by conduct. The Egyptian Civil Code is the bedrock of Arabic legal justice and is heavily influential in Oman.

Nonetheless, despite the ostensible security afforded by the Egyptian Civil Code, parties seeking to prove the existence of a contract or finalize an agreement should seek legal advice. At a minimum, it is important for the party seeking to prove the existence of a contract to detail in writing to the counterparty, on a contemporaneous basis, those elements which have been agreed upon. In this respect, it is noteworthy that Oman’s Supreme Court has ruled that silence can amount to consent. In other words, uncontested letters can prove vital in dispute resolution scenarios.

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Thursday, July 30, 2009

Doing Business in Oman: Market Disruption Clauses in Loan Agreements

We understand that the market disruption clause has recently been invoked by more than one Omani bank in relation to loans to at least one Omani company following the turmoil in the banking sector at the end of last year. Previously this clause had seldom been relied upon by lenders and therefore had not been highly negotiated by borrowers. Lenders have been reluctant to rely on this clause for reputational and competitive reasons - they are nervous about revealing they have to pay more in the interbank market than the LIBOR (London Interbank Offer Rate) and their actual funding costs.

The market disruption clause in the Loan Market Association (“LMA”) style loan agreement can be triggered if the cost of obtaining matching funds in the market to fund a loan for lenders with the required percentage of participation (typically varies between 25% and 50%) is in excess of LIBOR. If this clause is triggered, then the interest rate on each lender’s share of the loan for that interest period will be calculated using the actual cost to that lender of funding its share of the loan from whatever source it may reasonably select. This clause will need to be re-triggered for each interest period.

When this clause is triggered, the borrower may request that the agent enter into negotiations for up to 30 days with a view to agreeing a substitute basis for determining the interest rate. In reality, this may not assist the borrower, as any substitute basis for determining the interest rate will require all lenders’ consent.

Issues of concern for the borrower where this clause has been triggered include:

  • An increase in the borrower’s funding costs - the actual cost of funds will be payable to all of the lenders;
  • The potential breach of certain financial covenants – such as the interest cover ratio – in the loan agreement; and
  • If there is any interest rate hedging, this hedging is no longer likely to match the interest rate payable - there are typically no market disruption provisions relating to LIBOR in such hedging arrangements.
Actions that a borrower could subsequently take include:
  • Requesting that the additional interest costs should be ignored in calculating the financial covenants;
  • Prepaying the lenders with the highest funding rates - this is likely to require all lenders’ consent and may encourage lenders to quote higher funding rates;
  • Selecting shorter interest periods – there tends to be greater liquidity available in the market for shorter interest periods and it would also shorten the period during which this clause would apply; and
  • Agreeing a higher interest rate payable under the loan agreement - this is only likely to require consent of a majority of the lenders but all lenders’ consent would be required to effectively bind the lenders from subsequently triggering this clause.
The wording of the market disruption clause in a loan agreement will need to be reviewed carefully as it is likely to differ from the LMA style loan agreement.

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Tuesday, July 28, 2009

Focus On: Maritime Piracy and the Law

A series of spectacular attacks by Somali pirates over the last year has attracted enormous attention to the timeless, and now resurgent, problem of maritime piracy. For a time, the problem seemed limited to the waters off the Horn of Africa, but last month, pirates struck close to Oman in dramatic fashion. Armed with heavy weapons and night-vision capabilities, Somali pirates hijacked the German cargo ship MV Charelle 60 nautical miles off the coast of Sur. This attack was the first instance of Somali pirates seizing a ship outside of their normal area of operations.

The international attention is more than a passing fancy. Maritime piracy has had very real costs for shippers, as well as exporting countries and industries. The world has watched as pirates have hijacked vessels of increasing size and value, including a super-tanker carrying 2 million barrels of oil worth US$100 million. The total economic cost of maritime piracy has been estimated at over US$10 billion.

For a nation like Oman whose fortunes rest in part on a healthy shipping and export sector, security of shipping vessels and cargo is imperative. Perhaps the most significant determinant of security is how the law is used by both governments and private actors to combat and prevent maritime piracy.

International law creates a framework through which coordinated, collective action by states against maritime piracy is possible. Domestic civil law, on the other hand, provides a range of mechanisms through which businesses may protect their interests by taking preventative action.

The International Legal Response
The recent spike in attacks has sparked an unprecedented level of multinational anti-piracy activity; namely, the creation of an anti-piracy armada including ships from more than twenty countries. These joint patrols find legal authorization under the U.N. Convention on the Law of the Sea (the “U.N. Convention”). The United Nations Convention deals with the rights and responsibilities of nations in their use of the world’s oceans. Oman is a signatory to the U.N. Convention and ratified it in Royal Decree 67 of 1989. Recently, the U.N. Security Council has also issued a series of resolutions expanding the legal basis for the use of force on Somali pirates.

The result of this coordination has been, in the words of U.N. Secretary General Ban Ki Moon, “one of the largest anti-piracy flotillas in modern history.”

This cooperation has included many Gulf nations, including Oman. On June 29, Omani naval commanders participated in a conference in Riyadh with representatives from eleven other Arab states in the Gulf and the Red Sea aimed at coordinating a regional response. Out of this meeting came decisions to establish a joint naval task force and strengthen naval forces in the region.

In addition to providing a framework for joint action, international law has helped direct the criminal prosecution of suspected pirates. In the 18th century, it was determined that maritime piracy constituted a universal crime that could be prosecuted in any jurisdiction, regardless of geographic connection to the criminal act, the defendant or the victim. This concept became known as “universal jurisdiction.”

While universal jurisdiction allows any nation to prosecute a maritime pirate, in practice, most nations are loathe to spend time or resources prosecuting and incarcerating pirates from far away lands for crimes widely considered to be beyond the deterrent effect of limited judicial prosecution.

As a result, interested nations have increasingly entered into bilateral agreements on the prosecution of suspected pirates. In recent months, Kenya has signed memorandums of understanding with the U.S., the European Union and Britain to prosecute suspected pirates in Kenya.

The Domestic Legal Response
In Oman, there have been concerns about more pirates crossing into the territorial waters of Oman. Territorial waters, as defined in the U.N. Convention, consist of the coastal waters extending no more than twelve nautical miles from Oman’s coasts. These territorial waters are regarded as the sovereign territory of Oman.

While international law plays a crucial role in organizing the governmental response to piracy, businesses and individuals in Oman may consider a preventative approach by looking to domestic laws to protect their interests.

Specifically, exporting industries and businesses involved in shipping will secure their goods and vessels through contracts with insurers and private security contractors. In that regard, private maritime security companies are considering the establishment of business operations in Oman.

War insurance may be desirable, as may ransom and kidnapping coverage. The Oman Maritime Law (Royal Decree 35 of 1981, as amended) states that certain war risks, which may include piracy, are not included in a policy unless it has been agreed otherwise between the insurer and the insured. Therefore, it would be important for those seeking war insurance coverage for piracy in Oman to clearly agree what events are covered.

Some may seek new physical deterrents to employ onboard their vessels, while others may prefer to hire armed escort vessels to repel would-be pirates.

In instances where shipments have been hijacked, private individuals will need to ensure that the payment of ransom does not run afoul of the law in any jurisdiction in which they operate. While it is not typically illegal to make a ransom payment, it is illegal in many jurisdictions to make payments to parties determined to be involved in acts of terrorism. Given the murky relationships between Somali pirates and terrorist organizations active in Somalia, it must be determined whether any relevant domestic anti-terrorism laws would be implicated in the payment of ransom.

The legal issues created by maritime piracy underscore the need for internationally experienced legal counsel. In under a decade, the 21st century has shown with alarming frequency that domestic concerns, such as instability in Somalia, can give rise to global problems as significant as maritime piracy.

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Monday, July 13, 2009

Doing business in Oman FAQ: Bankruptcy

The financial crisis has resulted in many companies encountering difficulties in maintaining profits and even staying solvent. In Oman, courts may declare a company facing financial difficulties as bankrupt or insolvent if (i) its financial state is in disorder; and (ii) it has ceased to discharge its commercial debts. The bankruptcy declaration may be ordered by the court based on the court’s own initiative, upon application by the debtor company, or by one of the company’s creditors. Omani courts often appoint an administrator for managing the debtor’s assets while the bankruptcy application is pending.

Once a company has been declared bankrupt by an Omani court, the company may be liquidated. The court will usually appoint a liquidator for effecting the transfer of the company’s remaining assets. The liquidation is usually effected by way of judicial sale or public auction.

In distributing the assets of a bankrupt company, all expenses of the administrator or liquidator, including compensation, must be paid from assets of the bankrupt company before any distribution is made to creditors. Thereafter, creditors are ranked pursuant to the Law on Recovery of Government Debts [RD 32/94] in the following order of priority:

  1. Government;
  2. Employees;
  3. Secured Creditors;
  4. Unsecured Creditors; and
  5. Subordinated Creditors.
As a general rule, debt of secured and unsecured private debts is subordinate to debt owed to the government even if the government debt arose later and is not secured. The Government is generally known to give up its priority ranking in favor of employees.

Unlike the bankruptcy law of some countries, the Omani laws for bankruptcy and liquidation are very straightforward. The focus of the law is to protect creditors as much as possible and ensure the insolvent company is liquidated efficiently.

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Thursday, July 9, 2009

Hot Topic: Nuclear Energy in the GCC

Earlier this month, Oman’s Ministry of Foreign Affairs signed a Memorandum of Understanding (MoU) with the Russian Federal Atomic Energy Agency (Rosatom) that deals with cooperation in the peaceful use of nuclear power. The MoU could lead to Russia and Oman engaging in joint research projects and even building nuclear reactors together.

The MoU details Russia and Oman’s plan to establish a working group to promote Oman’s plans to develop nuclear power. The countries also plan to draft an intergovernmental agreement for cooperation in peaceful nuclear energy. Both countries have stated that they plan to cooperate in the following areas:

  • • development of nuclear power infrastructure;
  • • fundamental and applied research;
  • • use of radio isotopes;
  • • building and operation of commercial and research nuclear reactors;
  • • nuclear safety and control;
  • • execution of joint projects on prospecting and mining of uranium;
  • • treatment of radioactive waste;
  • • provision of nuclear fuel cycle services; and
  • • training and professional development of administrative and scientific-technical personnel.
Oman has long had plans to diversify its economy and encourage sustainable economic development policies, and the peaceful use of nuclear power fits in with those plans. Cooperation between Oman and Russia on nuclear power can help the Sultanate develop infrastructure, provide employment opportunities and training, and benefit from Russian expertise and technology.

Oman is not the first country in the Middle East to seek nuclear energy development. Bahrain, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates (UAE) and Yemen have all expressed their intention to develop nuclear energy. The UAE has already signed a bilateral agreement with the United States on nuclear cooperation and is also talking with France to cooperate on nuclear energy. In addition, the North African countries of Algeria, Egypt, Libya, Morocco and Tunisia have also expressed interest in nuclear energy.

MENA states have a number of motivations for this interest in nuclear energy, such as powering water desalination plants and air conditioning, diversifying beyond oil, and furthering scientific and economic development. Some countries have even stated that they prefer to sell their oil rather than use it to meet domestic demand, and constructing nuclear reactors would enable them to do that.

Energy demand is growing rapidly in Oman and the GCC, with electricity and desalination demands estimated to increase by about 10 per cent annually by 2015. Recently, a GCC-wide electricity grid was introduced which allows GCC states to share power during peak periods. The GCC electricity grid is designed to address what has been labeled a “power crisis” in the region.

GCC states are looking to nuclear and other alternative energy sources as providing potential solutions to the power crisis. Solar energy is another potential resource, with new projects underway. Earlier this month, Abu Dhabi opened the largest solar power grid in the Middle East and North Africa. Oman is also in the process of developing solar energy projects in response to the growing electricity demand.

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Monday, July 6, 2009

Focus on: Litigation in Oman

Summer time is when the Oman Courts almost go into hibernation; very few hearings take place between July 1 and September 30.

However, in many ways it is the most crucial time in Omani litigation, because the Court-appointed experts are often writing their reports to the Courts over these three months.

It is probably true to say that, about 90% of the time, the Omani Courts rubber-stamp and approve the report conclusions reached by the experts who have been appointed by those Courts.

The Courts in Oman choose to appoint experts in most cases, and they frequently turn to local private-sector accountants when monetary compensation is claimed.

In these cases, it is not the Oman Courts that must be persuaded - rather, one must convince the experts appointed by the Courts. Experts meet with the parties separately to hear arguments and receive documents. These meetings are central to determining who wins and loses in Oman Court cases.

Lawyers play an important part in assisting and guiding their clients in meetings with experts. Good preparation is a prerequisite, as is an ability to answer all the enquiries made by the experts in these face-to-face scenarios.

The general rule in Omani law is that an aggrieved party will be compensated for its direct losses, as opposed to indirect losses.

However, there is no clear-cut Omani judicial definition of “direct“ and “indirect“, and it should be borne in mind that most of the experts do not have qualifications in law in any event. Accordingly, it is the lawyers who need to convince the experts whether a specific head of claim should be perceived as direct or indirect.

It should also be remembered that Omani law includes a duty to mitigate one’s losses and, equally, Egyptian case law is highly persuasive to experts and the Courts in Oman.

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Wednesday, July 1, 2009

New Law Alert: Taxation

A new income tax law for Oman was issued on 25 May 2009. The new law will apply to a company’s accounting periods which begin on or after 1 January, 2010.

The main highlights of the new income tax law are:

  • • The replacement of a territorial basis for taxation with a global system – this means that Omani tax authorities will tax overseas income but relief will be granted for taxes paid overseas. Such relief will be available even if Oman does not have a double tax avoidance treaty with the relevant country where tax has been paid.
  • • There will be a uniform tax rate of 12% for all branches (including branches of foreign companies) with an initial tax-free exemption of RO 30,000. Previously, foreign branches (other than GCC companies) were taxed at a rate of up to 30%. Oman will now have the lowest tax rate in the region when compared with other countries which impose taxes.
  • • A 90-day threshold in any period of twelve months has been introduced for triggering the requirement for a permanent establishment of a foreign company in Oman – this will create certainty for foreign companies who visit on a limited basis as to whether a permanent establishment is required.
  • • A statute of limitations of ten years has been introduced; previously, the tax authorities could pursue a company without any limitation of time.
  • • There will now be penalties for late filing of tax returns as well as for incorrect tax filings.
The new tax law includes modifications that are generally favorable to companies doing business in Oman. Companies likely will be particularly interested in the tax reduction for branches of foreign companies, as this was previously a significant drawback for companies in deciding whether to form a branch in the Sultanate.

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