The DTA applies to taxes on income and on capital appreciation, and is likely to bring economic and trade relations benefits to Oman. Eligibility depends on meeting the definitions of “Resident” and “Permanent Establishment”, outlined below.
The inauguration of the Swiss Embassy in Muscat in mid-November 2014 has boosted the bilateral relations of both countries.
Switzerland, a member of the European Free Trade Association (EFTA), already benefits from the Free Trade Agreement (the “FTA”) between the EFTA member states (Switzerland, Iceland, Liechtenstein and Norway) and the GCC, which has resulted in steady growth in trade relations for several years. Whilst the EFTA member states have applied the FTA as of 01 July 2014, the GCC member states have just recently announced its full application as of 01 July 2015, after some technical issues had been sorted out, mainly with regard to the “Certificate of Origin” forms. For further detail refer to the article entitled “Free Trade Agreement between European Free Trade Association and GCC Countries” located on our blog.
The next milestone for bilateral trade relations has now been achieved: Omani Royal Decree 31 of 2015 has ratified an agreement between the Sultanate of Oman and the Swiss Federal Council on Avoidance of Double Taxation for Income Tax (the “DTA”), which had been signed in Soja, Switzerland, on 22 May 2015, following several years of negotiations and approval processes. The DTA follows similar agreements which Switzerland had concluded with the United Arab Emirates, the State of Qatar and Kuwait in recent years.
H.E. Christian Winter, the Swiss Ambassador to Oman, has emphasised the importance of the FTA and the DTA in the context of Swiss exports to Oman, amounting to more than R.O. 80 million per year with a focus on watches, pharmaceutical products and machinery, and is positive that the FTA and the DTA are likely to further GCC exports to Switzerland, as well.
Application of the DTA
Article 2 of the DTA applies to all taxes imposed on income, including taxes on gains from the alienation of movable or immovable property, the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation imposed on behalf of a contracting state or of its political subdivisions or local authorities, irrespective of the manner in which they are levied. The DTA also applies to identical or substantially similar taxes that are imposed after the date of signature.
It is important to note that the DTA is applied on the basis of definitions regarding “Residents” and
A “Resident” is any person who, under the laws of that state, is liable to tax therein by reason of his domicile, residence, place of management, place of registration or any other criterion of a similar nature and, in the case of the Sultanate of Oman, an individual who has a permanent home, his center of vital interest, or habitual abode in Oman. Corporations, funds and similar entities qualify as Residents as well.
An individual qualifying as a Resident of both states with regard to the above definition shall be deemed to be a Resident of one state only and respective assessment under the DTA is based on availability of a permanent home, “centre of vital interests,” habitual abode, nationality or even mutual agreement between the competent authorities in both states. In case of persons other than an individual, the place of “effective management” is decisive.
The term “Permanent Establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on, including places of management, branches, offices and factories etc., unless solely used for the purpose of storage, display, delivery of goods or merchandise belonging to the enterprise or related maintenance.
Brokers, general commission agents or any other agents of an independent status do not qualify as a Permanent Establishment, provided that such persons are acting in the ordinary course of their business.
It is furthermore important to note that a company that is a Resident of the one state that controls or is controlled by a company that is a Resident of the other state does not of itself constitute either company a Permanent Establishment of the other state.
Basic Principles under the DTA
The DTA addresses in detail certain forms of income and sets out the basic rules applicable to such form of income. Set out below is an outline on the basic principles applying to the most relevant forms of income and their respective treatment under the recent DTA:
Income from Private Sector Employment
Most notably, income derived by a Resident of a contracting state in respect of an employment shall be taxable only in that state.
If income from employment is derived in the one state, but employment is exercised in the other state, such remuneration may basically be taxed in the other state. An exemption applies if the recipient is present in the other state for a period not exceeding 183 days in aggregate in the concerned tax year and the remuneration was paid by an employer who is not a Resident of the other state and the remuneration is not borne by a Permanent Establishment or a fixed base which the employer has in the other state.
Director’s fees and similar payments may be taxed in the country where the company is a Resident. Likewise, pensions and similar remunerations may be taxed where arising.
Business Profits shall be taxable only in the state in which the enterprise is situated.
Should the enterprise entertain business through a Permanent Establishment in the other state, the profits of the enterprise may be taxed in the other state – but only so much of them as is attributable to that Permanent Establishment.
The DTA sets out an exemption and no profits shall be attributed to a Permanent Establishment by reason of the mere purchase by that Permanent Establishment of goods or merchandise for the enterprise.
Likewise, profits generated by an enterprise of either state from the operation of ships or aircraft in international traffic shall be taxable only in that state.
Profits may be included in the profits of an enterprise and taxed accordingly if the enterprise itself or the same persons directly or indirectly participate in the management, control or capital of an enterprise of the other state.
Income from Immovable Property
Income in the other contracting state, whether from direct use, letting or use in any other form, may be taxed in the other state. The same applies to income from inter alia usufruct rights and agriculture or forestry, including livestock and equipment used.
Dividends that are paid by a company of the one state to a Resident of the other state may be taxed in both states, but taxes applied on the company may be limited to 5% and 15% respectively of the gross amount of the dividends under certain circumstances. Full exemptions on taxation in the country where the company is a Resident can apply on inter alia certain pension and investment funds.
Interest is treated similarly to dividends with a 5% tax cap applying under certain circumstances. Additional exemptions on taxation in the country where the interest arises can inter alia apply to the
extent that such interest is paid on bank loans or intercompany loans.
Royalties are treated similarly to dividends, as well, with an 8% tax cap applying under certain circumstances.
Methods for the Elimination of Double Taxation
In addition, the DTA sets out certain methods to avoid double taxation.
Residents of Switzerland
Residents of Switzerland shall, in general, be exempt from tax in Switzerland with regard to income
which may be taxed in Oman in accordance with the DTA.
However, Switzerland may apply the rate of tax which would have been applicable if the exempted income had not been so exempted in calculating tax on the remaining income of that Resident.
With regard to dividends and interest, Switzerland shall allow a relief upon the Resident’s respective request, consisting of a deduction from the tax on the income of that Resident or a lump sum reduction of the Swiss tax or a partial exemption of such dividends or interest from Swiss tax, in any case consisting at least of the deduction of the tax levied in Oman from the gross amount of the dividends. Also upon request, Switzerland shall allow a deduction from the Swiss tax on pensions arising from Oman of an amount equal to the tax levied in Oman.
Furthermore, for the purposes of taxing dividends in Switzerland, a company which is a Resident of Switzerland and which derives dividends from a company which is a Resident of Oman shall be entitled to the same relief which would be granted to the company if the company paying the dividends were a resident of Switzerland.
Residents of the Sultanate of Oman
Residents of Oman shall, in general, be allowed a deduction from their taxes in Oman in an amount equal to the tax on the income paid in Switzerland which may be taxed in Switzerland in line with the provisions of the DTA.
However, the deduction shall not exceed that part of tax (as computed before the deduction is given)
which is attributable to the income which may be taxed in Switzerland.
In addition, Oman may, in calculating the amount of tax on the remaining income of a Resident, take into account income exempted from tax in Oman in accordance with any provision of the DTA.
Benefits for Oman
The DTA provides plenty of investment incentives between Oman and Switzerland and enhances economic and trade relations between the countries.
The Sultanate is likely to benefit from both Swiss investments and know-how brought through Swiss companies and nationals investing in Oman. Likewise, Omanis investing in Switzerland are granted plenty of attractive incentives.
The limits and caps introduced in the DTA on business profits, dividends (5%/15% at the source state), interest (5%), royalties (8%) and the methods to avoid double taxation will certainly have a positive impact. Even more, the DTA provides a number of exemptions, for example, with regard to (pension) funds.
Last but not least, the DTA goes hand in hand with the ideas of the FTA and furthers the benefits and incentives arising from the FTA. Along with the recent opening of the Swiss Embassy in Muscat, a diplomatic and economic foundation has been laid that shows the importance and attractiveness of Oman to (not only) Switzerland.