Withholding Tax on Management Fees

The Omani Tax Law (Royal Decree 28 of 2009) provides that companies earning income from management fees that do not have a permanent establishment in Oman are subject to withholding tax. Companies that plan to earn income from management fees that have not formed a permanent establishment, such as a limited liability company (LLC) or branch in Oman, need to examine their transactions carefully to determine whether they will be subject to this 10% withholding tax.

The Tax Law does not provide a definition for "management fees" as they relate to withholding tax. Particularly, the law does not specify whether management fees include remote management, which would occur from outside Oman, or management that occurs directly within Oman. Generally, the accepted practice is that management fees, whether the management occurs directly in Oman or remotely, will be subject to withholding tax if the management company does not have a permanent establishment in Oman.

In light of the withholding tax structure, companies should consider whether they prefer to form a permanent establishment in Oman. Forming a permanent establishment in Oman means the income from the management fees would not be subject to the 10% withholding tax. However, the local commercial entity would be subject to a 12% taxation rate on taxable income after allowable deductions.

Companies without a permanent establishment in Oman that earn income from management fees also should be aware of the restrictions laid down in the Foreign Capital Investment Law. Generally, foreign companies are not permitted to do business in Oman without forming a legal entity such as a branch or LLC. If the company providing the management services that are the subject of the management fees is doing business in Oman illegally, then payment of withholding tax on the income earned from the management fees would not excuse the company from any penalties resulting from the Foreign Capital Investment Law or other applicable Omani laws.