Wednesday, November 13, 2013

Corporate Tax Matters in Oman

Corporate tax matters in Oman are a key concern for any company wishing to pursue business opportunities within the Sultanate. As such, it is important for companies to remain current with developments regarding Omani tax law.

Tax year in Oman
The tax year in Oman coincides with the regular calendar year, beginning on 1 January and ending on 31 December. However, if necessary, special permission may be acquired from the Ministry of Finance to obtain a different fiscal period.

What qualifies as taxable income in Oman
Corporate tax law is governed by the Law of Income Tax on Companies (promulgated by Royal Decree No. 47/1981) (the “Tax Law”) and the Law on Income Tax (promulgated by Royal Decree No. 28/2009) (the “New Tax Law”). Article 8 of the Tax Law outlines the foundation of taxable income as “income of any Company which has been realized or has arisen in Oman”, or which the Secretary General presumes to have been realized or to have arisen which relates to “profits or gains…of any business”. There are several key issues which must be understood in order to fully grasp what qualifies as taxable income.

First, the original Tax Law adopted a territorial tax system, regarding income only generated “in Oman” as taxable income. As such, the original Tax Law failed to tax income generated by Omani companies from business activities outside of Oman. The Tax Authority, and subsequently the Supreme Court, attempted to offset this issue by adopting an “extension of Omani activities” doctrine in its decision 42/44 of 2004; however, this has remained an unsettled principle. Regardless, the New Tax Law has likely addressed this matter by not specifying income generated “in Oman” as taxable, but rather stating that income – in the general sense – is taxable. Since the New Tax Law was adopted in 2009, all income generated subsequently will likely be regarded as taxable, irrespective of where the income was generated.

Furthermore, the Executive Regulation to the New Tax Law, Ministerial Decision No. 30/2012 (“ER”), has added several key provisions that will have far-reaching tax implications on corporations operating within the Sultanate. One key provision the ER provides is the dependent agent principle. In sum, a corporation which does not have a formalized legal presence or Permanent Establishment in Oman but transacts their business in Oman through a dependent agent will be subject to Omani taxes. An agent is deemed “dependent” if it is reliant on the foreign company economically or legally, and the agent routinely enters into contracts on behalf of the foreign company.

The second issue arises in determining what qualifies as “profits” or “gains”. For instance, capital receipts resulting from the sale of a capital or fixed asset, such as machinery or goodwill, are generally not regarded as income, profits, or gains for tax purposes in most jurisdictions. However, since both “profits” and “gains” are vaguely defined, the Tax Authority may consider the proceeds received by a company from the sale of any company asset as taxable income.

Taxation of receipt of dividends
In sum, only distributions of profit by an Omani company are tax-exempt.

Under the previous tax regime, distributions of dividends by all companies were tax-exempt regardless of the domicile of the paying company. This position was authenticated by a 2012 Supreme Court decision in which our team at Curtis successfully argued that dividends received from foreign shareholding companies in tax years 2002-2004 were not taxable. However, Article 115 of the New Tax Law specifies that dividends received only from Omani companies are exempt from taxable income.

Accordingly, dividends paid by and received from any company prior to the adoption of the New Tax Law will be tax-exempt, while dividends paid subsequently by a non-Omani company will be subject to taxation.

Various tax exemptions
There are various tax exemptions which may apply to companies operating within Oman, such as investment in private hospitals, education, or the promotion of tourism (Royal Decree No. 54/2003). Oman has also entered into agreements for the avoidance of double taxation with several countries, including the United Kingdom, India, and China.

Further, the ER provides unique tax exceptions for smaller companies. Companies whose registered capital does not exceed RO 20,000, and whose gross income realized is not in excess of RO 100,000, while the average number of employees does not exceed eight, will be exempt from submitting tax returns for the corresponding fiscal year. Additionally, companies whose registered capital does not exceed RO 50,000 and gross income realized was less than RO 300,000 are not required to submit financial statements along with their tax return. Also, expenses in which companies are permitted to claim deductions were expanded to include contributions to pension funds, bad debts and, in some instances, interest in respect of loans from related parties.