Wednesday, May 20, 2015

Overseas Dividends: Supreme Court Perspective

The Supreme Court is the highest Court within the hierarchy of Courts in Oman. A judgment/decision issued by the Supreme Court is supposed to act as a precedent for all the lower Courts and Government authorities as the judgments issued by the Supreme Court are final and non-appealable. Thus, an issue which has been adjudged upon by the Supreme Court should become a binding precedent to be applied in all future cases pertaining to a similar issue.

Despite two judgments of the Supreme Court in 2012 on the issue of non-taxability of overseas dividends under the Omani Income Tax Law promulgated by Royal Decree 47 of 1981 as amended (the “Income Tax Law”), the Omani Tax Department continues to currently try to impose tax on overseas dividends received by companies from its investments out of Oman, referable to the tax years up to and including 2009.

The Tax Department, while imposing tax on overseas dividends, relies on the principle of economic dependency allied with Article 8 of the Income Tax Law, which taxes income arising out of Oman if it results from an extension of the activity of Omani company in application of the general rules of tax law. This principle was stated by the Supreme Court in its judgments in Case Numbers 42 and 44 of 2004, which was about tax years 1994, 1995 and 1996.

In the year 2000, Royal Decree 68 of 2000 amended the Income Tax Law by adding Article 8 (bis) which is an explicit provision about dividends. Article 8 (bis) stipulates that "dividends received by the company in respect of its shares or contribution to the capital of any other company are not taxable". Thus, dividends received by companies in relation to their investments in foreign companies are non-taxable.

The issue of non-taxability of overseas dividends again came up before the Supreme Court after RD 68/2000 came into force. The Supreme Court issued its final non-appealable judgments in Case Number 312/2010 (about tax year 2002) and Number 496/2010 (about tax years 2002, 2003 and 2004) on 18 January 2012 and decided that overseas dividends received by a company should not be considered as taxable income of the company. These judgments are the most recent in time and are consistent with Article 8 (bis) of the Income Tax Law.

In April 2015, the Muscat Appeal Court, in two cases, re-confirmed the position of the Supreme Court and reiterated that the Tax Department cannot impose tax on dividends received by companies from their investments abroad.