Thursday, September 29, 2016

Regulations for Working in the Sohar Free Zone

In recent years, the Sultanate of Oman has established a number of free zones, predominantly to boost foreign investment as part of its wider diversification plan for the country.  The focus of this article is the Sohar Free Zone (“SFZ”), in particular, the regulations applicable to companies operating within the SFZ.

Earlier  this  year,  the  Ministry  of  Commerce  and  Industry  (“MOCI”)  issued  Ministerial Decision 35/2016, on the Governing Regulations for Operation of SFZ (“MD 35/2016”), which came into force on 8 February 2016.  MD 35/2016 is to be read in conjunction with the Establishment of the Sohar Free Zone Law issued by Royal Decree 123/2010 (“Sohar Free Zone Law”) and was implemented in order to set out how companies (or rather “Working Companies,” a term defined by MD 35/2016) are able to operate.  Such detail includes:

  • how to acquire licenses;
  • benefits and incentives for operating in the SFZ;
  • tax exemptions available in the SFZ;
  • rules governing the import and export of goods;
  • rules of responsibility relevant to Working Companies; and
  • incorporation fees (including license, permit and service fees) for setting up within the SFZ.


There are two categories of licenses for operators within the SFZ; the Working Company License and a Service Provider’s License.  Each license shall specify the activity permitted to be conducted by the licensee and, in the event that the licensee wishes to add activities, it must obtain an additional license for each additional activity.   Each license application must be submitted to the Operating Authority (the “Sohar Free Zone LLC” or “OA”) who is responsible for the management and development of SFZ.

If a license application is refused by the OA, a party may re-apply six months later.  However, there is an option to appeal against refusal within a period of 60 days from the date of notification or from the date that the Working Company first became aware of the refusal decision, whichever is earlier.

Benefits and incentives of the Working Company

Further to the incentives available under the Sohar Free Zone Law and the tax incentives below, provided certain measures are adhered to, the Working Company is permitted to sub-let plots of land by virtue of a sub-lease agreement. Measures include but are not limited to obtaining the OA’s written approval of the sub-lease, registering the tenant as a Working Company, and providing a written undertaking evidencing the responsibility of the Working Company jointly with the tenant for any liabilities to the OA.

Tax exemption

Working Companies are exempt from taxes for a period of ten years, provided they register within the SFZ,  obtain  a  license  (in  accordance  with  the  above  heading),  enter  into  a  lease  agreement  or investment agreement with the OA, conduct business within the SFZ, and have not less than 15% Omanisation of its total workforce.  In order to benefit from tax exemption after the first ten years, the following Omanisation percentages must be met:

  • 25% for years 11 to 15;
  • 35% for years 16 to 20; and
  • 50% for years 21 to 25.
To qualify for the tax exemption status, under Chapter 4 of MD 35/2016, each Working Company is required to present a tax statement at the end of each year, including a list of its employees and the achieved level of Omanisation to date.  In a situation where the Working Company has not achieved the required Omanisation percentages described above for any given year: (1) it shall not be permitted to extend the period of exemption for that year; (2) any profit mentioned during that tax year should be subject to the applicable income tax; (3) it shall not be possible to transfer any accumulated losses in the annual profit and loss statement; and (4) the tax exemption shall not be effective unless the OA has otherwise issued a tax exemption certificate.

Import and export of goods

Chapter 5 of MD 35/2016 describes the arrangement of the import and export of goods into and out of the  SFZ.    For  example,  goods  shall  freely  enter  into  the  SFZ  (and may  remain  for  an  unlimited duration) and goods exported out of Oman or to another free zone are not subject to customs duty.

Certain goods, however, are prohibited from entering the SFZ including but not limited to, narcotics, arms and ammunitions and explosives, chemical materials or radioactive substances, toxic waste that is harmful  to  the  environment  and  any  goods  which  shall  violate  the  laws  protecting  intellectual property, commercial, industrial, literary and artistic property rights.

Procedures must be adhered to for importing and exporting goods into the SFZ, for instance:

 Goods imported into the SFZ from outside of Oman

a)   Customs officers shall prepare a statement of transit addressed to the SFZ at the border crossing point (i.e., the point of entry where the goods enter the SFZ). The goods are treated as goods passing the “Customs Territory” (defined by MD 35/2016 as any territory within Oman) provided that the owner of the goods submits a guarantee equal to the value of customs taxes, in accordance with the Unified Customs Law.

b)  Customs officers in the SFZ shall verify the statement of transit and record the detail in the relevant register.

c)   The OA or the Working Company shall take delivery of the goods, after a preliminary inspection of the goods has been carried out by customs and the inspection form is duly completed.

Foreign goods that are imported from the Customs Territory must enter the SFZ through customs by virtue of a certificate of origin and a bill from the exporter together with an export or re-export customs statement.

Goods exported out of the SFZ

a)   The owner of goods shall submit an application to the OA together with payment of any fees and relevant invoice.

b)  Upon the request of customs in the SFZ, the owner of the goods shall arrange for the goods’

c)   A customs statement shall be prepared by the owner of the goods. d)  The OA’s approval must be acquired before goods can be exported.

Any goods taken out of the SFZ and into the Customs Territory are treated as foreign goods, regardless of whether the goods contain domestic primary materials.  Any goods manufactured or assembled within  the  SFZ  shall  be  treated  as  goods  of domestic  origin  with  the  purpose  of being  exported overseas.


In addition, Chapter 7 of MD 35/2016 sets out the penalties that may apply to Working Companies where the OA may withdraw a license or terminate a lease if any of the following circumstances apply:

a)   failure to start building, construct works and prepare the site within six months from the issuance of a license without a justifiable reason;

b)   failure to carry out the activity provided for in the license for six months from the date of issuance without a justifiable reason;

c)   if the licensed activity is suspended for six months;

d)   if rent is delayed by a period of six months from its due date;

e)   bringing prohibited goods into the SFZ; and

f)   a violation of the provisions of MD 35/2016.

Penalties  for  non-compliance  with  MD  35/2016  and  the  Sohar  Free  Zone  Law  include  written
warnings, fines amounting to no more than 5,000 Omani Rials, prohibition from entering the SFZ for a period of one year, suspension from working for a period of three months, or prevention from conducting business within the SFZ, including being prevented from removing goods out of the SFZ until such violation is rectified.


Wednesday, September 21, 2016

Oman Officially Ratifies the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions

Royal Decree 41 of 2016 (“RD 41/16”), was issued on the 18th of August 2016 in relation to approving the Sultanate of Oman joining and becoming a party to the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the “Convention”).  The Organisation for Economic Co-operation and Development (the “OECD”) created the anti-bribery convention as a means of establishing certain legally binding standards to criminalise the bribery of foreign public officials in international business transactions and to allow the nations who join the convention to have effective measures in this regard.  RD 41/16 comes in the wake of the Sultanate of Oman’s recent focus on combating bribery, money laundering, fraud and other financial crimes.

The Convention was drafted in a manner to give parties a certain amount of flexibility in applying its articles, as it generally makes recommendations regarding the measures that parties should implement rather than forcing the parties to implement them.  The Convention deals with offences committed by persons who promise or give bribes, as opposed to dealing with the offence committed by the official who receives the bribe.   The Convention is the first international anti-corruption mechanism that focuses on this side of bribery transactions and it allows parties to implement the recommendations contained within the Convention without the need to initiate changes in the fundamental principles of the laws of any given party.  It also seeks to maintain efficient uniformity among the measures taken by all the parties in deterring bribery of foreign public officials.

In essence, the Convention allows the parties to implement penalties that they deem fit which would normally apply within their own legal systems. This was illustrated in article three of the Convention which states that the bribery of a foreign public official shall be punishable by effective, proportionate and dissuasive criminal penalties which are comparable to the penalties applicable to the bribery of the party’s own public officials in a manner that allows effective mutual legal assistance and even extradition if the case calls for it.

In order to achieve its main purpose, the convention clearly outlines the required measures needed to be taken by the “accounting” department in order to combat bribery. These measures include the prevention of establishing off the books accounts, recording non-existent transactions, keeping false expenditure records. The Convention strongly urges members that such methods should result in either a civil, administrative or criminal penalisation.

The Convention includes several recommendations for member countries regarding reporting foreign bribery, maintaining external audits and compliance.  Moreover, in order to raise awareness in the public and private sectors for the purpose of preventing foreign bribery, the Convention includes numerous recommendations for parties to have strong ethics and compliance regulations as well as obliging companies to maintain external auditing. Business organisations should be encouraged by the member countries to assist companies in developing internal controls, ethics, and compliance programmes or measures.

Additionally, member countries should necessitate that companies reveal the full scope of material liabilities within their financial statements.   Furthermore, the convention encourages a company’s management to disclose in their annual reports or otherwise publicly disclose their internal controls, ethics and compliance measures, including those measures which contribute to detecting bribery.

Fundamentally, companies should consider visible policies in prohibiting bribery. Clear and strong support from senior management to maintain high standards in ethics and compliance can be considered as one of the expected recommendations from the articles of the Convention. Likewise, a financial and accounting procedural system with internal controls which are reasonably designed to ensure the maintenance of fair and accurate records are required under the Convention. The guideline encourages companies to provide positive support for the observance of ethics and compliance programmes or measures against foreign bribery. Companies should ensure that they have periodical reviews of the ethics and compliance programmes in a manner designed to assess their efficiency in avoiding foreign bribery, taking into account related developments in the field.

With regards to reporting foreign bribery, members should ensure having easily accessible channels in place for the reporting of suspected acts in international business transactions to law enforcement authorities. In addition, appropriate measures should be in place to facilitate the reporting of public officials, in particular those posted abroad. In accordance with Article 8 of this Convention, Members shall provide effective and proportionate civil, administrative or criminal penalties for such omissions in respect of the books, records, accounts and financial statements of such companies.

Therefore, being a member to this Convention and adhering to the articles of the Convention enables companies to avoid financial crimes especially those in relation to bribery. Joining in the Convention does not necessarily mean that the country has been given new regulations. Rather, the Convention reaffirms the regulations that the Sultanate already has in place such as the Code of Corporate Governance for Public Joint Stock Companies, the Law on Anti-Money Laundering issued through Royal Decree 30 of 2016 as well as other laws and regulations which relate to compliance, ethics and avoiding financial crimes.


Wednesday, September 14, 2016

Islamic Finance - Part 3

This is the third part of a series of articles discussing Shari’ah compliant structures used in project financing  transactions.  In  the  second  part  of  this  series,  we  discussed  two  Sukuk  (i.e.,  Shari’ah compliant capital markets instruments) structures used to finance particular projects. In this article, we will discuss the third structure, namely, the Sukuk al-Musharakah structure and the different ways in which it can be used in project financing transactions.

Sukuk al-Musharakah

The term Musharakah literally means sharing. This term is derived from the Arabic word Shirkah, which means partnership. In Shari’ah, Musharakah means a partnership arrangement formed between two or more partners for some business purpose where each partner makes a contribution (in cash or in kind) to the Musharakah (i.e., the partnership). The profits of the Musharakah are shared amongst the partners according to an agreed ratio whereas the losses are shared according to the ratio of their respective contributions.

Musharakah can be divided into two structures, namely, the Shirkat-ul-Aqd structure and the Shirkat- ul-Milk  structure  for  the  purposes  of  Sukuk  issuance  for  financing  a  particular  project.  We  are discussing below the salient features of the said structures and the key principles involved in their utilization in project financing transactions.

A. Shirkat-ul-Aqd (Partnership by contract)

In this type of Shirkah, Musharakah is created by a mutual contract between the originator and the trustee where the originator and the trustee agree to contribute their efforts and resources towards achieving a common business purpose.

For the purposes of structuring a Sukuk issuance based on the Shirkat-ul-Aqd structure, a special purpose vehicle (“SPV”) is established to hold the Sukuk holders’ interest in the Musharakah. The SPV issues Sukuk certificates representing an undivided ownership interest in the underlying Musharakah and the Sukuk holders contribute towards the capital of the Musharakah by contributing cash to the SPV in exchange for Sukuk certificates.

A trust is declared by the SPV over the proceeds and any asset(s) acquired therefrom.  The SPV acts as a trustee for and on behalf of the Sukuk holders. Subsequently, the trustee enters into a Musharakah agreement with the originator where both the trustee and the originator contribute towards the capital of the Musharakah. In return, both the trustee and the originator receive a proportionate number of units in the Musharakah. Contribution from the trustee comes in the form of proceeds from the Sukuk issuance. The respective contributions of the trustee and the originator are used for the purposes of the Musharakah.

The profits generated from the Musharakah are shared between the originator and the trustee in an agreed proportion. The said proportion may not necessarily be the same as the proportion of their respective contributions to the Musharakah. The trustee’s share of the profits is calculated in such a manner so as to be enough to pay the periodic distribution amounts to the Sukuk holders.

The losses, on the other hand, are shared strictly in proportion to the respective contributions of the trustee and the originator to the Musharakah.

The trustee and the originator also enter into a purchase undertaking pursuant to which the trustee is granted the right to require the originator to purchase the Musharakah asset at an agreed exercise price on the maturity of the Sukuk or upon the occurrence of an event of default; thereby dissolving the Musharakah. The exercise price is equal to the Sukuk holders’ subscription amount plus any accrued but unpaid periodic distribution amounts.

In some cases, the originator is granted a call option by the trustee under a sale undertaking pursuant to which the originator can require the trustee to sell the Musharakah asset to the originator prior to the maturity  of  the  Sukuk.  The  sale  price  in  such  cases  is  equal  to  the  Sukuk  holders’  amount  of contribution to the Musharakah plus any accrued but unpaid periodic distribution amounts.

Under a management agreement, the trustee appoints the originator as the managing agent to manage the joint venture according to an agreed business plan. In consideration for its services, the originator is paid a nominal management fee.

B. Shirkat-ul-Milk (Partnership by joint ownership)

Under this structure, Musharakah is created by the joint ownership of the originator and the trustee in a particular asset. This joint ownership can be created in two ways, either by both the originator and the trustee making cash contributions to the Musharakah for jointly acquiring an asset, or by the originator selling its ownership interest in an asset to the trustee.

There are three essential ingredients of this structure. The first is that both the originator and the trustee are the joint owners of the relevant Musharakah asset. Secondly, the originator (in the capacity of a lessee) utilizes the share of the trustee (in the capacity of a lessor) in the Musharakah asset. Lastly, the originator buys back the share of the trustee in the Musharakah asset.

To begin with, the SPV issues Sukuk into the capital markets. The Sukuk holders subscribe to the Sukuk by contributing cash to the SPV in return for Sukuk certificates. The Sukuk certificates represent the proportionate ownership of the Sukuk holders in the underlying Musharakah asset.

The SPV declares trust over the Sukuk issuance proceeds and acts as a trustee for and on behalf of the
Sukuk holders.

The trustee and the originator then enter into a Musharakah agreement pursuant to which they jointly acquire the Musharakah asset or the trustee acquires the ownership interest of the originator in the Musharakah asset (as the case may be). Following such acquisition, the originator and the trustee become co-owners of the Musharakah asset.

Under a rental agreement, the originator (in the capacity of a lessee) uses the trustee’s share in the Musharakah asset against periodic rental payments. Such rental payments are then passed on by the trustee to the Sukuk holders as periodic distribution amounts.

The originator, pursuant to a purchase undertaking, purchases the units or the ownership interest of the trustee in the Musharakah asset on specified dates. Such purchase can be either during the tenor of the Sukuk or at maturity.

Where the Sukuk is structured on a diminishing Musharakah basis, the units are purchased during the term of the Sukuk. With each such purchase, the ownership interest of the trustee in the Musharakah asset decreases with corresponding increase in the originator’s ownership interest.

The originator and the trustee also enter into a management agreement under which the trustee appoints the originator as its agent to manage the Musharakah asset and to carry out the services pertaining to the major maintenance, takaful and payment of ownership-related taxes and expenses in
respect of the Musharakah asset.


Wednesday, September 7, 2016

Commercial Name Reservations

The Ministry of Commerce and Industry (“MOCI”) has recently issued a Ministerial Decision No. 124 of 2016 on issuing the regulation regulating to Commercial Names (“MD 124/16”).

In order for an investor (i.e., a company or individual) to set up a new company in Oman, the investor shall first identify and seek approval on the proposed name of the new company. Previously, whilst the MOCI permitted investors to include the foreign investor’s name, it has generally prevented the investors from including the word “Oman” in the new company name, unless the minimum capital invested in the company was RO 500,000 or more.   However, under the new MD 124/16 only joint stock companies have the right to include the word “Oman” in the commercial name.  This means that limited liability companies would not be able to include the word “Oman” in the commercial name, regardless of whether the limited liability company has a capital investment of RO 500,000.

The  MOCI  has  recently  taken  the  initiative  in  implementing  rules  and  regulations  relating  to company’s name reservation.  MD 124/16 cancels all provisions or rules that contradict the regulations. Article 4 of MD 124/16 provides that the investor is not permitted to reserve or register the company name unless the name has a meaning or expression in Arabic, and must not include a term or a word that cannot be translated into Arabic.  Such rule however does not apply to foreign branches that are registered in Oman or Omani companies that have joint foreign ownership or foreign companies that have full ownership.

Further, it is not permitted for any branch of a company to hold an independent commercial name different to that of the name of the company.  Any trademark of the establishment or its branches may be registered as per the Intellectual Property Law.

MD 124/16 provides that any names that fall under the following categories are not permitted to be registered:

  • plural of a tribe name, which includes the two letters (AL);
  • a name that is identical to a commercial name of an establishment which has a local and an international reputation;
  • a name which may indicate or include a religious, political, military meaning or content;
  • a demonstrative pronoun, an honorary sign or a special character in any of the regional, Arab or international organizations or one of its institutions;
  • a name that resembles a name of an authority or organisation, a social institution, local charities or international institutions;
  • a name that resembles a registered trademark or its name, or contains one of its components;
  • a  name  that  carries  a  synonymous  meaning  to  the  commercial  name  of  an  establishment  or pluralizes or singularizes the name of a registered establishment;
  • a name that carries the word “Oman” or “Omani” or one of its derivatives or implications, except for the joint stock companies; and
  • a name that indicates an incorrect geographical division of the Sultanate.

Article 8 of MD 124/16 grants the MOCI the power to cancel, or request an applicant to change or amend  the  commercial  name  of  the  establishment  if  it  does  not  comply  with  these  rules  and regulations.   The applicant will bear its costs and expenses associated in amending or changing the name.

An applicant may appeal the MOCI’s decision to cancel the registration or its request to amend the name by submitting a written request to the undersecretary of the MOCI within sixty (60) days from the date of notification of its decision.  The MOCI shall decide on the appeal within thirty (30) days from the date of submission. If no decision is made within thirty (30) days, the decision shall be deemed to have been rejected.

Therefore, in light of the new MD 124/16, it is important for an investor to understand the rules relating to name reservation.  The investor must ensure that they comply with MD 124/16 prior to forming a company in Oman, as it will clearly mitigate any additional expenses (and time) that may be incurred by the investor if it is required to amend or change its proposed name.