Taxable Income and Profits under Oman Law

The current Commercial Companies Law (issued pursuant to Sultani Decree 4/1974) provides for payment of net profits of companies to its shareholders as dividends.  In practice, the management or board of the company would allocate net profits that are proposed to be distributed to the shareholders as dividends after taking into consideration future cash and investment requirements of the business and subject to any statutory reserve and after making provision for tax.  The new Commercial Companies Law (issued pursuant to Sultani Decree 18/2019, but yet to come into force) contains no provisions that significantly alter the current position with regard to the above.

The Income Tax Law issued pursuant to Sultani Decree 28/2009 (as amended) (the “Income Tax Law”) provides for the preparation of financial statements of Omani companies in accordance with applicable accounting standards in Oman, such as the International Financial Reporting Standards (the “IFRS”) and the International Accounting Standards (the “IAS”).  IAS 12 provides guidance in respect of calculation of taxes under IFRS.  It recognises both the current tax consequences of transactions and events and future tax consequences of future recovery or settlement of the carrying amount of an entity’s assets and liabilities.  The auditors, while preparing the audited financial statements, will make provision for the tax liability of a company on the basis of its taxable income rather than net profits.  In order to calculate the tax liability, the auditors are required to adjust the net profits for the relevant financial year by giving due consideration to potential allowances and disallowances, including deferred tax, in accordance with the provisions of the Income Tax Law, and the executive regulations issued by Ministerial Decision 30/2012, as recently clarified by Ministerial Decision 14/2019 (the “Tax Regulations”).

The Income Tax Law has no provisions relating to the calculation of dividend and net profit of a taxpayer nor does it provide a definition of these terms.  According to the Tax Regulations, retained profits are determined according to the certified accounts and financial statements of the company including the general reserve.  The Income Tax Law sets out the method for calculating the taxable income and tax liability of a taxpayer.  Under the Income Tax Law, taxable income is equal to the gross income of the taxpayer after deducting the expenses and allowing for any deductions, set-offs or exemptions under the law.

The Income Tax Law distinguishes between categories of expenses that are deductible for the purposes of calculating the taxable income and tax liability of a taxpayer and those that are not.

Whether an expense is tax deductible or not is only relevant to calculation of the taxable income and the tax liability of the company.  The characterisation of an expense as tax deductible or non-deductible does not affect the net profit of the taxpayer in its financial statements.  According to the Tax Regulations the retained profits are determined on the basis of its taxpayer’s financial statements.  Hence, if an expense is not tax-deductible, it does not necessarily follow that the company cannot consider that expense as deductible for the purposes of calculating its net profit.