The development of free trade zones across Oman has been a centerpiece of the Sultanate’s plans to diversify the national economy beyond the oil sector by spurring the growth of value-added, export-focused industries such as refining, manufacturing, shipping and logistics. Free zones serve as catalysts for this growth by providing infrastructure (e.g., roads and ports), a streamlined regulatory framework (e.g., fewer visa and entry/exit restrictions) and financial incentives (e.g., income tax and customs duty waivers) that encourage high-end foreign and domestic companies to set up operations. By attracting these companies to Oman and locating them together in a concentrated, business-focused environment, the free zones aim to build an industrial and trade base that will help bring the Sultanate new technology, jobs and sustainable economic growth in higher value-added fields.
The large free zones in Salalah and Sohar are now well-known features of the Omani economic landscape. However, it is a smaller, lesser known free zone that has recently been capturing headlines: the Al Mazunah Free Zone, located in the Dhofar region near the Oman-Yemen border.
The Omani government recently signed an agreement with a Kuwaiti-based company, Golden Hala Trading, to develop the infrastructure for the Al Mazunah Free Zone. Golden Hala, a part of Kuwaiti development conglomerate Jawaharat al Fanar Group, has pledged to invest an estimated 680 million Omani Rials in the project over the next five years, and has already launched an intensive marketing campaign to lure companies to the free zone. Among the generous incentives that the free zone offers companies are a 30-year exemption from income tax, the right to import commodities duty-free, and the allowance of 100 percent foreign ownership. Golden Hala has cited the processing, storage and shipment of produce from the Dhofari agricultural heartland, along with the automobile and industrial vehicle trade, as potential focus areas for the free zone’s growth plans.
With Al Mazunah thus gearing up to take its place alongside Salalah and Sohar as a major industrial hub, Oman’s free zones appear poised to play an increasingly important role in the Sultanate’s economic future and are a sector to watch closely for companies that already do business in Oman and those that seek to do so in the future.
Monday, August 2, 2010
In the News: Al Mazunah Free Zone
Friday, July 30, 2010
Key Issues in Omani Tenancy Law
One of the most fundamental administrative priorities for a company operating in Oman is securing and maintaining local business premises. As many companies, particularly foreign companies, rent their business premises, it is important to be aware of the legal provisions governing the landlord-tenant relationship. This article summarizes some of the key features of Omani tenancy law that are most relevant to companies.
The landlord-tenant relationship in Oman is governed by Royal Decree 6/89 (as amended), the Law Regulating the Tenancy of Residential, Commercial and Industrial Premises (the “Tenancy Law”).
The Tenancy Law requires that the landlord-tenant relationship, as with other business relationships (e.g., commercial agency relationships), be recorded in a lease contract that is registered with the government. The statutory default rule is that the landlord must register the lease contract with the relevant municipality and pay the attendant registration charges. However, the parties may agree to shift this responsibility to the tenant, and the tenant in any case has the right to register the lease if the landlord fails to do so. As the Tenancy Law provides important protections to tenants, particularly in the form of rent controls and protections against eviction (see below), even when the duty to register the lease contract falls on the landlord, it usually behooves the tenant to ensure that this contract is duly registered with the municipal authorities.
One of the main focuses of the Tenancy Law is limitations on rent increases. Rent controls were featured in the Tenancy Law as originally promulgated in 1989 and were strengthened significantly by an amendment to the Tenancy Law issued in 2008 in response to sharp inflation in the Omani real estate market. Under the current Tenancy Law, landlords are not allowed to increase rent during the first three years of the lease, and rent increases thereafter may not exceed 7 percent per annum. As an exception to this general rule, the landlord may increase the rent at any time commensurate with the cost of any improvements that the landlord makes to the property at the tenant’s request.
The other key focus of the Tenancy Law relates to the term of the lease, in particular protections for the tenant against eviction. Like rent control, this featured in the original Tenancy Law but was bolstered significantly by the 2008 amendments. Under the current Tenancy Law, during the first 7 years of a business tenant’s lease (i.e., a lease for commercial, professional or industrial purposes), the lease is subject to consecutive automatic renewals unless the tenant gives the landlord notice of his intention to vacate at least three months prior to the end of the original term or the relevant renewal term. Subject to limited exceptions (e.g., misuse of the premises by the tenant or a municipal demolition order), the landlord may not terminate the lease contract or evict the tenant during this initial 7-year period.
Thursday, June 10, 2010
Doing Business in Oman – The Three Business Structures Foreign Companies Can Use
Oman’s combination of a growing, affluent population and a modern, open economy offers an abundance of business opportunities and attracts companies from around the world keen to take advantage of those opportunities.
For any foreign company looking to enter the Omani market, one of the first steps is to consider which business structure to use. Under Omani law, it is mandatory for any company doing business in the Sultanate to have a “legal presence” in Oman. Foreign companies must form and register an Omani legal entity that can do business in the Sultanate. There are three options available for foreign companies to establish a legal presence: (i) form an Omani company with a local partner; (ii) engage a local agent; or (iii) establish a branch in Oman.
Choosing the business structure most appropriate for the foreign company’s needs is often one of the keys to doing business in Oman successfully. This article provides an overview of the three options, including some of the important features of each.
Option One: Form an Omani Company with a Local Partner
There are two kinds of Omani companies that a foreign company may form with its local partner: a limited liability company (LLC) or a joint-stock company. Although joint-stock companies are required by law for some fields of business (e.g., insurance or investment companies), most foreign companies seeking to do business in Oman choose to form an LLC, as there are far fewer procedural, disclosure and corporate governance requirements for LLCs than for joint-stock companies.
The main advantages of an LLC are that it may continue to exist indefinitely, it may service both private and government clients, and it limits the foreign parent company’s liability to the amount of its capital contribution.
Among the requirements for forming an LLC are a capital contribution of 150,000 Omani Rials and a minimum of 30 percent shareholding by the Omani partner, although the allocation of the capital contribution and the distribution of profits may be however the shareholders agree, and need not correspond to shareholding percentages. LLC taxable income over 30,000 Omani Rials is taxed at a rate of 12 percent.
Option Two: Engage a Local Agent
Foreign companies typically enter into an agency agreement with a local Omani agent for purposes of selling and distributing their products in Oman. Under an agency relationship, all business done in Oman must be performed by the local agent; the foreign company principal may not, for example, sell its products directly in Oman. (We note that in special cases, such as defense-related products, foreign companies may sell directly in Oman without an agent, and indeed may be encouraged or required by the buyer not to use an agent.) Income derived from agency arrangements is taxed at a rate of 12 percent.
Engaging a local agent is a quick and simple process: all that is required is a signed agency agreement between the parties, which is almost always registered by the agent with the Omani Ministry of Commerce and Industry. However, it is important to bear in mind that terminating an agency relationship is significantly more difficult than forming one, as Omani courts tend to be highly protective of local agents and may award terminated agents generous compensatory damages. Foreign companies considering entering into an agency agreement therefore should be prudent in selecting a local agent, and should consult with a legal advisor to ensure that the agency agreement adequately protects the company’s interests.
Option Three: Establish a Branch in Oman
Foreign companies performing a contract for the government may establish a legal presence by opening a branch in Oman. The main advantages of a branch are that there are no minimum capital requirements, administrative burdens are minimal, and branches can be 100 percent owned by the foreign company. The drawbacks to branches include their limited lifespan (they exist only as long as the government contracts they were formed to service; although their life can be extended if the foreign company wins a new government contract prior to the expiration of the contract under which the branch was formed), their narrower scope (branches may not service private-sector clients) and the fact that under Omani law branches are considered extensions of the foreign parent company for liability purposes.
Forming a branch is typically the preferred way for foreign companies servicing a government contract to establish a legal presence in Oman, largely because the ability to own the branch 100 percent allows the foreign company to maintain sole control over the entity that receives payments under the contract. The procedural requirements for forming a branch are less than for forming an LLC, but greater than for entering into an agency agreement. Taxable income derived from branches is taxed at a rate of 12 percent.
