The Secretariat General for Taxation (SGT), considered to be a division of Oman’s Ministry of Finance, is responsible for applying taxation laws in the sultanate and providing general guidance on tax application.
The income tax law, which was enacted by Sultani Decree 28/2009, provided for certain payments made by Omani taxpayers to foreigners without a permanent establishment in Oman to be subject to a withholding tax (WHT) of 10 per cent on the gross amount payable. The categories of income to which the tax then applied were limited to royalties, consideration for the conduct of research and development, consideration for the use of or right to use computer software and fees for management.
Oman withholding tax
As part of the government of Oman’s efforts to promote a fiscal policy designed to increase revenue generation from sources other than hydrocarbons – and against a backdrop of a budget deficit and lower oil prices – in 2017, Sultani Decree 9/2017 introduced significant changes to the income tax law. Among the changes was an extension of the scope of WHT to apply to dividend payments, interest and payments for services. The amended income tax law also extended the obligation to deduct and account for WHT to ministries, public authorities and units of the administrative apparatus of the state. These changes came into effect on 27 February 2017.
Due to the widened scope of the WHT regime, the application of international treaties to offer relief or exemptions from WHT have taken on greater significance. The double taxation agreements (DTAs) that Oman has entered into with recipient countries have become important in tax planning, as these can alleviate WHT obligations on businesses.
The practical application of the extended scope of WHT has not always been clear. In a long-awaited new development, the existing Income Tax Regulations (issued by Ministerial Decision 30/2012) were amended by Ministerial Decision 14/2019 (Tax Decision) in February. The Tax Decision provides some clarity around the application and interpretation of the 2017 amendments to the income tax law.
Shortly after the introduction of the amended income tax law, clarifications were issued by the SGT that only fees paid for the provision of services rendered from within, or partially within, Oman would be subject to WHT. However, more recently, a further clarification was issued by the SGT confirming that WHT also applied to all service fees, irrespective of where the services were rendered.
This had raised some commercial concerns for Omani businesses and foreign service providers as to whether or not the initial clarifications could be relied upon. We understand, however, from discussions with the SGT, that the withdrawal of the initial clarification will not have retroactive effect.
The Tax Decision now specifies categories of payments that are not considered to be service payments subject to WHT, being payments in relation to: participation in organisations, conferences, seminars or exhibitions; training; freight charges and associated insurance; air tickets and accommodation costs abroad; meetings of boards of directors; reinsurance payments; and any services provided that are linked to a business or property located outside of Oman.
Furthermore, the Tax Decision confirms our understanding that only dividends distributed to foreign shareholders by Omani joint stock companies are subject to WHT, while profit distributions from Omani limited liability companies to foreign partners are not. This is because, strictly speaking, ownership in a limited liability company is of a ‘participating interest’ and not shares, and profit distributions from a limited liability company are not considered dividends. The Tax Decision provides that the distribution of dividends on investment instruments by investment funds will also be subject to WHT.
The SGT has clarified that, pursuant to the principle of “equal treatment” in the Economic Agreement (EA) 2001 between members of the GCC, dividends paid to GCC entities are not subject to WHT. This exemption would also extend to GCC-registered companies, regardless of the nationality of shareholders.
The Tax Decision provides detail as to what constitutes interest for the purposes of the application of WHT. The definition includes amounts obtained through loans or any financial arrangement, with or without guarantee or a right to share in profits, income earned on bonds and sukuk and amounts earned in lieu of interest. There are some notable exceptions, in particular: coupon and periodic distribution amounts paid in respect of bonds and sukuk issued by the government or banks in Oman; interest payable in respect of facilities between banks for purposes of liquidity management with a tenor of five years or less; and also interest paid on amounts deposited in banks in Oman, are excluded from the definition of interest and not subject to WHT.
The inclusion of interest in the categories of income subject to WHT is relevant in the context of cross-border financing. Tax gross-up provisions are typically incorporated into documentation for loans and debt capital market transactions which, following the issuance of the Tax Decision, will remain relevant to issuances of bonds and sukuk (save for issuances by the government or banks) and also to loans (other than some bank-to-bank financing).
Such provisions customarily provide that, where there is a mandatory withholding by operation of law, then the Omani entity – whether the borrower or the issuer of securities – will gross-up any payment subject to WHT so that the receiving party is made whole and receives the net amount free of any deduction. Consequently, the cost of borrowing from foreign lenders without a permanent establishment in Oman increases.
In an effort to limit the impact of gross-up provisions, some Omani borrowers who pay interest to foreign lenders have sought to benefit from partial or full withholding tax relief under any relevant DTA.
Given that the amended income tax law is fairly recent, the interaction between it and international treaties, including the EA 2001 and certain DTAs, has yet to be determined. But the cooperative approach of the SGT in providing responses and clarifications on any ambiguities has allayed concerns about the application of WHT in differing scenarios and, with the passage of time, it is expected that the clarifications provided in the Tax Decision should further solidify the practical application of WHT.
About the authors
Nick Simpson is managing partner at Dentons & Co Oman Branch. Justine Harding is a senior associate and Shireen al-Busaidi is a paralegal