Oman - Taxation of cross-border M&A | KPMG | GLOBAL

Oman - Taxation of cross-border mergers and acquisitions

Oman - Taxation of cross-border M&A

Oman imposes income tax on broadly the same terms to all types of commercial activity (except petroleum, which is taxed on a different basis at higher rates), regardless of the legal form of the enterprise, or the level of foreign ownership.

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Introduction

Oman imposes income tax on broadly the same terms to all types of commercial activity (except petroleum, which is taxed on a different basis at higher rates), regardless of the legal form of the enterprise, or the level of foreign ownership.

There is no zakat imposed on businesses in Oman.

Individuals are only subject to income tax to the extent that they carry on commercial, industrial or professional activities in Oman as a ‘proprietorship’, in their own name. Otherwise, there is no personal income tax.

Detailed comments on the tax system in Oman are covered under the relevant headings throughout this report.

Overview of Omani income tax law

IncomeTax Law No. 28/2009

Income tax is imposed by Income Tax Law No. 28/2009 on the worldwide profits of taxpayers, including dividend income received on foreign shareholdings.

Flat 15 percent income tax rate

The income tax law imposes a flat 15 percent rate of income tax on all domestic and foreign companies and commercial operations.

Credit for foreign tax suffered

The income tax law provides for a tax credit against a company’s Omani income tax liability for foreign tax paid on overseas income. The credit is limited to the Omani income tax that would otherwise be due on that income.

Permanent establishment

The definition of ‘permanent establishment’ (PE) includes a ‘services PE’ test, which deems a PE to exist where a foreign entity is providing services in Oman through its employees (or other individuals under the control of the enterprise) for a period exceeding 90 days in any 12-month period. This is subject to the application of a tax treaty between Oman and the foreign entity’s country of tax residence.

Withholding tax

There are no withholding taxes (WHT) on payments to resident companies. For payments made to non residents, WHT applies at a standard rate of 10 percent on the gross amount of dividends (paid by joint stock companies only and not limited liability companies), interest, fees for provision of services, royalties, consideration for carrying on research and development, consideration for the use or the right to use computer software, and management fees.

Executive Regulations supplementing income tax law

The income tax law is supplemented by Executive Regulations that took effect on 29 January 2012. Further amendments to these executive regulations are in the pipeline, to address various uncertainties arising from the recent extension of the scope of WHT to dividends, interest and provision of services.

Although the regulations are intended to codify the previous practices of the Secretariat General for Taxation (SGT), the manner in which the regulations are applied and interpreted in certain cases often leads to ambiguities. Until the regulations have been tested through a number of years’ tax assessments, there will be some uncertainty over assessments issued by the SGT.

FreeTrade Zones and Special Economic Zones

Oman has established free trade zones in Sohar, Salalah and Mazunah and a special economic zone, at Duqm.

The respective zone rules grant exemption from income and other taxes and customs duties for companies, branches and permanent establishments carrying out qualifying projects within the zone.The exemptions are granted on a case to case basis, for terms of 10 to 30 years, depending on the individual zone rules, and the exemption may be extendable. Certain entities or activities may be excluded from qualification.

In addition to the tax exemption, foreign investors are able to hold 100 percent interest in the project vehicle and are exempt from investment restrictions under the Foreign Capital Investment Law (FCIL) and the minimum capital requirements normally imposed under the Commercial Companies Law (CCL).

Recent developments

Recent amendments to the income tax law

For tax years starting after 27 February 2017, taxpayers (including companies registered in Oman), irrespective of their ownership, are taxable at the rate of 15 percent (increased from 12 percent) on a net basis (i.e. gross revenue less tax-deductible expenses and with no tax-free threshold).

As noted, the scope of WHT has been widened to include withholding tax on dividends, consideration for services and interest payments to non-residents.

As of 27 February 2017, Oman has promulgated a self- assessment regime under which inspection of Final Return of Income (FRI) should occur only on a sample basis. FRI may be assessed by the Oman Tax Authorities within a 3-year period (or returned tax position becomes final). However, the tax authorities usually examine tax returns for 2 or 3 years at once and request additional information and explanations before issuing an assessment (see ‘Tax indemnities and warranties’ later in this report).

The amended tax law has specific provisions to ensure that Islamic Finance transactions are treated in accordance with their underlying substance for tax purposes, resulting in treatment equivalent to conventional financial transactions.

Future developments

Potential amendments to the Foreign Capital Investment Law

Current proposals to amend the FCIL could remove the requirement for companies to have a local shareholder and permit a foreign investor to hold 100 percent of the shares in an Omani company. There may be a list of certain sectors or activities for which a local shareholder is still required. The amendments may also remove the minimum capital requirements.

Proposed introduction of value added tax

The countries of the Gulf Cooperation Council (GCC) have agreed on a common value added tax (VAT) framework to operate across the GCC states, namely, Oman, Saudi Arabia, Kuwait, Bahrain, Qatar and United Arab Emirates. Each GCC state must formally adopt the agreement and issue its own VAT law, based on the agreed framework.

The Oman government continues to develop its own VAT legislation. Current indications are that the Oman could implement VAT in the first quarter of 2019.

Asset purchase or share purchase

A buyer may acquire a business in Oman by purchasing the trade and assets of the business or by purchasing the shares of the company through which the business is carried on.

As income tax in Oman is applied only to commercial activities, the tax position of the seller is determined by the capacity in which they are selling, that is, as a taxable or non- taxable person.

In the case of a trade and asset sale, the seller would typically be acting in a taxable capacity, either as a company or any other form of commercial entity, or as an individual carrying on business through a proprietorship (each of which is subject to tax).

A sale of shares could be exempt from income tax if the sale is made by an individual holding the shares as an investment (i.e. not holding them in a taxable capacity).

A share sale may also be exempt from tax if the disposal relates to shares in a joint stock company listed on Muscat Securities Market (as opposed to a limited liability company). Any gain on such disposal of listed shares is specifically exempt under the income tax law (discussed in the section on purchase of shares later in this report). Where a foreign entity has no taxable presence in Oman, it is not subject to Omani income tax, so no Omani income tax should arise on a disposal of shares in an Omani company.

In this commentary, the seller is assumed to be a taxable person. It is helpful for the buyer to be aware of the alternatives and better understand the seller’s position.

Purchase of assets

Where the buyer purchases the trade and assets of the business, the seller is subject to income tax on any gain arising on the disposal, consisting the aggregate gain realized on each of the individual assets of the business (and offset by any loss arising on individual loss-making assets).

Capital gains form part of the seller’s normal taxable income. Assets on which the seller has claimed tax depreciation are not taxed by way of capital gain but would give rise to balancing allowances or balancing charges, which are themselves reflected in taxable income.

Gains (and losses) are calculated by reference to the proceeds received on disposal. The SGT has broad powers to substitute actual disposal proceeds with fair market value in the case of related-party transactions or transactions considered to have taken place at below market value with a view to avoiding tax.

If a foreign buyer intends to carry on the acquired trade through an Omani branch, the foreign buyer should be aware of the restricted circumstances in which a foreign company can operate through a branch. These restrictions are imposed by the FCIL (discussed below).

Purchase price

The buyer will usually take the purchase price as its tax basis in the assets for its own future capital gains purposes and for purposes of calculating tax depreciation.

The income tax law allows the allocation of sale proceeds across different assets in accordance with the breakdown provided in any sale agreement. The SGT should generally follow this allocation but has the power to apply a different allocation if it is felt that the contractual allocation is designed to achieve a tax advantage.

Goodwill

The buyer may claim a deduction for goodwill arising on a trade and asset purchase (representing the excess of the purchase price over the fair value of the net assets acquired). The deduction can be claimed over the productive life of the goodwill (or other individual intangible assets). The productive life is determined by the taxpayer but must approved by the SGT on assessment of the buyer’s tax return.

Tax depreciation rates and the basis for depreciation of particular assets are as follows:

Asset Type Rate Basis
Tractors, cranes and other heavy equipment and machinery of a similar nature, vehicles, computers, computer software and intellectual property rights, fixtures, fittings and furniture 33 percent on pool of assets Written-down value or reducing-balance
Digging equipment 10 percent on pool of assets Written-down value or reducing-balance
All other equipment not included above 15 percent on pool of assets Written-down value or reducing-balance
Intangible assets — including goodwill but excluding computer software and intellectual property rights (included above) Productive life of asset as approved by the tax authority Straight-line
Permanent buildings — superior construction (as determined by the tax authority) 4 percent Straight-line
Temporary buildings — inferior construction or pre-fabricated 15 percent Straight-line
Ships and aircraft 15 percent Straight-line
Quays, jetties, pipelines, roads and railways 10 percent Straight-line
Hospitals and educational institutions 100 percent Straight-line

Tax attributes

Tax losses of the acquired business do not transfer to the buyer on a transfer of the trade and assets; tax losses remain with the seller.

Value added tax

There is currently no VAT in Oman, but it is expected to be implemented in the first quarter of 2019 (see ‘Future developments’).

Transfer taxes

There is currently no stamp duty or other transfer taxes in Oman.

Depreciation

A tax deduction is available for depreciation, calculated using the depreciation rates and the depreciation basis specified in the income tax law. The accounting depreciation charge is disregarded for tax purposes.

Tax depreciation is available for capital expenditure incurred in connection with tangible assets (e.g. plant and machinery, vehicles, furniture, computers and buildings) and certain intangible assets (e.g. goodwill, intellectual property rights and computer software). Tax depreciation is not available for the cost of land. The purchase of land is subject to a registration fee of 5 percent of the agreed land value. There are restrictions on the ownership of land by foreigners.

Purchase of shares

The seller may prefer to dispose of a business by way of share sale where they hold the shares in an individual, non-taxable capacity (see ‘Asset purchase or share purchase’).

Where the seller is an Omani taxable entity, the disposal of shares in a limited liability company (LLC) is subject to Omani income tax, as is the disposal of an interest in any other form of commercial enterprise (i.e. proprietorship, share in a general or limited partnership or interest in a joint venture).

The income tax law exempts gains arising on the disposal of shares registered on the Muscat Securities Market, namely joint stock companies taking the form of:

— general Omani joint stock company — with the designation ‘SAOG’ and representing a public listed company
— closed Omani joint stock company — with the designation ‘SAOC’ and representing a private listed company.

The main difference between the two forms of joint stock companies is that in a closed joint stock company (SAOC) the transfer of shares is subject to other shareholders’ preemptive rights. In an open joint stock company (SAOG), the shares issued may be freely sold to third parties.

A foreign buyer should be aware that the FCIL currently restricts foreign participation in any form of Omani company to 70 percent. This applies whether the shareholding is taken up on incorporation of a new company or acquired on the takeover of an existing company.

Even where the foreign shareholding falls within these limits, the Ministry of Commerce and Industry (MOCI) generally requires the foreign shareholder to show that it has existed for a number of years (typically 3 years) and provide 3 years’ audited financial statements in support. In addition, foreign companies with negative equity in their audited accounts would not be permitted to invest in Oman.

A foreign shareholding of more than 70 percent is currently permitted only with the recommendation of the MOCI and approval of the Council of Ministers. Approval is reserved for projects deemed critical to the development of the national economy, such as those involving investment in long-term manufacturing or production facilities, and training and employment of the local labor force. The threshold for approval is typically quite high.

The FCIL sets additional requirements to govern foreign investment, including the minimum share capital that must be invested (see ‘Equity’ later in this report).

Amendments to the FCIL are being drafted, which — if enacted in their current form — would remove the restriction on foreign share ownership and allow a foreign investor to hold 100 percent of the shares in an Omani company. There may be a list of certain sectors or activities for which a local shareholder is still required. The amendments may also remove or reduce the minimum capital requirements (See ‘Future developments’).

Under a free trade agreement between Oman and the United States, a US investor can hold an interest in an Omani entity of up to 100 percent without seeking specific approval.

Foreign companies operating in any of the country’s free trade or special economic zones are permitted to hold 100 percent of the shares in the registered Omani company through which those activities are carried on, subject to satisfying the requirements set out in the regulations for each zone.

Tax indemnities and warranties

Where the buyer purchases the shares in an existing company, it is usual for the buyer to request, and the seller to provide, indemnities and warranties in respect of undisclosed tax liabilities of the target company. The extent of indemnities and warranties that can be secured is a matter for negotiation.

As the buyer is taking over the target company, together with all related liabilities, the buyer normally requires more extensive indemnities and warranties than in the case of an asset acquisition. Where significant sums are at stake, it is customary for the buyer to initiate a due diligence exercise, which would normally include a review of the target company’s tax affairs.

Omani income tax law currently imposes a full tax assessment system. The SGT considers each tax return that a taxpayer submits for each tax year. The tax assessment period for the SGT to enquire into the tax return has been reduced to 3 years (from 5 years) from the end of the tax year in which the tax return is submitted. Technically, due to a change in tax law, the tax department is required to prescribe a selection process. However, in practice, the tax department is assessing 100 percent of returns, adopting the position that the change in tax law apply only for 2017 and later tax years. As a result, the target company may have more open tax years than in other countries, and older years’ assessment enquiries may become more difficult to answer, depending on the availability of information.

Typical indemnities and warranties may impose obligations on the seller to help resolve open tax assessments. As a practical matter, the buyer should consider how this could be enforced over the extended enquiry period in operation in Oman.

Where the target company has a significant number of open tax years, the buyer could consider asking the seller to transfer the trade and assets of the business into a newly incorporated company, so that the buyer can acquire the business in a new, ‘clean’ company, although this may lead to capital gains tax implications in the hands of the seller on transfer.

In contrast to a share sale, a buyer purchasing the trade and assets of a business does not take over the related liabilities of the company (except for those specifically included in the purchase agreement), and fewer indemnities and warranties may be needed.The indemnities and warranties that can be secured are a matter for negotiation but are also governed by the nature of the individual assets and liabilities being acquired.

Tax losses

A taxpayer can carry forward tax losses for 5 years following the tax year in which the tax loss arose.

On a transfer of the shares in a company, the tax losses remain with the company. The change in ownership does not restrict the company’s ability to carry forward or utilize the tax losses (subject to usual expiry after 5 years).

Crystallization of tax charges

There are no grouping rules in Omani income tax law, so no de-grouping charges would crystallize on the transfer of shares in an Omani company. As a result, the transfer of assets between Omani companies is always taxable.

Where an entity ceases to be taxable in Oman, Omani income tax law may impose exit charges. These provisions deem assets held on the date the taxpayer ceases to be taxable in Oman to have been disposed of at their market value on that date. Any gains (or losses) realized under these provisions are included in taxable income.

Pre-sale dividend

Dividends received from an Omani company are not subject to tax under the income tax law. If the seller would be subject to income tax on any disposal gain arising on the transfer of shares in the Omani company, they may consider stripping surplus cash out of the company by paying a pre-sale dividend — reducing the purchase price and thus the potential gain on disposal.

Dividends received by an Omani taxpayer from a foreign company are subject to tax. Any such pre-sale dividend would be included in taxable income in the same way as any potential gain on disposal of the foreign shareholding.

Transfer taxes

There is currently no stamp duty or other transfer tax in Oman.

Tax clearances

Any change in the ownership of a company must be reported to the SGT in Oman by filing a revised business declaration form.

Choice of acquisition vehicle

A buyer may use a number of structures to acquire a business in Oman, and the tax and regulatory implications of each can vary. The issues associated with the most common holding structures are discussed below.

Local holding company

Omani income tax law does not provide for the transfer of tax losses between members of the same group or, for example, intra-group transfers of assets at their tax value. Thus, no group relief benefits are gained by holding the shares through a local holding company.

That being said, dividends paid by an Omani company to a local holding company are exempt from income tax. No adverse tax consequences should arise from holding the target company shares in this way, although consideration should be given to the requirements of the CCL in respect of holding companies.

A foreign investor is currently limited to holding a 70 percent shareholding in the Omani company and would need to find a local partner to hold the other 30 percent. A foreign investor looking to acquire a business in Oman may find it beneficial to identify a local partner first and set up a local company that complies with these restrictions. That company could then acquire 100 percent of the shareholding in the target company, allowing the investor to move more quickly once a target is identified.

Potential changes to the FCIL are highlighted in the section on future developments above.

Foreign parent company

Omani income tax law imposes WHT at the rate of 10 percent on dividends paid by a joint stock company to its foreign parent company and other shareholders. Interest paid by all companies to foreign lenders is also subject to WHT.

Omani income tax law does not tax gains realized by an overseas parent company on the disposal of shares in an Omani company (provided the shares are not held through or attributed to a PE in Oman of the parent company).

Management fees and royalty payments paid to the foreign parent company (or other foreign group company) are subject to WHT at 10 percent. Payments for research and development and for the use or right to use computer software are also subject to WHT at the rate of 10 percent. The scope and rate of WHT rate may be reduced by an applicable income tax treaty (see ‘Tax treaties’ later in this report).

Recent tax law amendments have broadened the scope of domestic WHT (see ‘Recent developments’). The income tax law contains broadly drafted provisions governing related-party transactions. Transactions with the foreign parent company (or other foreign group company) must satisfy the arm’s length principle. The foreign parent company should make sure that it has appropriate policies governing transactions with the Omani subsidiary and documentation supporting the transfer pricing methodology to mitigate the risk of tax deductions being denied and/ or additional taxable income being imputed in the Omani subsidiary’s tax calculation.

Non-resident intermediate holding company

A foreign intermediate holding company is treated in the same way as a foreign parent company. Where the intermediate holding company seeks to claim the benefit of any reduced WHT rates, the SGT would likely take steps to establish whether the intermediate holding company is beneficially entitled to the income, is tax resident in the treaty country, and includes the income in its own books, before approving the use of the reduced rate.

Local branch

A foreign company can only establish an Omani branch where it is performing a contract awarded to it by the government of Oman. Registration lasts only for the duration of the contract.

Joint venture

A local corporate joint venture (e.g. by way of 50:50 shareholding in an Omani corporate vehicle) is taxed in the same way as a local Omani company. If the corporate joint venture company is formed outside Oman, it would need to meet the requirements to register a local branch (see above) in order to be registered and operate in Oman.

A joint venture formed by way of a joint venture agreement is also treated as a separate taxable entity for Omani income tax purposes. The tax law captures all arrangements that, in substance, represent a pooling of resources and of income and expenses of the joint venture parties. Any joint venture party that is itself subject to income tax in Oman may eliminate its share of joint venture profits from its own income tax calculation such that it is not taxed twice on the share of joint venture profits.

Choice of acquisition funding

Debt

A trade and asset purchase typically gives the buyer more flexibility (than a share acquisition) to introduce debt into the business, and interest paid on debt financing should be deductible (subject to potential restrictions discussed below).

Deductibility of interest

The deductibility of related-party interest is restricted under thin capitalization rules, where the local company has a debt- to-equity ratio in excess of 2:1.

The debt-to-equity analysis takes into account debt from third- party lenders, as well as related-party lenders. Any restriction on the deductibility of interest is applied only to related-party interest payments, and interest on third-party funding is not subject to restriction.

The SGT may also deny some or all of the interest expense on related-party debt where it is felt that the interest rate is not comparable with third-party rates or terms. The related- party lender and the borrower should ensure that they have appropriate policies governing their intragroup loans and documentation supporting the rates and terms in order to mitigate the risk of tax deductions being denied in the local company’s tax calculation.

Where the debt is taken by a local holding company (i.e. to acquire the shares in an existing business), the tax deduction for interest paid by the local holding company is denied to the extent that the interest expense relates to exempt income (i.e. dividends from any Omani company or gain on disposal of shares in SAOC or SAOG companies).

Where the local holding company carries on any other taxable activities, the interest expense is apportioned on an appropriate basis and a tax deduction is permitted only for that part that relates to the taxable activity.

Where the foreign company is carrying on its activities through an Omani branch, a tax deduction is denied for any interest expense of the foreign company that is attributed to the branch. In order for interest to be deductible by the branch, any debt should be taken from a third party and in the name of the branch or should be directly identifiable to the branch.

Subject to these restrictions, any income tax deduction would be based on the charge accrued in the financial statements of the company or branch.

No tax deduction is available for fair value adjustments included in the financial statements. A tax deduction is allowed only at the time of payment and the crystallization of any actual gain or loss on the instrument.

Withholding tax on debt and methods to reduce or eliminate it

Omani income tax law imposes WHT at the rate of 10 percent on interest payments.

Checklist for debt funding

  • Consider the impact of the thin capitalization rules.
  • Where loans are taken from related parties to fund the acquisition, ensure that the rates are comparable to rates that can be obtained from third-party lenders to avoid adjustments by the SGT.
  • Where activities are carried on through a branch of the foreign company, consider whether the branch itself can make the borrowing locally, so that interest payments can be deducted against branch income.

Equity

Where a newly incorporated company is used to acquire the trade and assets, the CCL and the FCIL stipulate the minimum equity funding required by each form of company (see ‘Purchase of shares’ regarding the restriction on foreign investment in an Omani company and cases where the restriction is relaxed; see also ‘Future developments’).

For an LLC, the current minimum capital requirement is OMR150,000 (approximately 390,000 US dollars — US$). Where a foreign investor is given approval to hold more than 70 percent of the Omani company’s share capital, this minimum share capital requirement is increased to OMR500,000 (approximately USD1.3 million). Minimum capital requirements are substantially higher for banks, insurance companies and finance & leasing companies.

These limits apply to an incorporation of a new company as well as a foreign investor’s acquisition of shares in an existing Omani company (see the section on choice of acquisition vehicle earlier in this report).

The minimum share capital of an SAOC is OMR500,000 (approximately US$1.3 million). A SAOG is required to have a minimum share capital of OMR2 million (approximately US$5.2 million).

Oman has no capital duty or any other duty or tax on the issue of share capital.

Oman has no exchange controls that limit the repatriation of funds overseas. The following points should be noted when funding a company with equity:

  • When a new joint stock company is formed, there is a lock-in period of 2 financial years before promoters can withdraw their money from the company.
  • If the target company has accumulated accounting losses, dividends can only be declared once the company has achieved positive distributable reserves.
  • In the case of a SAOG, the promoters must have a minimum interest of 30 percent and they are restricted to a maximum interest of 60 percent of the capital, with the remaining shares being offered for public subscription.

No single promoter can hold more than 20 percent of the share capital.

Hybrids

Hybrids are not common in Oman.

Discounted securities

Discounted securities are not common in Oman.

Deferred settlement

The income tax law does not set out specific rules governing the taxation of earn-out provisions in sale contracts. The SGT would look at the contract to determine the price at which the sale was completed and, applying general principles, would likely take into account the value of any earn-out rights provided.

The income tax law also gives the SGT broad powers to substitute open market value if it is felt that the transaction has taken place at an undervalue. In principle, this market value substitution should pick up the value of any deferred consideration.

If a final determination of the earn-out value gave rise to a greater amount, the SGT would look to tax this extra amount in the year it was realized. If the earn-out calculation gives rise to a lower amount, it may be difficult to argue for a reduction in the taxable gain. The SGT would likely abide by their earlier determination of open market value.

Where the contract does not provide for an earn-out payment but instead calculates the total sale price at the date of completion and simply defers cash payment, the SGT would calculate the gain based on the consideration stipulated in the sale agreement. The SGT would still consider the open market value position and determine whether any adjustment is needed in calculating the capital gain.

Other considerations

Group relief/consolidation

There is no concept of group tax loss relief under Omani income tax law.

Transfer pricing

The rules governing related-party transactions are drafted very broadly and give the SGT significant scope to challenge what they perceive to be non-arm’s length prices.

Increasingly, the SGT requires clear documentary evidence to support positions adopted between related parties.That being said, the income tax law does not currently include specific rules governing the basis on which related-party prices should be calculated — beyond the broad principle that pricing should be on an independent (i.e. arm’s length) basis — or any guidance on the form that supporting documentation should take.

The income tax law provides for compensating adjustments to be made in calculating the taxable income of any other taxable Omani related party to the transaction.

The related-party provisions fall within a broader anti- avoidance framework. These rules are also widely drafted and give the SGT broad powers to challenge transactions that they perceive as having avoidance as a motive. The rules also give the SGT powers to make adjustments that they feel necessary to counter the perceived avoidance.

Base Erosion and Profit Shifting Inclusive Framework

Oman has recently joined the Inclusive Framework under the Organisation for Economic Co-operation and Development’s Action Plan on Base Erosion and Profit Shifting (BEPS). Oman is the second GCC country after Saudi Arabia to sign the framework. By joining it, Oman has committed to implement the four minimum standards of the BEPS package:

  • Measures against harmful tax practices (Action 5).
  • Model provisions against treaty abuse (Action 6).
  • Transfer pricing documentation and country-by-country (CbyC) reporting (Action 13).
  • Enhancing dispute resolution through mutual agreement procedure (Action 14).

Furthermore, members of the Inclusive Framework agree to work together on an equal footing to develop further BEPS measures and commit to participate in peer reviews on BEPS measures' consistent implementation. The implementation of tax treaty related measures to prevent BEPS is covered by the multilateral instrument (Action 15) which has not been signed by Oman yet.

Some of the anticipated key impacts on Oman entities are as follows:

  • The Omani tax authorities are expected to increase their focus on substance before providing any treaty benefit to the taxpayer or foreign company.
  • Currently, Oman tax law contains provisions in relation to transfer pricing but no documentation requirements. The provisions mention that the transaction prices should be at arm’s Length. However, the Omani tax authorities expect the taxpayer to provide detailed transfer pricing documentation during the assessment proceedings. With the increased focus on transfer pricing as part of the BEPS measures, and CbyC reporting as one of the minimum standards, it is likely that explicit documentation requirements may be introduced in Oman.
  • Oman will have to work closely with other member countries to monitor implementation of BEPS, which should facilitate access for taxpayers to effective and expedient dispute resolution mechanisms under bilateral tax treaties.
  • More detailed disclosures to ensure transparency and additional compliance requirements are expected.

Other International tax considerations

On 5 December 2017, the European Economic and Financial Affairs Council (ECOFIN) determined a list of 17 non- cooperative jurisdictions for tax purposes (i.e. the European Union black list). This list was established based on three screening criteria: tax transparency, fair taxation (no harmful tax regimes) and implementation of BEPS minimum standards.

In addition to the EU black list, there is a separate grey list with 47 jurisdictions that includes Oman. Grey listed jurisdictions have cause for concern on one or more of the criteria but have committed to address these concerns by changing their tax legislation by the end of 2018 (or the end of 2019 for developing countries). As Oman is not black listed, it does not fall within the recommended sanctions.

Merger provisions in the Commercial Companies Law

The CCL includes provisions for the legal merger of companies in the following ways:

  • dissolution of one or more companies and the transfer of assets and liabilities to an existing company
  • dissolution of two or more companies and the establishment of a new company to which the assets and liabilities of the dissolved companies are transferred.

The SGT should be notified prior to carrying out a legal merger of companies, and it has the right to object to the merger.

If approved, the SGT should be asked to finalize and close the tax file of the dissolved entity. The tax liabilities of the dissolved entity would transfer to the surviving company.

Further, the surviving company whose ownership has changed on account of merger is required to file a revised business declaration form with the SGT.

Foreign Capital Investment Law

In addition to the foreign ownership restrictions detailed in earlier sections, a foreign national or entity must obtain a license from the MOCI before engaging in any commercial, industrial or tourism business in Oman or acquiring an interest in the capital of an Omani company.

The license is granted on certain conditions, including that the business be carried on through an Omani company.

Foreign companies may operate in Oman through a branch only by virtue of a special contract or agreement with the government or in the case of projects declared by the cabinet as necessary for the country. A branch registration is valid only for the duration of the project.

In the case of a takeover of an Omani branch of another foreign company (or an acquisition of the shares in the foreign company owning the Omani branch), the buyer should satisfy itself that the branch registration continues to be an appropriate form for operating in Oman. The change in ownership would need to be reported to the MOCI.

Although the FCIL restricts the level of investment by foreign entities in an Omani company, the law protects the foreign investor by:

  • ensuring the right of foreign investors to repatriate capital and profit
  • stipulating that foreign investment projects may not be confiscated or expropriated unless it is in the public interest (in which case equitable compensation must be paid)
  • requiring the use of a local or international arbitration tribunal (as may be agreed) in the case of disputes between the foreign investor and third parties.

See comments regarding proposed changes to the FCIL in ‘Future developments’ above.

Labor law and Omanization

The government of Oman has set targets in certain sectors for Omanization (employment of Omani nationals). All companies must adhere to these targets.

The government also has in place a wage protection system that requires all salary amounts to be paid to local employees through a local bank account.

Other approvals/consents

In addition to the requirements of the CCL and the FCIL, public companies and regulated industries, including banking and insurance companies, require the approval of the relevant regulating agency.

For all M&As, consideration should be given to informing and, where necessary, obtaining the consent of key customers and suppliers (particularly in the case of government contracts).

Foreign exchange controls

There are no foreign exchange controls in Oman. Capital and income may be repatriated without restriction.

Foreign investments of a local target company

The income tax law adopts a worldwide basis of taxation and, in particular, taxes foreign dividends (and other foreign source income) received by an Omani taxpayer.

A tax credit is available for any foreign tax paid. The tax credit is restricted to the amount of the Omani income tax liability relating to that particular item of foreign income.

In carrying out a due diligence review of an Omani target company, the buyer should consider the company’s related- party transactions with its foreign subsidiaries and whether any challenge of those transactions under the related-party provisions of Omani income tax law could trigger additional tax for the Omani target company.

The SGT requires strong documentary evidence to support the pricing of related-party transactions, and the outcome of their assessments cannot be predicted reliably.

Comparison of asset and share purchases

Advantages of asset purchases

  • Buyer is entitled to depreciation on the fair value of assets purchased and would take a fair value tax basis for capital gains purposes.
  • Seller’s tax history and tax liabilities do not transfer to the buyer.
  • A deduction can be claimed against any goodwill included in the acquisition.
  • Buyer is able to choose which assets and which parts of the business to acquire and does not need to acquire unwanted parts of the business.
  • Buyer may have greater flexibility to fund the acquisition with debt and achieve the preferred debt-equity mix.

Disadvantages of asset purchases

  • Pre-acquisition losses do not transfer to the buyer and are not available for use by the acquiring company.
  • The company selling the assets is liable to tax on any capital gains arising from sale of the business assets (including goodwill). This may be unattractive to the seller, who may look to increase the sale price accordingly.

Advantages of share purchases

  • Pre-acquisition tax losses within the target company are acquired and can be carried forward to be offset against future taxable income of the target company (subject to 5-year expiry of unused tax losses).
  • Seller may be exempt from tax on any gain arising on a share disposal where the shares qualify for exemption (companies with SAOC or SAOG status) or where the individual is not holding the shares in a taxable capacity.

Disadvantages of share purchases

  • Buyer inherits the tax history of the target company and any tax liabilities that might arise in connection with open tax years. Suitable warranties and indemnities should be included in the sale agreement and  more importantly — they should be enforceable if liabilities should arise.
  • No tax deduction is available against goodwill realized on the acquisition of shares.
  • It may be more difficult to adjust the debt-to-equity balance of the target company.

KPMG in Oman

Ashok Hariharan
Head of tax
KPMG in the Lower Gulf
4th Floor, HSBC Building, MBD
P.O. Box 641, PC 112 Muscat
Oman

T: +968 2474 9231
E: ahariharan@kpmg.com

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