Sultanate of Oman
A brief introduction to Company formation A number of accounting firms and some legal consultancy firms in Oman have in their portfolio of services a product called “incorporation services” which basically has to do with “giving birth” to a business entity. Unlike childbirth, which has a longer gestation period, this process usually takes less than a month but may, in certain situations extend to two or three months. Regardless of whether you intend to do business as a sole proprietorship, partnership, LLC Company or any other form (including SAOC, SAOG companies, foreign branches or JV’s) the basic requirement is for all commercial entities to get themselves a commercial registration from Ministry of Commerce & Industry (MCI) & the Oman Chamber of Commerce and Industry (OCCI). Only upon obtaining a certificate of commercial registration can an entity commence its business in Oman. The certificate is usually valid for a period of 5 years and needs to be renewed thereafter. Apart from registration with the OCCI, there are a number of other conditions, documentary requirements and pre-incorporation formalities to be fulfilled depending upon the form of business organization that one chooses to embark upon. The choice of a form of organization is not a random one, but is to be based upon a number of factors such as size of the business, number of people involved, complexity of the operations etc. For example if you were a sole proprietorship, (which is typical for an individual starting a small business) the formalities are fairly simple but your risk would be unlimited and would extend even to your personal assets, whereas if you were a LLC company your risk would be limited to the extent of your capital contribution. Likewise, if you chose to operate as a partnership firm you could either be a Limited Liability Partnership (LLP) or a general partnership where the members have unlimited liability as well as joint and several liability. Whilst your consultants are the right people to advise you on the choice or a form of organization best suited for your requirements, for foreigners (i.e. other than Omani Nationals) wishing to set up operations in Oman the most popular business entity structure is the LLC Company. We will now briefly discuss the procedures and requirements for incorporating an LLC company. Foreigners can set up businesses in Oman only with the participation of one or more Omani shareholders i.e. there is no concept of a 100% foreign owned company except in a commercial free zone. Also foreigners can hold a maximum of only 70% of the share capital of the Company. The minimum capital requirement for a LLC Company with mixed ownership is RO 150,000 which should be deposited in a designated bank account before registration is completed. Further, companies are also required to register with the Income Tax department, the Ministry of Labor, the ministry of Manpower, Immigration department etc; and obtain various other permissions and clearances in order to commence and continue operations in Oman. It
should also be borne in mind that since foreign companies and individuals are not permitted to own land or purchase buildings in Oman for business purposes the business premises have necessarily to be leased from Omani owners and in this connection a number of tenancy laws and regulations (such as registration of tenancy agreements with the municipality) are to be complied with. LLC Companies are also required to draft and register their Memorandum and Articles of Association, appoint directors and designate appropriately qualified persons as authorized signatories for all government and Ministry matters. Whilst all this may appear to be daunting and time consuming and anyone attempting to accomplish these tasks on their own would certainly run into a number of frustrating roadblocks , for the consultant with his experience, language skills and most importantly his “ministerial skills” it’s in all in a day’s work. Therefore choosing the right consultant is important for the entrepreneur to ensure a quick and trouble free incorporation of his company. A number of accounting firms and some legal consultancy firms in Oman have in their portfolio of services a product called “Liquidation services” which basically has to do with giving defunct companies a decent burial. Unlike the job of an undertaker, this process takes a significantly longer amount of time and can be quite complicated. More about this in our next issue.
What’s new in IFRS Like every New Year, the year 2013 has also brought with itscoming, many new hopes and challenges, opportunities and threats and, in recent times, a feeling of intense helpless uncertainty brought about by a rapidly unfolding social, political and technological landscape where “change” appears to be the only constant. It is also the year in which the IASB has introduced may changes to existing standards and has also introduced IFRS 13, Fair Value Measurement a standard that has far reaching implications on the reported results, i.e. profits or losses of all entities that are required to apply IFRS in preparing financial statements. IFRS 13 is effective from January 1, 2013 onwards, and is applicable to interim as well as annual financial statements of all entities such as
SAOG, SAOC, LLC companies and government enterprises (Public Authorities) that chose to apply IFRS. It is applicable to both large corporations as well as to SMEs. The importance of IFRS 13 is underscored by the fact that it is an all-pervasive standard. In other words it is to be applied to any and every other IFRS or IAS that requires amounts to be measured and reported at fair values. To illustrate, it is applicable to IAS 18 Revenue Recognition (since revenues are to be measured by the “fair value” of the consideration received or receivable) and is also to IAS 39 where financial instruments are required to be stated at fair values. Similarly, IFRS 13 is to be used in measuring fair values under IFRS 3, IAS 16, IAS 36, IAS 40 and many more. Whilst the concept of “fair value accounting” is, by itself, not new to IFRS or to the preparation of financial statements what IFRS 13 has done is bring about a radical change to the concept of fair value by shifting the perspective from “individual” based valuation to “market” based valuation. To illustrate this point, consider the following statement “what’s fair value of an asset to entity X may not be fair value to entity Y since both X and Y have a different perception about its value to themselves”. While most people would accept this statement to be true from a common sense perspective under IFRS 13 it is not a “relevant consideration” since individual perceptions do not reflect the “market driven” fair value of the asset. IFRS 13 has also introduced a set of new considerations that must be taken into account in determining fair value such as the concept of an orderly transactions, principal versus most advantageous market, highest and best use of asset and fair-value hierarchy etc and has included valuation techniques based on the Market Approach, Cost Approach or Income Approach that may be used in the determination of fair values. Another critical aspect of IFRS 13 is the requirement to make a number of assumptions and judgments, such as the existence of an active market and existence of market participants, that asset would be always put to their highest and best possible use etc which may either oversimplify or over-complicate the valuation leading to a “theoretical valuation” number which may not reflective of the substance of a transaction. In conclusion it may be said that the “practical application” of IFRS 13 would pose several challenges to the both company’s management as well as the auditors. Accountants and auditors are advised to prepare themselves to address these challenges by seeking viable solutions within the framework of the standard.
Islamic Banking Snapshot With advent of Islamic Banking making waves in Oman, it is important to be aware of some of the common terms used for Islamic financial transactions and contracts. Mudarabah – is a profit sharing contract where one party provides capital and the other party providing specialist knowledge and services to manage the project Murabahah – refers to sale of goods at a mutually agreed price, with clearly indicated costs, profit margins, compensation for time value of money, along with payment schedules. Musharakah – or a joint venture where parties contribute capital and profits are shared at a pre-agreed ratio while losses are shared in proportionate to the capital contribution of each party. Ijarah – means renting or leasing something, usually a bank makes available to the customer use of an asset for a fixed period and price. Istisna – allows for financial lending in stages or phases. For example, while constructing a building finances can be sourced for each phase of the construction. Sukuk (Islamic Bonds) - is an Islamic name for financial certificates similar to bonds but structured in a way to comply with Islamic principles of avoiding fixed income or interest bearing transactions. Takaful (Islamic insurance) – an alternative form of insurance cover against unforeseen calamities principally based on the law of large numbers, where combining the risks of a group of people allows each individual to enjoy the coverage.
A brief introduction to the law on INCOME TAX IN OMAN
The most attractive part of the new Oman Income Tax Law is the uniform tax rate of 12% for all types of Business Establishments carrying on Business or Profession in Oman. All entities pay tax at 12% only if their Net Profit as adjusted by the Oman Income Tax Law (i.e. the Taxable Income) exceeds Rial Omani 30,000/-. A Foreign entity that does not have a Permanent Establishment in Oman, but has income arising in Oman would be taxed at 10% of the gross income at source. i.e. the tax is collected at the time of payment of the amount or at the time of credit of the same in the books of the payer, whichever is earlier. This is called ‘Withholding Tax’ (WHT). A foreign entity which is not registered as a Business Establishment with the Ministry of Commerce in Oman with Commercial Registration Number, but is present in Oman for the purposes of carrying on an activity of profit, and in the process earns income in Oman, is charged to normal income tax in Oman if it has a Permanent Establishment in Oman. An entity is said to have a PE in Oman if it is present in Oman either directly or through its employees or agent, for a period of 90 days in all in a span of 12 months and further declares that its income arising in Oman is part of its Gross Income in Oman. If it has no Permanent establishment (PE) in Oman or even if it has a PE in Oman but claims that the income earned n Oman does not form part of its Gross Income in Oman, then such income would be subject to WHT in Oman, depending upon the nature of the income. All income arising in Oman to a foreign entity is not subject to WHT. Only certain categories of income are subject to WHT in Oman. Only income of Business establishments is taxed in Oman. The nature of income of such business establishment can be business profits, interest, rent from real estate, dividends, etc. Dividends from Omani companies whether listed on Muscat Stock Exchange (MSM) or not are exempt from tax. Similarly Capital Gains from sale of securities listed on MSM are exempt from tax. Foreign Income of an Omani business establishment earned outside Oman on its investments abroad is taxable in Oman. Tax reliefs on double Taxation of such income both in Oman and abroad would be dealt with under the relevant Double Tax Avoidance Agreements entered into by Oman Government with the respective countries. Educational Institutions, certain specified Industries, etc; are granted Tax Holiday for a period of Five Years from their inception, or date of production, on approval from the
Ministry of Finance and the concerned Ministries. Assessments are completed on a ‘Tax Year’ basis. Each Tax Year commences on 1st January and ends on 31st December of the relevant calendar year. Tax is computed on ‘Taxable Income’ at the rates prescribed by the Tax Law. Taxable Income refers to the Profit derived from the business, as adjusted according to the provisions of the Tax Law. All business ventures are expected to maintain their accounts in accordance with the Generally Accepted Accounting Principles (GAAP). Oman follows International Financial Reporting Standards (IFRS) and entities should therefore prepare their financial statements in accordance with the requirements of IFRS. Every entity carrying on business or profession in Oman should maintain proper accounts on a year to year basis. The accounting period for the first year of business can be less than 12 months but not more than 18 months. In cases of liquidation or voluantary winding up the period of accounting for the last year of business can be less than 12 months. The financial statements for entities whose Capital is more than Rial Omani 20,000 should be compulsorily audited by an Independent Auditor based in Oman and such audit report should accompany the Return of Income every year.
Income Tax Law was first introduced in Oman in 1970 and was later replaced by Royal Decree No.47/1981. The present Oman Income Tax Law was introduced under Royal decree No.28/2009 with effect from 1st January 2010.
Every entity carrying on Business or Profession in Oman should register with the Secretariat General of Taxation, as soon as it commences Business or Profession. This is compulsory, as the entity will be required to produce a Clearance Certificate from the Department of Taxation, in order to process all its requirements with the Ministry of Labour, Tender Board, etc.
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Every entity, irrespective of the results of the business during the year, should file a Provisional Return of Income within three months from the end of the Accounting year disclosing the expected Taxable Income and pay Tax if any based on such Provisional Income forthwith. Every entity should, similarly, file the Annual Return of Income along with the Audit Report wherever applicable, within six months from the end of the accounting year and pay the balance of tax if any on such income forthwith. Taxes which are due as per the Provisional Return of Income or the Annual Return of Income that are not paid within the due dates are subjected to ‘Additional Tax’ at the rate of 1% per month for each month of delay. All expenses incurred wholly and exclusively in the production of gross income, are allowable as deductions from the gross income of the business. Provisions for bad and doubtful debts and other contingencies are generally not allowed as deductions from the gross income. However, provisions that are required to be created as per statutes in Oman, such as Provident Fund, Leave Salary, Leave Travel, etc; are allowed provided they are in compliance with the respective statutes.
If a particular source of income is exempt from tax, then expenses or losses incurred in connection with such source are also not allowed as deductions from other Taxable Income. Only revenue expenditure incurred in the earning of the gross income is allowable as deductions. Capital expenditure is not allowed as deduction. However, the Tax Law provides for allowance of deprecation on such Capital expenditure. The rates of depreciation depend upon the nature of the Capital expenditure and the asset acquired. Personal expenses of the owner of the business, as a Proprietor or a Partner or a Share holder are not allowed as a deduction. Contribution of such persons to the business is recognized to a limited extent for the purposes of deduction in the form of Salary, Fees, etc; subject to various conditions prescribed in the Law. The above article is intended only to provide the reader with a broad overview of the law on Income tax in Oman and is not to be construed as advice to any person or entity on tax matters nor is it to be relied upon by any person or entity in making decisions on individual or generic tax issues without undertaking a further consultation with a competent tax practitioner.
SMEs & the Angel Investors – March 2013 For a number of years now, the subject of Small and Medium Enterprises (SMEs)has been spoken about, written and debated and discussed endlessly at economic forums, board rooms, drawing rooms, coffee shops etc with everyone nodding their heads (sagely) that something needs to be done about addressing the issues of these “poor” SMEs. So what exactly is an SME, and what are the common issues of the SMEs? Why are they so important? What’s being done by the public/private sector to address their issues and are there any new ideas to encourage the growth of SMEs. For those who are interested, this article attempts briefly to answer some of these questions.
finance to meet working capital requirements. Inexperiencedmanagement, lack of training and guidance, highly labour intensive business models etc are, no doubt some of the other “critical” issues but lack of finance seems to be on top of the list.
Whilst many of us often speak of SMEs (in the same manner as we speak of global warming) it may come as news to some of us that there is actually a specific definition of an SME in the Omani context. In order to call yourself a “Small” enterprise in Oman you would have to have a head count of 5 to 9 persons and an annual sale of RO 25,000 to 250,000. To be a “Medium” enterprise you would need to be in the range of 10 to 99 on the head count and sales of RO 250,000 to RO 1.5 million. By this definition, about 90% of the establishments in Oman are SMEs. However, it is reported that this 90% contributes to only 14% of the GDP.
The Government of Oman at the start of 2013 announced the launch of the Al Rafd Fund by Royal Decree 6/2013 with a concerted emphasis on SME development in Oman. Further, last year there was an announcement made for setting-up an SME development fund with an initial capital of RO 100million the Ministry of commerce and industry (MoCI) has also launched its SME loan guarantee programme last year, which provides a guarantee for 50 % of each SME loan up to RO 250,000 with an interest rate of 3% p.a. All Omani SMEs with a project value of less than RO 500,000 are eligible for the programme. The MoCI has also partnered with the United Nation Economic and Social Commission for Western Asia (UN-ESCWA) to set up a green helpdesk at the ministry for small and medium enterprises to provide technical data and consultancy to SMEs that wish to produce and promote products keeping in mind the goal of sustainable development. The Oman Development Bank (ODB) has also jumped into the act and is actively helping SMEs through concessional finance.
It has been acknowledged by all knowledgeable people, that the most common challenge faced by SMEs is the issue of “funding” the initial investment and the availability cheap
These initiatives (and a few others) from the public sector are expected to provide the required impetus for the growth of the SME in Oman.
It is now worthwhile to turn our attention to whether and to what extent the so called “large” affluent and influential private sector has contributed to the growth and development of the SMEs. This private sector includes in its ambit, high net worth individuals (who could potentially be called Angle investors), venture capital funds and the big business houses. If truth be told, their contribution so far to the growth and development of the SME has been negligible, which however, comes as no surprise. Private sector constituents investment funds and large corporate operate on the principle of maximizing return, minimizing risk-and quick turn-around time. The SME which has low initial returns, is subject to high risk and has a long gestation period is the anti-thesis of what the private investor is looking for and therefore, to expect the venture capitalists and the big business houses to get excited about SMEs is misplaced optimism. However, what is at least a workable option is to get the Angel investors interested in the SMEs. These Angels are not to be mistaken for the ones with wings and halos. Far from that, these are successful high net worth individual businessmen with deep pockets and a high risk appetite that are willing to invest in the country’s development and have an inclination not only to fund new ventures but also to provide the benefit of their knowledge and wisdom to up and coming entrepreneurs. A tall order one would think.
However there are a number of examples in the US, UK, India etc where Angel investors have come forward to invest in entrepreneurial ventures which have resulted in a win-win situation for both the investor and the entrepreneur. Google, Apple, Amazon, Ebay, etc. are just a few examples that underscore the success of the concept of an Angel investor. In the context of Oman what may be required is a common platform where such investors and investees can come together and explore ideas and options which generate synergy for the pave the way forward for a vibrant SME sector. Of course, like all investors, the Angel too needs to have a reasonable return and a clearly defined exit route within a set time frame. The terms of the agreement can be developed by external consultants who would bring the required objectivity and balance to the transaction. In the final analysis, the question of whether the SME sector will grow, perish or worse still stagnate and be consigned forever to “discussions at economic forums” is largely a matter of concerted and consistent effort both by the public and the private sector. If the SME sector is neglected, the long term economic consequence could be that wealth is increasingly concentrated in the hands of a few and the gap between the rich and the poor continues to widen. This would not auger well for the overall development of the country. More on the SME topic in our next issue….
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