International. Conducting business in Oman - a guide for foreign investors. About Trowers & Hamlins. Basis of the legal system.

Transcription

1 International 1 Conducting business in Oman - a guide for foreign investors Published by Trowers & Hamlins LLP Sceptre Court 40 Tower Hill London EC3N 4DX t +44 (0) f +44 (0) Trowers & Hamlins LLP is a limited liability partnership registered in England and Wales with registered number OC whose registered office is at Sceptre Court, 40 Tower Hill, London, EC3N 4DX. Trowers & Hamlins LLP is regulated by the Solicitors Regulation Authority. The word partner is used to refer to a member of Trowers & Hamlins LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Trowers & Hamlins LLP s affiliated undertakings. A list of the members of Trowers & Hamlins LLP together with those non-members who are designated as partners is open to inspection at the registered office. Trowers & Hamlins LLP has taken all reasonable precautions to ensure that information contained in this document is accurate but stresses that the content is not intended to be legally comprehensive. Trowers & Hamlins LLP recommends that no action be taken on matters covered in this document without taking full legal advice. About Trowers & Hamlins Trowers & Hamlins is an established City of London and international law firm with more than 100 partners and 600 staff. As well as offices in Manchester and Exeter in the United Kingdom, we have offices in Abu Dhabi, Bahrain, Cairo, Dubai and the Sultanate of Oman. Our Cairo office operates closely in association with Nour Law Office. The firm also works in co-operation with Feras Al Shawaf Law Office in Saudi Arabia and in Syria through Sultans Law. Chambers Global The Guide to the World s Leading Law Firms and Lawyers consistently confirms Trowers & Hamlins' status as one of the No. 1 firms in the Middle East and North Africa Region. Source Corbis Architectural details Introduction The Sultanate of Oman is the second largest country in the Arabian Peninsula with a total area of approximately 300,000 square kilometres (120,000 square miles). The majority of the 2,300,000 population, of which approximately 550,000 are expatriates, live in and around the capital, Muscat, in the north of the country. The official language is Arabic, although English is the accepted business language and is widely spoken in commercial and government circles. Certain official correspondence must be in Arabic and Royal Decrees and Ministerial Decisions are published only in Arabic. While unofficial English translations are available, the original Arabic text will prevail. The unit of currency is the Omani Rial (RO) which is divided into 1,000 baizas. The Central Bank of Oman fixes the rate of exchange, which has remained unchanged against the US Dollar since January 1986 at a middle rate of $1 = RO Basis of the legal system The Sultanate of Oman is an absolute monarchy and all laws are promulgated by the Head of State, His Majesty the Sultan, as Royal Decrees. Pursuant to these Royal Decrees, Ministerial Decisions and regulations are issued, from time to time, by the administrative units of the Government of the Sultanate of Oman. In addition to the laws which are published in the Official Gazette, Oman also operates an independent system of Shari'ah (Islamic) Law. It is extremely rare for commercial activities to be affected by the Shari'ah Law. Civil and common law Much of the legislation in Oman is consistent with that in force in other member States of the Gulf Cooperation Council (GCC) and displays a considerable degree of Egyptian influence. The Code Napoléon was implemented in Egypt and much legislation has a French or civil law influence. Other laws reflect a common law influence, the Banking Law of 1974 being an important example. Contract law The approach which is adopted by the Commercial Court is that parties to a contract, particularly a

2 commercial contract, are free to arrange their own affairs, subject to mandatory legislative provisions. Jurisdiction and governing law Omani law does not limit the choices of jurisdiction or governing law in contracts. However, we are not aware of any case in which the courts in Oman have applied a law other than the law of Oman. The Court (as it then was) has stated to Trowers & Hamlins, as a firm, that it has no objection on grounds of public policy or otherwise to a choice of a foreign law in preference to Omani laws, provided that the parties to a case before it are able to bring evidence, and to agree upon that evidence, as to the chosen foreign law. Enforcement of foreign judgments Prior to the introduction of Royal Decree 13/97 (now repealed), there were no formal rules for and recognition of foreign judgments or arbitral awards, the parties could be required to re-litigate the matter. There are now express reciprocal enforcement provisions which may be applied by the courts in Oman pursuant to Royal Decree 29/2002. These are subject to a number of conditions being fulfilled, including that both parties must have been correctly represented in the foreign court, that the judgment must not be contrary to Omani law and must have been obtained in a jurisdiction in which Omani judgments or arbitral awards are enforceable. To our knowledge no judgment of a foreign court has ever been enforced directly in Oman. Oman is not a signatory to any international treaties providing for the recognition of foreign judgments, with the exception of a convention that has been signed between the six GCC countries. We are aware of a recent appeal court judgment where it was held that a judgment of a United Arab Emirates court was enforceable pursuant to the terms of that treaty. Oman is a signatory to the Convention, although to our knowledge no foreign arbitral award has ever been enforced by the Commercial Court in Oman on the basis of Oman being a Contracting State (as defined in the Convention). World Trade Organisation (WTO) Oman became a member of the WTO on 10 October Entry into the WTO has led to an overhaul of the Sultanate's legislation which will continue apace. Membership seems set to improve both the level of foreign investment in the country and Oman's economy in general. The government has declared its intention to become an active member in the WTO. Free Trade Agreement (FTA) The year 2006 saw a major step in the relationship between the USA and Oman with the ratification of the Free Trade Agreement (FTA) by both Governments. The importance of the FTA stems from the fact that only a few countries in the Middle East have actually signed FTAs. Only Bahrain and Morocco have, so far, succeeded in concluding such agreements with the USA. It is interesting to note that Oman is at the forefront of free trade initiatives, as was apparent through the accession to the WTO in This, together with other measures, will enable Oman to be recognised as taking free trade and economic liberalisation seriously in its effort to diversify its economy and reduce reliance on oil, as well as attracting foreign investment into other sectors of the economy. Oman is an ICSID signatory and has entered into a number of investment protection treaties with other states, such as the United Kingdom (ratified in Oman by Royal Decree 73/95) and France (ratified by Royal Decree 74/95). Recognition of foreign arbitral awards Royal Decree 36/98 approved Oman becoming a signatory to the 1958 New York Convention (the Convention) on the Recognition and Enforcement of Foreign Arbitral Awards. Source Corbis Global Industry

3 Foreign investment - the Foreign Capital Investment Law In order to be able to do business in Oman, it is necessary for any foreign individual, partnership or company to comply with laws governing foreign business activity, in particular, the Foreign Capital Investment Law (FCIL). This is in addition to all other laws affecting commercial enterprise within Oman generally which include the Commercial Companies Law, the Commercial Register Law, the Commercial Agencies Law as well as the wide ranging Oman Commercial Code. Whether a foreign company intends to trade or invest on its own account or as a partner in an Omani company, the effect of the Commercial Code and the FCIL is that the activity of the foreign company is unlawful unless the appropriate authorisations have been issued by the Ministry of Commerce and Industry (MCI). There is no such thing as an "off the shelf" company in Oman. Every company must be specifically incorporated and is subject to express authorisation in respect of any foreign investor. This is neither a simple nor a speedy process and requires the preparation of the significant amount of documentation on the part of the foreign shareholder. Article 1 of the FCIL provides that non-omanis may not acquire an interest in the capital of an Omani company without a licence to do so obtained from the MCI. Article 2 stipulates minimum capital requirements of RO 150,000. Following Royal Decree 39/98 amending Commercial Companies Law 4/74 those minima for an SAOC and SAOG respectively are RO 500,000 and RO 2,000,000. Under Article 2 of the FCIL the foreign shareholding should not exceed 49%, although it maybe increased to 65% if the Minister agrees. Standard MCI practice now indicates that up to 70% foreign ownership is routinely permitted. This change is part of Oman's commitments in joining the WTO, however, while amendments have been made to the tax laws in respect of this commitment, no amendments have yet been made to the FCIL. An Oman registered company with any element of foreign shareholding requires a minimum share capital of RO 150,000. Article 2 of the FCIL states that it is possible to increase the percentage of foreign shareholding to 100% for projects "which contribute to the development of the national economy", which have a minimum project capital of RO 500,000, and which are approved by the Council of Ministers following a recommendation by the Minister. We are currently witnessing an increased willingness on the part of the MCI in the granting of 100% foreign-owned companies. Registration formalities All companies in Oman must be registered with the following governmental departments: Company Affairs Department at the MCI Commercial Registration Department at the MCI Oman Chamber of Commerce and Industry. Types of business structures in Oman The following forms of business structure are permissible in Oman: limited liability company joint stock company (private (SAOC) or public (SAOG)) branch office commercial representative office commercial agency general partnership limited partnership holding company. Brief details of the most popular structures (limited liability company and branch office) are as follows: Limited Liability Company (LLC) An LLC must have a minimum of two and a maximum of 40 participants. All shares must be fully paid-up and of the same nominal value. An LLC is less regulated than an SAOG/SAOC. The reporting requirements are less onerous than for an SAOG/SAOC and in certain cases an auditor need not be appointed.

4 An LLC is easier to operate on a daily basis. Management of an LLC is effected through a manager or managers rather than through a board of directors. Under the terms of the company's constitutive contract the day to day running of the company, and many of the decisions taken in the ordinary course of business, can be delegated to the manager(s). There is a right under law for decisions of the members of an LLC to be reached by consent of the members in writing rather than through a meeting of the members, whilst there is no comparable right under law for an SAOG/SAOC. Such a structure suits a small operation with a limited number of promoters more akin to a partnership. A control structure, similar to the board of directors of an SAOG/SAOC, can be introduced by way of a members' agreement between the members of an LLC. Establishment of an LLC is an easier and quicker process, and therefore cheaper, than the establishment of an SAOG/SAOC. Branch office A foreign company, which has entered into a contract with a government entity or quasi-government entity, is entitled to register and operate in Oman as a foreign branch. The branch registration is dependent upon the term of the government contract(s), which must also be registered, and the branch office is not normally entitled to seek and carry out business with the private sector. Foreign branches are treated for tax purposes as 100% foreign owned. A branch office is a "footprint" of the foreign company in Oman. Accordingly, this kind of corporate entity will require neither a share capital nor a local partner. We understand that many organisations would prefer to operate without a local partner, if possible. Ongoing commercial obligations Registrations of companies are renewed periodically and there are fines for late, or non-renewal. Auditing of accounts Audited accounts of a joint stock company must be filed with the MCI, CMA and the MSM within three months after the end of the company's financial year. As all companies in Oman are liable to tax, the Ministry of Finance (acting through the Department of Taxation Affairs), effectively polices the requirement to produce accounts. Omanisation Source: Corbis Architectural detail The aim of Omanisation is to limit the Sultanate's dependence on expatriate staff. Non-Omanis are not permitted to work in Oman unless first labour clearance and second, work permits have been obtained from the Ministry of Manpower. Royal Decree 35/2003 states that employers must employ Omanis "to the greatest extent possible" and different sectors of industry are given different Omanisation percentages which must be met. It is notable that over recent years, these percentages have increased considerably as well as the category of jobs that are open to Omanis. The Omanisation programme is taken seriously by the Government and failure to reach industry targets results in liability to pay fines as well as blocks to labour clearance applications.

5 Employment The bedrock of industrial relations/labour legislation governing the employer/employee relationship in Oman is contained in Royal Decree 35/2003 (the "Labour Law"), however many of the Ministerial Decisions and circulators predating this law are still applicable until such time that they are revoked. The process of applying for work permits for expatriates is tightly regulated by the Ministry of Manpower and is granted upon certain conditions being met, including the skills of the proposed employee as well as regard to the Omanisation policy. Failure to obtain the required work permits whilst employing an expatriate will result in one or more penalties being imposed on both the employer and the expatriate employee. Employers are legally required to insure its expatriate workforce against industrial injuries and illnesses with an approved insurer. For its Omani workers, employers must make contributions equivalent to 1% of the worker's monthly salary to the Public Authority for Social Security (PASI) for industrial injuries and a further contribution of 9.5% of the monthly salary by way of pension for old age, disability and death. There are separate obligations to provide access to or meet the cost of medical treatment for all it's workforce. Recently, we have seen the introduction of trade union legislation in Oman by way of Royal Decree 74/2006 and two Ministerial Decisions, giving workers the right to form trade unions, engage in peaceful strike and collective negotiations. As this new law is very much in its infancy, we will no doubt witness further development in this area. Taxation There is no personal income tax in Oman. Tax is applied to companies and establishments in Oman. It is not necessary to be registered in order for tax to be applied. The requirement is for a "permanent establishment" to exist and for income to arise in Oman. The tax authorities interpret this criteria very widely to include, for example, the entire income of a procurement contract performed by a foreign contractor whereby commissioning takes place in Oman, even if the relevant part of such contract is of minimal value. Tax is payable on income, from all sources, which has been realised or has arisen in Oman. All deductions, such as business costs or depreciation, must be justified as an allowable deduction in terms of the tax legislation. Permitted depreciation rates are set out in the tax legislation. In practice, the allowable deductions mean that tax is charged on what is substantially a profit calculation, but it is important to appreciate the underlying basis of the system. Tax rates in Oman The rates of corporate tax depend upon the legal status of the entity in question. Oman registered companies with or without foreign participation and branches of companies registered in the GCC will be taxed at the following rates: Taxable income - OMR 0-30,000 Nil Tax rate 30,001 and above 12% Other entities, including branches of foreign companies, will be taxed in accordance with the following rates: Taxable income OMR 0-5,000 Nil 5,001-18,000 5% Tax rate 18,001-35,000 10% 35,001-55,000 15% 55,001-75,000 20% 75, ,000 25% 100,001 and above 30% Withholding tax The Sultanate of Oman applies a withholding tax which was introduced by Royal Decree 87/96. The Income Tax Law has been amended so as to tax foreign companies which do not have a permanent establishment in the Sultanate of Oman (and are not, therefore, subject to Omani income tax on profits) but which derive income from the Sultanate of Oman from the following sources.

6 Where applicable the tax rate is 10% of the gross amount paid to the overseas company. The payments to which the withholding tax applies are: royalties (whether a one-off payment or a series of payments) the end of the month in which the tax is deducted or payments are due or made to the foreign entity. March 2008 Trowers & Hamlins LLP Ref 06/09 For more information, please contact : management fees machinery and equipment rentals payments for the transfer of technical expertise payments for research and development. Majid Al Toky e maltoky@trowers.com Roger Byrne e rbyrne@trowers.com t f e oman@trowers.com Charles Schofield e cschofield@trowers.com The Omani business making the payments is responsible for deducting that percentage and paying it to the Tax Department. This must be done within fourteen days of Trowers & Hamlins LLP is a limited liability partnership registered in England and Wales with registered number OC whose registered office is at Sceptre Court, 40 Tower Hill, London, EC3N 4DX. Trowers & Hamlins LLP is regulated by the Solicitors Regulation Authority. The word partner is used to refer to a member of Trowers & Hamlins LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Trowers & Hamlins LLP s affiliated undertakings. A list of the members of Trowers & Hamlins LLP together with those non-members who are designated as partners is open to inspection at the registered office.

7 London (head office) Abu Dhabi Bahrain Sceptre Court 40 Tower Hill London EC3N 4DX United Kingdom Floor P1, Tower C1 Al Bateen Towers Bainuna Street PO Box Abu Dhabi United Arab Emirates 7th Floor West Tower Bahrain World Trade Center P O Box 3012 Manama Bahrain t +44 (0) f +44 (0) e enquiries@trowers.com t (0) f (0) e abudhabi@trowers.com t f e bahrain@trowers.com Cairo Dubai Oman In association with Nour Law Office 1 El Gabalaya Street 3rd Floor Zamalek Cairo Arab Republic of Egypt BurJurman Business Tower Sheikh Khalifa bin Zayed Road (Trade Centre Road) PO Box Dubai United Arab Emirates Al Jawhara Building Al Muntazh Street Shatti Al Qurum PO Box 2991, PC112 Muscat Sultanate of Oman t +20 (0) f +20 (0) e egypt@trowers.com t +971 (0) f +971 (0) e dubai@trowers.com t f e oman@trowers.com Saudi Arabia Feras Al Shawaf, Law Firm, in cooperation with Trowers & Hamlins P.O.Box Riyadh Olaya, Prince Sultan St. Kingdom of Saudi Arabia t f Feras Al Shawaf e feras@alshawaflaw.com Syria Sultans Law Al-Kawakbi Aleppo Syria P.O Box 9001 t f Sultans Law e samer.sultan@sultanslaw.com