Contributed By Al Busaidy, Mansoor Jamal & Co. (AMJ)
Although the oil price remains lower than most would like to see, the loan markets continue to operate fairly robustly. Projects are continuing to be approved and they are being built using debt from, usually a combination of local and international banks as well as, for larger or more strategic projects, ECA-backed funding.
Oman does not operate within the high-yield market. It issues notes, bonds, EMTNs and Islamic products (mainly through the sukuk structure). These are priced to the market and demand and, although they are often oversubscribed, Oman’s bonds are cheap in comparison to other GCC nations.
Alternative credit providers are active in Oman, although their sphere of operation is limited to consumer finance.
The lending market in Oman is relatively stable and techniques and structures have changed little over time. Islamic finance has become a firm feature of the market, although more in the context of raising finance through the capital markets than through debt instruments. Local and international banks continue to remain the main source of funding for most projects or corporate financing needs.
The Central Bank of Oman (CBO) continues to work on strengthening regulatory oversight as well as safeguarding consumer and investor protection in line with regional and international standards. Further, Oman is committed to strict compliance with anti-money laundering regulations.
As in most other jurisdictions, the biggest threat to the success of the financial sector in Oman is the challenge faced by banks in ensuring stability across the sector, the efficiency of the judicial system, as well as providing for the protection of consumers. The CBO has set up a dedicated Financial Stability Unit which undertakes regular reviews to ensure continued stability, reduce volatility, and identify systemic risks. Cyber security threats and geopolitical risks are ever-present and have increased significantly in recent years. Oman has also taken a number of measures to address risks arising from money laundering and terrorism financing, including setting up a separate anti-money laundering and terrorism financing unit, operating within the CBO.
The new Foreign Capital and Investment Law, issued by Royal Decree 50/2019 (the “New FCIL”) will come into effect on 7 January 2020 (six months after its publication). The Ministry of Commerce and Industry (the “MOCI”) is expected to publish the implementing Regulations by 7 July 2020.
The New FCIL allows for full foreign ownership of companies conducting certain activities. These activities are not specified in the New FCIL but are expected to be listed in the implementing Regulations. The Minister of Commerce and Industry is now empowered by the FCIL to issue a list of activities that foreign investors may be prohibited from undertaking through 100% foreign owned companies incorporated in Oman.
The New FCIL enables foreign investors to obtain a single approval for establishing, operating and managing a foreign investment project, including building and manpower permits. This all-inclusive approval will be granted by the Cabinet of Ministers following a recommendation by the Minister of Commerce and Industry. Eligible investment projects include those contributing to the development of public facilities, infrastructure, new or renewable energy, roads, transportation and ports.
The New FCIL sets out certain incentives for foreign investors. These include the provision of state land to carry out the investment project through long-term leases or usufruct agreements. Certain foreign investment projects may be exempt from tax and custom duties.
The introduction of VAT is expected in early 2019. This is widely expected to be implemented at the GCC-agreed rate of 5%. Although the biggest impact will be felt by consumers, bank lending and financial markets are also expected to suffer mildly, depending on the extent to which VAT is applied.
In general, the conduct of any banking business in Oman requires that a licence be obtained from the CBO and provides sanctions (including fines and imprisonment) for persons who conduct such activities without the required licence. The term “banking business” is defined by the Banking Law and covers such activities as receiving deposits, opening accounts, the provision of credit (whether secured or unsecured), issuing guarantees, the sale and placement of bonds and similar instruments, the sale or exchange of currencies, investment management, factoring, trading in precious metals and such other activities as may be determined by the CBO as requiring a banking licence.
Foreign banks with no licensed presence in Oman providing offshore banking services to customers in Oman, are an exception to this.
The marketing of foreign securities and foreign investment products in Oman is regulated by the Capital Market Authority (the “CMA”) under the Capital Market Authority Law, Royal Decree 80/1998 (the “CMAL”) and the related Executive Regulations. The term “securities” as defined in the CMAL includes “Shares and bonds issued by joint stock companies and the bonds issued by the Government and its Public Authorities, treasury bonds and bills and other securities negotiable in the Market”. Despite the apparent restricted scope of this definition, in practice the CMA regulates any kind of investment products that are offered, marketed or sold in Oman.
As part of the application process the applicant must specify the type of banking business it intends to perform. By way of example, this might be commercial or investment banking, lease financing, hire-purchase activities or the operation of money exchange centres. There are separate forms depending on whether the application is submitted by an Omani entity or a foreign bank applying to carry out banking business in Oman.
The approval of a licence application and the consequent issuing of a licence by the CBO will be for the specific kinds of banking business that the applicant has sought. Indeed, the licence itself will state which kinds of banking business may be carried out by the person to whom the licence has been issued. Further, the CBO has the authority to approve applications for Islamic banking business, whether from an Islamic bank or as a window from an existing conventional bank.
The CBO reviews each application and the supporting or incidental documentation to determine whether such application meets the requirements of the Banking Law, the commercial, financial and economic needs of Oman and such other factors as may be required by regulations issued by the CBO from time to time or other applicable law (all constituting the “Requirements”).
The CBO must notify the applicant in writing that the licence application has been completed. Within 120 days of this notice, the CBO must, if the application meets the Requirements, approve the application. If the CBO determines that the application does not meet the Requirements, it must, within the same timeframe, notify the applicant, setting out the reasons for its determination. The Banking Law further states that failure by the CBO to approve or disapprove an application with the 120 day timeframe specified in the Banking Law shall constitute a disapproval of the application.
Foreign banks may conduct banking activity with Omani counterparties without establishing a presence in Oman. This is not considered to be carrying on business in Oman and so a foreign bank would not need to establish a presence in Oman or be licenced by the CBO.
The granting of security or guarantees to foreign lenders is generally not restricted or impeded. Practically, a local bank is usually appointed as the local or onshore agent for the purposes of holding and enforcing the security on behalf of the foreign lenders.
There are no foreign currency exchange controls or restrictions currently in force in Oman.
There are no restrictions on the borrower’s use of proceeds from loans or debt securities provided that the purpose is not unlawful under Oman law. Unlawful purposes may include dealing in arms or other restricted or prohibited goods such as alcohol, pork products or tobacco.
The Banking Law (Royal Decree No 114/2000) provides that licensed banks may hold assets in a fiduciary capacity and the CMAL provides that licensed banks and certain companies licensed to carry out securities related business in Oman may establish trust accounts on behalf of their customers.
The concept of agency is recognised in Oman and security agency arrangements are usually used in these circumstances.
The most usual method of transferring a loan between lenders in Oman is by novation. In terms of transferring security, this may or may not be possible, depending on the type of asset secured and whether or not the pre-existing security agent will continue to hold security for the benefit of the transferree lenders. Usually, a fresh security agreement is negotiated at the same time as the novation of the loan agreement.
Subject to the terms of the documentation governing the debt incurred (and, potentially, the articles of association of an issuing company), debt buy-back by a borrower or a sponsor is permissible.
“Certain funds”, being the requirement of a potential purchaser to show proof of its ability to meet the purchase costs, is not a feature of Omani acquisition finance transactions. In any event, true acquisition finance structures are rare.
Payments of principal and other payments are subject to the payment of withholding tax. Withholding tax is payable at the rate of 10%.
Interest, dividends and payments for services are within the scope of the withholding tax regime which came into force on 27 February 2017.
Ministerial Decision No 14/2019 (the “Ministerial Tax Decision”), issued on 28 February 2019, amends certain provisions of the Executive Regulations of the Tax Law. This decision confirms that inter-banking transactions, for the purpose of providing and managing liquidity or finance with a term of less than five years, will not be subject to withholding tax under Article 52 of the Tax Law.
Further following a Royal Directive of 15 May 2019, obtained by the CMA, the Oman government has suspended the assessment and collection of withholding tax on dividends and interest payments for a period of three years, subject to further extension if so required, effective from 6 May 2019.
Withholding tax is still required to be paid on the value of services provided by foreign companies to Omani beneficiaries.
Registering a legal mortgage in Oman may have a significant financial impact on borrowers as the current fees for registering a legal mortgage at the Ministry of Housing (the “MOH”) are equal to 1% of the secured liabilities and are capped at OMR300,000.
Other security registration fees are negligible or, at the very least, insignificant.
As noted above, the introduction of VAT is expected in early 2019. This is widely expected to be implemented at the GCC-agreed rate of 5%.
As a general rule, the Primary Commercial Court will uphold provisions relating to the payment of interest on principal and on overdue principal in commercial transactions (including without limitation, default interest). It will not award interest which may be penal (as opposed to being compensatory for any loss suffered on account of default or delay in repayment of debt). In the absence of the parties having agreed to the applicable rate of interest, it may limit the rate of interest recoverable on a judgment to the maximum levels specified by the CBO from time to time or to a level considered by the Primary Commercial Court to be reasonable.
The CBO permits banks to determine the interest rates to be applied to credit that is advanced, with the exception of consumer loans. The CBO will not , however, permit any cartel arrangements among banks to artificially inflate the cost of credit or any attempt unreasonably to widen interest rate margins. In addition to these powers, Article 80 of the Commercial Code of Oman, Royal Decree 55/90 (the “Code”), empowers the MOCI in agreement with the Oman Chamber of Commerce and Industry (the “OCCI”) to specify every year interest rate limits within which interest rates on commercial credits may be charged, taking into account the term of the loan and the purposes and risks thereof. The wording of the Article is ambiguous in that it does not state whether it would be applicable to or override the CBO's directions to banks on interest setting. The most recent Ministerial Decision 172/2017 permits creditors to charge interest at a maximum rate of 6.5% per annum on commercial loans and debts unless a lower percentage has been agreed by the parties. This Ministerial Decision includes a statement to the effect that the limitation on rates of interest introduced by it does not apply to loans advanced by commercial banks licensed by CBO in accordance with the Banking Laws of Oman.
Security interests under Omani law are categorised as:
Omani law provides for three forms of security over rights in rem, being commercial mortgages (security over assets not comprising interests in land), pledges and legal mortgages (security over interests in land). Security interests over rights in personam are typically guarantees, assignments and obligations.
A commercial mortgage grants certain rights to lenders over the borrower’s assets. These rights may be exercised following a default in relation to the payment of the underlying debt.
A commercial mortgage is entered into with the consent of the borrower and it may be granted over a very wide range of the borrower’s assets including tangible and intangible assets. Commonly, a commercial mortgage will secure the borrower’s business (including its commercial registration number and business name), machinery, equipment, trademarks, intellectual property, goodwill, stock and vehicles.
Registration of a commercial mortgage usually takes up to two working days and requires the parties to the commercial mortgage to sign in person at the MOCI as well as payment of a small registration and witnessing fee.
Registration of a legal mortgage over land can be more cumbersome and expensive than a commercial mortgage. The MOH typically likes to vet this type of mortgage and the registration process may take much longer than with regard to other security interests. The costs of registering a legal mortgage are as noted in 4.2 Other Taxes, Duties, Charges or Tax Considerations.
The concept of a floating charge is not recognised by Omani law, although it is worth noting that the MOCI has, in the past, not objected to the inclusion of wording in commercial mortgages which provides for the creation of a floating charge. The Commercial Code of Oman (Royal Decree 55/90 as amended, the “Code”) provides that, where the assets included within the commercial mortgage are not precisely defined, the commercial mortgage shall only apply to the trade name, the right of lease, the right to contact clients and goodwill. This suggests that commercially mortgaged assets must be precisely defined. As to the enforceability of a floating charge this is untested before the Omani Courts and so the position remains unclear.
Omani law recognises the concept of a guarantee.
It is permissible for a company to guarantee the obligations of its parent or a subsidiary.
The Code requires express authorisation, either by a company’s constitution or by shareholder approval, for various acts including mortgaging or pledging that company's assets (except to secure debts of that company incurred in the ordinary course of the company's business) or to guarantee the debts of third parties (except guarantees granted in the ordinary course of the company's business).
Where a company is guaranteeing the obligations of its parent or a subsidiary in order to secure finance to either of those entities subject to the form of registration of the borrowing and the lending entities, these lending may not be construed as being in the ordinary course of business and, consequently, in these circumstances a shareholder resolution may not generally be required.
The Code provides that if payment of a debt which has been guaranteed is deferred with the agreement of the debtor it shall likewise be deferred with regard to the guarantor. The Code further provides that guarantors shall be jointly liable amongst themselves and jointly liable with the debtor. A creditor may, however, claim against the debtor or the guarantor at his option and by claiming against one he does not forfeit his right to claim against the other. It is usual for guarantees to include a clause to this effect.
Although the Civil Transactions Law (the “CTL”) stipulates that a creditor must exhaust all claims against the principal debtor before claiming against the guarantor, the position is uncertain as it remains untested before the Omani Courts.
The Code imposes a duty on a creditor to safeguard securities held to cover a guaranteed debt and in so doing to take account of the interests of guarantors. If a creditor fails in this duty, and the guarantor suffers a potential loss as a result, the guarantor is released to that extent.
A creditor in a bankruptcy situation must pursue his claim in the bankruptcy. If the creditor fails to do so and the guarantor sustains loss, the creditor forfeits his right to seek recourse against the guarantor to the extent of that loss. The guarantor may also “release his liability for the guarantee” where the creditor grants the debtor a period of time for payment without the approval of the guarantor. In addition, should a debt fall due and the creditor fails to make a claim for payment, a guarantor is entitled to notify the creditor that legal measures must be taken to settle the debt within a period not exceeding one month. If that period comes to an end and the debtor has not yet been asked to make payment, the guarantor will be released save where the debtor provides the guarantor with adequate security in respect of the guarantee obligation.
In relation to indemnities, the Omani Courts are yet to draw a clear distinction between guarantees and indemnities. Provided, however, that an indemnity has been agreed to contractually and is not in conflict with public policy, the contractual provision should be recognised by the Omani Courts.
In the context of a target being acquired, save for where it is outside of the corporate power for that target to grant security, guarantee or give financial assistance for the acquisition of its own shares, there are no financial assistance regulations currently in force in Oman.
Finance for power projects in Oman requires, in accordance with the Law for the Regulation and Privatisation of the Electricity and Related Water Sector (promulgated by RD 78/2004 as amended from time to time), approval by the Authority for Electricity Regulation in Oman. Security documents, including commercial and legal mortgages, are approved in advance and approval usually takes one to two weeks from the date of submission.
Release agreements are entered into between the chargor and chargee and are filed with the relevant authority for a discontinuation of the charge.
There is no legislative recognition of the concept of subordination of debts or security in Oman. That said we have been involved in transactions where subordination arrangements of some complexity have been drafted with the approval of the CBO.
In principle, there appears to be no reason why the Omani courts would regard subordination of debts or security as contrary to public order or custom in circumstances where all the relevant parties have agreed to the arrangement and the rights of third parties have not been prejudiced.
Enforcement of security in Oman is made by application to the Omani courts. In order to enforce security, a judgment must be obtained. In a relatively straightforward debt recovery action, obtaining judgment from the Primary Commercial Court may take about six months where the debt is not contested and no verification of the debt is necessary through the appointment of an expert. For a judgment of this kind to become final or enforceable, the time period provided for appealing the decision before the appeal court will need to have lapsed.
The enforcement of simple security will usually take up to four months. Where enforcement is more complicated, the process can take anything up to two or three years. Invariably, during that time the chargor/mortgagor will continue to hold and control all the charged assets.
At present, enforcement in Oman is principally by way of public auction of the charged assets, following application by the creditor to the courts.
With the exception of land, there are no laws setting a minimum price which must be reached at public auction and secured creditors generally have no say in the matter. In the case of land, the Omani courts may seek the assistance of court appointed experts to decide a “basic price”. If this price is not reached, the property is re-auctioned and the minimum price is reduced by 10% until a sale is achieved. The secured creditors have the right to object at any time (for example, if the sale price was too low). The legislation does not specify the effect of raising an objection and it would appear that an objection would not stop the enforcement process continuing. In the result secured creditors have little control over the level of the proceeds realised from the enforcement of their security.
Any party, including the chargor/mortgagor, is able to bid for the assets at public auction. The auction of assets takes place subject to the secured creditors’ claims being determined by the concerned court. The court would accept the debt due to the chargor/mortgagor in lieu of the purchase price and grant the secured creditors possession of the assets without the secured creditors having to incur additional expenditure.
In the past, Omani courts have not held themselves bound by foreign governing law or jurisdiction provisions contained in contracts. More recently, with the introduction of the CTL, the Omani courts have expressed their willingness to apply foreign law, provided the relying party is able to demonstrate, to the satisfaction of an Omani court, the existence of the applicable foreign law. This, in our experience, has not occurred to date.
Notwithstanding that a document may provide for the resolution of disputes in a foreign jurisdiction, if one of the parties to the dispute is resident or domiciled in Oman then, in all likelihood, the courts will accept jurisdiction.
Under the Civil and Commercial Procedure Law (Royal Decree No.29/2002), applications to the courts of first instance in Oman for the recognition and enforcement of foreign judgments, arbitral awards and orders are permitted. An order seeking execution of a foreign judgment or award will not be permitted by an Omani court unless applicable conditions provided for by law have been satisfied. With Oman having become a signatory to the New York Convention on the enforcement of foreign arbitral awards, arbitration awards obtained from tribunals constituted in New York Convention member states should be held to be enforceable as a matter of Omani law.
It remains unclear whether a judgment obtained from a foreign court would be recognised and enforced by the Omani courts. To our knowledge, no judgment of a foreign court has ever been enforced by the Omani courts. Notwithstanding the Civil and Commercial Procedure Law, in the absence of specific Omani legislation permitting registration and recognition of foreign judgments, it is likely that a foreign judgment would be of evidentiary value only and the matter may have to be litigated de novo before the Omani Courts.
It is generally considered advisable for foreign lenders to follow past practice and appoint an onshore security agent for this purpose. That said, limited case law exists on how the Omani courts would approach such enforcement.
A new Insolvency Law has been issued by Royal Decree 53/2019 on 1 July 2019, to take effect upon the completion of 12 months from the date of its issuance. Pending the new Insolvency Law coming into effect, the Insolvency Law set out in Book V of the Code will continue to apply. The Code states that “the Court may, at its own discretion or at the request of the company defer an adjudication of bankruptcy in respect of a company where there is a likelihood that its financial position will be strengthened”. No indication is given as to the period of any such deferral or as to whether proceedings can be deferred more than once.
With the approval of a majority of its shareholders at an EGM, a company which is not in the process of being liquidated but whose financial difficulties are sufficient to result in its ceasing to make payments of its commercial debts as they fall due may apply to the Commercial Court for an order for preventive composition. Provided that it is able to demonstrate that, whilst its financial difficulties may be such that it is unable to continue to make payments as they fall due, it has not committed any fraud or gross negligence and has continued to conduct business during the preceding two years prior to the date of its application, an order is likely to be granted.
An order granting preventive composition will allow the debtor time to continue to administer its own assets in the normal course of business but under the supervision of a court appointed supervisor. Ordinary creditors (but not secured creditors) are entitled to vote to either accept or reject the proposed composition arrangement. Secured creditors do have the right to contest the application for composition but there is no indication, under Omani law, of the basis upon which the Commercial Court might refuse to ratify the application on the basis of an objection by a secured creditor.
If successful, the result of an application for preventive composition is that the secured creditors, along with other creditors, are prevented for a period of up to five years from claiming payment of any outstanding debt from the company or from enforcing any security. It is unclear whether an order for preventive composition would interrupt applicable limitation periods. Lenders in precedent financings have accepted this position without any other preventive composition specific provisions being incorporated into the financing documents to prevent them from exercising their rights.
Binding contracts cannot stand abrogated upon the declaration of bankruptcy of one of the parties, unless the contract itself was based on personal considerations. If the receiver in bankruptcy does not discharge its obligations under the contract, the counterparty may apply to the courts for its abrogation. The general understanding is that bankruptcy will not affect the enforceability of the right of a contracting party (be it a lender or otherwise) to terminate or declare a default if such right is expressly provided for under the agreement. A receiver of an entity in insolvency has the right to affirm or reject contracts which are binding on the insolvent entity but does not stipulate a time frame within which the receiver must make such a decision.
Monies owed to Omani Government bodies have priority over all monies owed by the debtor to other persons (including those with security).
On insolvency, potential preferential creditors will be;
Security interests granted within the two years immediately preceding an adjudication of bankruptcy may be ruled to be of no effect if the security was granted after the date which is determined by the Commercial Court as being the date on which the bankrupt ceased paying its commercial debts.
In addition to the risk that the preferred creditors exhaust the proceeds of sale of secured assets in repayment of the debtor’s liabilities, lenders should also be aware that, unlike in certain other jurisdictions, insolvency action cannot be commenced out of court. A receiver is appointed by the court, and not, as may be the case in other jurisdictions, by the creditors of the debtor. Consequently, lenders have less influence over the insolvency process. A court “may authorise the continued operation of the business concern where the public interest, the interest of the debtor or the interest of the creditors so requires”.
Oman continues to undertake many large scale infrastructure and industrial projects, especially in the power, water and petrochemical sectors. Oman has planned or is currently undertaking a large number of construction projects, including the Duqm Refinery Project and the Barka V and Ghubrah 3 IWPs. Oman is a highly attractive destination for project finance, partly due to its stable legal and political system. In addition, the Muscat Securities Market remains relatively small and there is more emphasis on project finance as a source of funding in comparison to other jurisdictions with larger equity markets.
Wide-ranging legislation is in place to promote business and foreign investment in Oman, including the Commercial Companies Law Royal Decree 18/2019 (the "CCL"), the Code, the CTL, the FCIL, the Real Estate Law and the Tax Law.
The most important legislation is the Basic Law (Royal Decree 101/96). This provides for the constitution of Oman. It is a requirement that all other laws are consistent with the Basic Law. There is a well-defined judicial system, comprising of the Primary Commercial Court, the Appeal Court and the Supreme Court.
The Sector Law, (Royal Decree 78/2004) regulates the electricity and water sector and established the Public Authority for Electricity and Water. The sector law is expected to be amended so that it regulates IWPs as well as IPPs and IWPPs.
There are no restrictions in Oman on foreign capital remittances. Overseas banks may participate in project finance in Oman. While there are restrictions on foreign ownership of companies in Oman, 100% of the shares in a project company can be owned by non-Omani entities by special application to the Council of Ministers. There are well established precedents for project finance agreements in Oman, especially for IPPs and IWPPs.
As a general rule, project agreements have 20-year time scales, giving project companies a suitable period of time to operate their projects with certainty. This also helps give predictability when calculating expected cash flows and returns from projects.
Sharia-compliant sources of funding for project finance also exist as Islamic banks and windows look to invest a portion of their investments in Islamic project finance. Notable examples include financings of the Moon Iron and Steel plant and the Sohar Aluminium plant, both in Sohar. Both of these used a combination of conventional and Islamic financing.
The Project Agreements entered in for IWP and IPP Projects may require a project company to conduct an IPO of a certain percentage of the share capital within a certain timeframe after the date of incorporation of the project company.
The Public Private Partnerships Law (the “PPP Law”) took effect in early July 2019 following the publication of Royal Decree No 52/2019. At the same time, a new Privatisation Law (Royal Decree No. 51/2019, the “Privatisation Law”) was also published.
The PPP Law is intended to encourage progress of the wide range of PPP projects currently anticipated to be implemented in Oman. That said, since the associated regulations for both the PPP Law and the Privatisation Law will not be published until even a year after the publication date of the two Royal Decrees, it is hard to ascertain the full scope of Oman's planned PPP regulation.
Public and Private Partnerships agreements (PPP) are exempted from the Privatisation Law and the Tender Law (36/2008 as amended).
A person awarded a PPP project must do so by way of a newly formed Project Company, in the form of a joint stock company, and not by means of an existing company. A Project Company that enters into a PPP Agreement may be 100% foreign-owned. The Executive Regulations will set out the legal form and minimum capital requirements of the Project Company. It is also responsible for implementation of the Privatisation Law.
The Public Authority for Privatisation and Partnership (“PAPP”) is mandated to encourage PPPs and to expand the role of the private sector in investing in projects of social and economic importance. It is expected to publish its regulations in due course.
The Privatisation Law applies to Government utilities and facilities, or wholly or partially Government owned companies, that are selected for privatisation by the Council of Ministers.
The type of consents and permits required vary from sector to sector. By way of example with regard to an IPP or an IWP project, a licence would be required from the AERO in addition to environmental permits being required from MECA and the construction permit from the MOH. It would be unusual for a government body to require an approval without there being an express statutory requirement relating to that government body or the activity contemplated. Other than in the case of registration of security interests, the obtaining of approvals, permits, authorisations and other registrations will attract a standard administrative fee.
Most goods imported into Oman (included project materials and equipment) attract a customs duty of 5% levied on the cost, insurance and freight (CIF) value of the goods imported. The importation of equipment is theoretically subject to restrictions under the Israeli Boycott List, although in practice, these restrictions have not, to our knowledge, been enforced.
Tax is imposed by the Director of Taxation Affairs pursuant to the Tax Law. Oil companies are taxed at a rate of 55% on their taxable income insofar as it relates to income earned from the sale of oil.
Article 112 of the Tax Law provides that the annual tax rate applicable to all companies incorporated in Oman including the branches of foreign entities and permanent enterprises is 15% of taxable income.
Only security interests capable of registration need to be filed with government authorities. Powers of attorney in support of security interests require notarisation by a notary public at the Ministry of Justice. All documents filed with any government authority must be in Arabic.
The oil and gas sector is regulated by the Council for Financial Affairs and Energy Resources, which acts in conjunction with the Ministry of Oil and Gas and its various departments (pursuant to Royal Decree 60/1996). The Directorate General of Petroleum and Mineral Resources (the “Directorate”) is the body responsible for granting licences and permits for the exercise of oil and gas related activities. In addition, the Ministry of Environment and Climate Affairs (“MECA”, established pursuant to Royal Decree 90/2007) is the body responsible for regulating environmental aspects of upstream operations in Oman.
The Oil and Gas Law promulgated by Royal Decree 8/2011 (the “Oil and Gas Law”) is the primary law in the oil and gas sector in Oman. It sets out the general rules that regulate the oil and gas sector and the parties that are granted interest(s) in hydrocarbon assets in Oman. Executive Regulations of the Oil and Gas Law have not been issued as at the date of publication. Details in relation to the rights and obligations of parties who have been granted the right to explore and exploit hydrocarbons in Oman are, in addition to the Oil and Gas Law, primarily contained in exploration and production sharing agreements which grant the exploration and exploitation rights to the concerned concessionaire.
A project company may be incorporated as an LLC, SAOG or SAOC.
As of the date of this publication, a foreign investor is permitted to invest in a corporate entity up to 70% without a specific licence. Should a foreign investor wish to retain 100% of the equity, the foreign investment would need to be approved by the Council of Ministers or otherwise be permitted by a project or sector-specific law issued by Royal Decree 51/2019 (the "Privatisation Law") or by the PPP Law.
Currently, in practice, 70% foreign participation is common. The nature of the proposed company’s activity has a bearing on whether, and how much, foreign participation is licensed in excess of 70%. The authorities have certain priority areas, such as industries using local products and raw materials, export industries and projects for tourist villages and tourism.
Pursuant to the free trade agreement between Oman and the United States, a wholly-owned US entity can register a branch in Oman to conduct business except in certain reserved sectors.
The principal sources of financing available to project companies are direct lending from export credit agencies, and international and local bank funding.
Article 11 of the Basic Law provides that all natural resources and revenues are the property of the state, which will preserve and utilise them in the best manner possible, taking into consideration the requirements of the state’s security and the interests of the national economy. No concession or investment in any of the public resources of the country may be granted except by virtue of a specific law (ie, a royal decree) and only then for a limited period.
All land is owned by the state unless it is owned by private individuals pursuant to the Land Law. While the Basic Law provides for the grant of concessions or investment rights regarding exploitation of mineral resources, specific royal decrees, for example Royal Decree 8/2011 (the Oil and Gas Law) regulate oil exploration and production.
In relation to the oil and gas sector, most of the exploration and production activities are carried out pursuant to exploration and production sharing agreements (EPSAs) and the share of revenue payable to the government is based on the terms of the EPSA. EPSAs provide that the revenue from the oil production is to be shared between the government and the concessionaire in an agreed ratio, for example 20:80 or 30:70 as the case may be, after meeting the costs involved. The concessionaire provides all funds required for and bears all costs and expenses in connection with the exploration of oil or gas, as the case may be. A formula may also be agreed between the government and the concessionaire for computation of the amount of income tax to be paid by the concessionaire and included in the EPSA. Royalties payable to the government in respect of mining activities are specified in the related concession licence.
Special rules apply to cross-border sales or deliveries of crude oil or crude oil products. In practice, all of these deliveries are in the nature of export transactions. Such transactions are closely controlled by the shareholders of the relevant operating companies.
MECA is the principal authority for environmental protection and pollution control in Oman and is responsible for implementing the national plan for the conservation of the environment and prevention of pollution. One of MECA’s most important functions, through its Directorate of Environmental Planning and Permits, is the administration of the Environmental Permit system, which applies to all new projects undertaken within Oman. MECA is also responsible for the Oman National Oil Spill Contingency Plan.
The framework law on environmental protection and the prevention of pollution in Oman is Royal Decree 114/2001 (the “Environmental Law”). RD 114/2001 regulates a wide range of physical, chemical and biological pollutants, and many of its provisions are directed specifically at potentially polluting work-places, both onshore and offshore. It imposes a general prohibition on the disposal of Environmental Pollutants and requires owners of polluting work-places to ensure that all applicable emission and discharge standards are complied with.
Further, organisations exploiting natural resources are required to “formulate the rules for the optimal utilisation of such resources in order to ensure their conservation and prevention from pollution”. Contracts for the exploration, drilling and exploitation of oil, gas or other natural resources must incorporate provisions that ensure compliance by the contracting parties with the provisions of the Environmental Law and executive regulations.
The Environmental Law is supplemented by a substantial number of other Royal Decrees and Ministerial Decisions, some of which prescribe discharge and emission standards or require permits to be obtained prior to the commencement of operations. These permits are subsidiary to the main Environmental Permit required under the Environmental Law, and any permits falling within MECA's competence may be issued by MECA on the basis of the main permit.
In accordance with the Environmental Law, the Law for the Encouragement of Industry in Oman and the Regulations for Organising the Issuance of Environmental Approvals and Final Environmental Permit (Ministerial Decision 187/2001, “MD 187/2001”), the promoters of industrial projects in Oman are required to apply to the MECA for an environmental permit where their project is likely to have an impact on the environment. The permit will need to be obtained by the promotors of the project at the outset as a condition precedent to the project being approved and undertaken by way of a preliminary environmental approval, and then once the construction phase has been achieved and the project company is ready to commence its commercial operations. Before doing so, it would need to obtain a final environmental approval which will be issued for specified durations. Further renewals can be granted subject to MECA being satisfied that all conditions set out in the permit have been met, prior to the industries department at the MOCI granting an industrial license for the establishment of the project company and for the commencement of operations.
MD 187/2001 prescribes that permit holders must comply with the conditions set out in their Environmental Permit. Notwithstanding the penalties prescribed in other Omani Environmental Laws, MECA may close down an establishment on the basis of that establishment not having its environmental approval or the final environmental permit or the establishment continuing to practice its activity after the expiry of the environmental approval or the final environmental permit.
The Islamic banking sector has emerged in recent years as a growing segment within the Omani financial market, with support from both the Government and the legislature. Following the recognition of Islamic banking in Oman by way of Royal Decree 69/2012 (which amended the Omani Banking Law) the CBO issued the Islamic Banking Regulatory Framework (the “IBRF”) in the same year.
The IBRF is a comprehensive, 500-page regulatory guideline. It sets out the requirements and conditions for undertaking Sharia-compliant commercial and investment banking activities as well as the offering of Sharia-compliant products in Oman. The IBRF clarifies and elaborates on the authority of the CBO as the regulator of Sharia-compliant financial institutions in Oman.
The IBRF regulates in detail areas such as, in relation to Islamic banking providers, licensing requirements, general obligations and governance, accounting standards and auditor reports, supervision, capital adequacy and control well as, more generally, credit, market, operational and liquidity risks.
The IBRF provides that a licensee authorised to undertake Islamic banking activities should be a fully-fledged Islamic bank, an Islamic banking window of a conventional bank or a branch of an Islamic bank.
The IBRF particularly focuses on the transactional and operational Sharia-compliance of all licensed Islamic financial institutions in more detail than in other GCC countries. With regards to verification of Sharia-compliance of transactions, the IBRF leaves such task to individual, qualified Sharia-boards within each licenced Islamic bank and does not provide for a centralised authority to audit Islamic bank transactions. Minimum criteria and qualifications for persons who may sit on Sharia-boards of Islamic banks or windows are set out in the IBRF.
The CBO established, in 2013, a central Sharia authority to, amongst other things, advise the CBO in relation to Sharia-compliant transactions and to settle Sharia-related disputes arising among the Sharia auditing boards of financial institutions in Oman.
Additionally, the IBRF sets out the criteria, requirements, specifications and risks of each Islamic finance product. Especially noteworthy in this respect is that the Omani IBRF expressly prohibits the use of Tawarruq (ie, commodity murabahah) by Islamic banks which, whilst being frowned upon by the majority of Islamic scholars, is permitted in several GCC countries (including Saudi Arabia). While key stakeholders continue to discuss the possibility of permitting Tawarruq in Oman on a case-by-case basis, the CBO currently maintains its conservative approach and continues to restrict the use of Tawarruq by Islamic banks in Oman.
Only Sharia-compliant securities, which (similar to conventional securities) can be either debt or equity-based may be listed and traded on the Islamic Capital Markets (“ICMs”), and where such trading takes place in a manner which does not breach the principles of Sharia in order for the market, the securities being traded on it, and the transactions undertaken within it, to be free of any matters or activities which contravene Sharia law. This includes, for example, interest (riba), gambling (maysir), and excessive speculation (gharar). ICMs typically consist of two sub-markets: the Islamic equity market and the sukuk market. Sukuk represents an ownership interest in an underlying funding arrangement structured according to Sharia, entitling the sukuk-holder to a proportionate share of the returns generated by such arrangement and, at a defined future date, the return of the capital.
The main Sharia-compliant finance products include Ijarah, Murabaha and Mudaraba.
Securities products include:
Equity based instruments include Sharia-compliant stocks, Islamic trusts, Islamic investment funds (including real estate investment funds) and Islamic index funds. With regards to derivatives (eg, options, swaps and futures), and in spite of the same being generally frowned-upon by the majority of Muslim scholars, certain ICMs do exist which allow the trading of “Sharia-compliant” derivatives (eg, profit swap rather than interest swap).
Sukuks are treated by the CMA as debt instruments although, according to the Sharia, they are generally considered to be partnership or quasi-equity structures. Usually, the sukuk structure would use an SPV to hold the main/sole asset, with security being granted to or for the benefit of the sukukholders, with the sukukholders having recourse to that asset through the security so created.
There have been no recently published cases in Oman on jurisdictional issues, the application of Sharia or the conflict of Sharia and local laws relevant to the banking and finance sector.