Contributed By Al Busaidy, Mansoor Jamal & Co (AMJ)
As a politically stable country in the MENA region that is reliant on oil and gas exports, Oman continues to diversify its economy by encouraging the establishment and growth of investment funds. Oman has an established and experienced Capital Market Authority (CMA) pursuant to the Capital Market Law (Royal Decree 80/98) (CMAL). The CMA is responsible for regulation of the issuance and offering of all securities in the Sultanate of Oman. The term Securities is defined by the CMAL to include shares and bonds issued by joint stock companies, bonds issued by the government and its public authorities, treasury bonds and deeds and any other securities negotiable in the Muscat Securities Market (MSM). The CMA and the MSM have been active over the years resulting in the listing of a number of public joint stock companies and investment funds established for investment in Securities.
Whilst the CMA allows for the establishment of funds to invest in stocks, bonds and other types of securities as noted above, it has not traditionally approved or authorised the establishment of what may be termed as Alternative Investment Funds (AIF); ie, funds investing in class of assets other than those defined as being securities trading on the MSM.
More recently, however, by the CMA’s Decision No. E/2/2019, the CMA has provided for the issuance of real estate investment trusts (REITs) and is also considering the approval of a privately owned private equity infrastructure fund. It is intended that such REITs and infrastructure funds will be listed on the Third Market on which the REIT units and funds unites although listed will not be traded.
As noted above, the different types of AIF may be developed and established with the passage of time based on the law as currently enforced will be REITs, real estate funds and private equity infrastructure funds to be listed on the Third Market.
Article 209 of the Executive Regulations (Decision No 1/2009) (Executive Regulations) issued by the CMA provides that investment funds may be established as open-ended investment funds or as closed-ended investment funds.
An open-end investment fund is a fund with variable capital. The capital for such a fund may be increased following the issue of additional units or reduced by the redemption of some of the units during a period(s) prescribed by the articles of association.
A closed-ended investment fund is a fund with fixed capital whose investment units are only redeemable after the expiry of the fund in accordance with its terms. The capital for this type of fund can be increased pursuant to the articles of association. The units for this type of fund must be listed on the MSM. Article 209 further provides that a REIT can only take the form of a closed-ended fund.
All funds, whether open or closed, are governed by the CMAL and the Executive Regulations issued by the CMA. For the purposes of REITs, the CMA has issued separate regulations (CMA Decision No E/2/2019) (REIT Regulations).
An investment fund established in Oman must comply with the provisions of the Executive Regulations and its own articles of association, which are the sources of legal authority that govern the operations of the fund. In accordance with the terms of the Executive Regulations the ownership of the fund's assets is to be registered in the name of the name of the fund. The management of the fund, investment manager and the service providers are required to provide all information and documents as may be requested by the CMA. Additionally, when making a disclosure to the market with regards to the investment units the fund will be required to disclose all facts and information pertaining thereto without exaggeration. All marketing and promotional activities pertaining to the fund must first be approved by the CMA.
Article 222 of the Executive Regulations requires that at least 75% of the fund’s capital should be invested to achieve the main investment objective(s). Article 223 of the Executive Regulations provides that a fund aiming to invest in securities should comply with the following rules:
Article 115 of the REIT Regulations provides that the fund should not invest more than 25% of the total value of its assets outside Oman. In the event the fund wishes to exceed the prescribed limit it will be required to obtain an exemption from the CMA.
According to the Executive Regulations a fund investing in real estate should not borrow more than 30% of its net asset value.
The investment fund constitution may provide for its ability to make borrowings, however, Article 223 of the Executive Regulations provide that an investment fund may not borrow more than 10% of its net asset value. Article 224 of the Executive Regulations further provides that a fund investing in real estate may not borrow more than 30% of its net asset value.
REITs may make borrowings subject to the restrictions set out in the REIT Regulations amongst which
Article 115 of the REIT Regulations further provides that a REIT may not provide loans or other financial facilities to third parties.
Additionally, the Oman Banking Law (Royal Decree 114/2000) (Banking Law) restricts the undertaking of banking activities, including loan origination, unless the fund holds a banking licence issued by the Central Bank of Oman (CBO). It follows that a fund established in Oman is required to obtain a banking licence from the CBO before it can conduct any loan origination activities.
Whilst there is no provision in the Executive Regulations which expressly prohibits funds from investing in cryptocurrencies or other non-traditional assets, funds established pursuant to the CMAL, with the approval of the CMA, will only be permitted to invest in a class of assets which may come within the definition of Securities or what may otherwise be provided for by the CMAL or Executive Regulations; ie, investment in real estate funds or REITs.
Additionally, no specific rules have been issued by the CMA which sets out the procedure for investing in non-traditional assets. The offer to sell cryptocurrencies to an onshore fund by a party outside Oman may also be viewed as marketing of a non-Omani securities or conduct or banking business, thereby bringing the transaction within the regulatory oversight of CMA and CBO, respectively. With respect to non-CMA persons – ie, other than those regulated by the CMA – the CBO has issued informal guidance that people wishing to undertake cryptocurrencies transactions should exercise caution when so doing.
The sponsor is required to apply to the CMA to obtain preliminary approval to establish the fund and should attach with the application the draft articles of association, the draft prospectus and any statement and/or document(s) required by the CMA.
Following submission of the application, the CMA is required to issue its decision within 15 days from receipt of the application. Upon receipt the sponsor is required to complete the process by establishing the fund within three months from the date of the approval by the CMA. Otherwise, the approval will be considered void unless extended by the CMA.
Article 213 of the Executive Regulations and Article 70 of the REIT Regulations provides that any person wishing to establish a fund should appoint a company licensed by the CMA to be the investment manager for the fund. The investment manager will be expected to liaise with the CMA in order to establish the fund as well as issuing and listing the units.
Article 125 of the Executive Regulations provides that a company acting as an investment manager should have paid-up capital and shareholder equity of at least OMR200,000.
Article 244 of the Executive Regulations provides that the fund should be managed and supervised by a management body elected by the members in accordance with the articles of association. The members of the management body should not be less than three and not more than seven including the chairman and vice chairman.
Members of the management body are liable to the investors and the CMA for failure to supervise and oversee the investment manager and other service providers. Further they are required to safeguard the interests of the fund and the investors in accordance with the law.
Additionally, funds are required to comply with and adhere to the Omanisation targets set by the Ministry of Manpower (MOM) which are industry-specific and may be varied depending on the size of the fund and the changing requirements of the MOM.
Article 261 of the Executive Regulations and Article 66 of the REIT Regulations provide that service providers should be persons licensed or approved by the CMA and should have adequate human and financial resources to discharge their obligations. The Executive Regulations further provide that funds should conclude contracts with the service providers setting out the rights and obligations of each party and that such contract should be reviewed annually.
The service providers include an investment manager, custodian and external auditors.
Please see above, 2.7 Requirement for Local Investment Managers. Article 265 of the Executive Regulations provides that the fund should entrust the management of its investment to an investment manager. An investment manager is required to undertake the following tasks:
Additionally, Article 76 of the REIT Regulations provides that an investment manager should prove that it has the necessary experience, competence and capacity to perform its duties, including the following:
Article 267 of the Executive Regulations and Article 82 of the REIT Regulations respectively provide that an investment fund must have a custodian and a REIT must have a trustee. The custodian/trustee must be independent of the investment manager and be licensed by the CMA to provide custodial services.
Article 267 of the Executive Regulations provides that the assets of a fund should be placed with a custodian whose principal place of business is in Oman. However, in order to facilitate transactions abroad the custodian may appoint a sub-custodian to keep some or all of the assets outside Oman. Appointment of a sub-custodian does not exonerate the custodian of its obligations. Article 268 of the Executive Regulations provides that a written consent of the fund's management body should be obtained for all the contracts concluded with the sub-custodian. All contracts concluded with the custodian or sub-custodian should as a minimum cover:
No contract concluded with the custodian or sub-custodian should provide for the creation of any encumbrance on the assets of the fund, except for fee claims by the custodian or the sub-custodian for acting in such capacities. The contracts should not contain any provision that would require the payment of fees or expenses to the custodian or sub-custodian in the form of a transfer of the fund’s assets.
The custodian or sub-custodian are required to undertake due diligence in maintaining the assets of the fund and protecting the interests of the fund. They will be liable for any loss to the fund's assets resulting from any omission or wrongful act by them or their respective employees, directors or managers.
Article 273 of the Executive Regulations provides that the management body of the fund should appoint an external auditor from amongst the audit firms accredited by the CMA. The external auditor of the fund cannot also serve as an external auditor of the investment manager. Article 276 of the Executive Regulations provides that the external auditor should be appointed for one financial year and can act as the external auditor for up to four consecutive years. Thereafter it can be reappointed after the expiry of a cooling-off period of two years.
Article 73 of the REIT Regulations provides that the investment manager should ensure that its compliance officer has essential knowledge of Islamic Shari'a principles or Islamic finance.
The Executive Regulations issued by CMA is silent as to the requirements for non-local service providers. As stated above (2.9 Rules Concerning Other Service Providers) service providers should be licensed or approved by the CMA.
Article 66 of the REIT Regulations provides that a service provider may assign the duties entrusted to it to a third party subject to the CMA’s approval.
Article 72 of the REIT Regulations provides that if the third party is established outside Oman, it should be licensed by the relevant authority in the home country to undertake the business of management of investment trusts subject to the CMA’s approval.
The taxation of income and capital gains of a fund established in Oman is governed by the Oman Income Tax Law as promulgated by Royal Decree No 28/2009, as amended by Royal Decree No 9/2017 and as supplemented by the Executive Regulations to the Income Tax Law, as promulgated by Ministerial Decision No 30/2012 and No 14/2019 (collectively the Tax Law).
Article 117 of the Tax Law provides that income earned by a fund set up in Oman in accordance with the CMAL or funds set up abroad to deal in Omani securities registered with the MSM is exempt from tax.
Absent the exemption under Article 117, the fund will be subject to tax at the rate of 15%, on its income and gains, as calculated in accordance with the Tax Law.
The exemption under Article 117 does not exempt funds from any obligation to deduct and remit withholding tax of 10% in respect of dividend payments to foreign recipients in accordance with Article 52 of the Tax Law.
Currently, withholding tax on dividends is suspended following a Royal Order of His Majesty the Sultan of Oman. The suspension is for a period of three years effective from 6 May 2019, but may be extended. There is currently no guidance or indication as to whether an extension will be granted. If no extension is given, the standard rate of 10% dividend withholding tax will apply from 6 May 2022.
In November 2016, Oman and other states of the Gulf Cooperation Council (GCC) concluded the Unified VAT agreement for the Cooperation Council for the Arab States of the Gulf (GCC VAT Framework), under which the member states of the GCC committed to the uniform imposition of VAT at a rate of 5%.
Currently, it is envisaged that implementation will take effect in either 2020 or 2021.
All investment funds generally qualify for beneficial treatment under the double-tax treaties entered into between Oman and other nations provided that they are established in Oman in accordance with the CMAL.
We have seen examples where locally established investment funds including REITs, infrastructure funds etc. have used subsidiaries for investment purposes. Such subsidiaries are typically utilised as special purpose vehicles in order to hold assets for the benefit of the fund or as sector-specific investment vehicles such as infrastructure funds or real estate investment funds (REITs).
The majority of investors in funds may be GCC and non-GCC nationals.
The majority of investors in funds are likely to be GCC and non-GCC nationals.
The investments made by the funds are mostly in Oman. Article 115 of REIT Regulations provides that a fund should not invest more than 25% of the total value of its assets outside Oman. In the event a fund wishes to exceed the prescribed limit it will be required to obtain an exemption from the CMA.
Notwithstanding the above, we have seen a move towards expanding the scope of such investments to include investment opportunities in the larger MENA area, India and Pakistan.
The key trend is towards REITs as they enable foreign investors to gain investment exposure to real estate in Oman. In view of this trend, the CMA issued REIT Regulations in 2018. Prior to the REIT Regulations all the funds including REITs were governed by the Executive Regulations issued by the CMA. However, following the promulgation of the REIT Regulations, REITs are now governed by the REIT Regulations.
Disclosure and Reporting Requirements Under Executive Regulations
The requirements are as follows:
Disclosure and Reporting Requirements Under REIT Regulations
We are not aware of any forthcoming changes which may impact on any of the information provided above.
Please refer to 2.2 Fund Structures, above.
Investment fund managers are subject to the requirements of the CMAL and the Executive Regulations. Please note that fund managers are required to be licensed by the CMA in order to operate in Oman for management of investment funds established in Oman. Please see 2.6 Regulatory Approval Process and 2.7 Requirement for Local Investment Managers.
There is currently no specific tax regime applicable to alternative fund managers in Oman. All income received by a fund manager in connection with its management of an investment fund shall be taxable under the Tax Law.
There are no specific rules exempting a fund or its investment manager from having a "permanent establishment" in Oman. Under the Tax Law, the presence of representatives of foreign businesses in Oman for a period of more than 90 days in any 12-month period would result in income tax liabilities to the foreign business regardless of whether such businesses have physical offices in Oman.
While investment funds are exempt from the requirement to pay income tax under Article 117 of the Tax Law, investment managers will be seen to have a taxable presence in Oman if they are deemed to have a "permanent establishment" in Oman on the basis of the abovementioned test.
There are no specific provisions of the Tax Law which deal directly with the issue of carried interest. As such, any benefit to the manager in the form of carried interest would be subject to income tax under the Tax Law of Oman at the rate of 15%.
The outsourcing of investment functions and business operations to a third-party service provider in consideration for a fee under a contract is permitted. Please see 2.10 Requirements for Non-local Service Providers, above.
If a fund manager is incorporated in Oman, then it will be required to employ sufficient Omani nationals to meet its Omanisation target. Please note that these requirements are industry-specific and may vary depending on the size of the fund manager's workforce and the current requirements of the MOM in Oman.
Fund managers, whether local or foreign, must be licensed by the CMA for the purposes of acting for local investment funds in compliance with the requirements of the CMAL.
Government funds and pension funds are the main investors in Omani established funds.
Investment funds established in Oman may be marketed to the general public in Oman provided that fund investments relate to products and services licensed by the CMA and the CMA has approved the marketing and promotional materials and activities.
Please see 4.5 Regulatory Regime, below.
There is no restriction on local investors investing in funds in Oman.
Article 211 of the Executive Regulations requires any fund established pursuant to the CMAL to provide all its marketing and promotional materials to the CMA for its approval prior to issuing the same to prospective investors and to disclose all facts and information pertaining thereto without exaggeration.
Under Article 249 of the Executive Regulations, a fund manager is required to disclose to investors the annual report, financial statements and other information and ensure that disclosure is fair, timely, transparent and not materially misleading.
Please note that Oman does not currently levy any income tax in respect of individuals. Please refer to 2.11 Tax Regime and 2.12 Double-tax Treaties, above, for an overview of the relevant tax implications to investors.
The CBO expects all Omani financial institutions to comply with FATCA and has requested, among other things, statutory auditor sign-off on FATCA compliance on an annual basis.
Provided that the investment funds is found to be a foreign financial institution to whom FATCA is applicable, it will be required to apply FATCA, withholding 30% on payments of US sourced income to investors (if any). In order to remain compliant with the CBO requirements, the fund may require each investor to provide information about themselves. Where a fund is unable to satisfy its reporting obligations (including the possibility that the fund cannot collect the requisite information from some or all of the investors), certain payments received by the fund may be subject to withholding on the basis of FATCA.
The CBO has also recently issued guidance implementing CRS with effect from 1 July 2019. It is understood that Oman is currently preparing the primary and secondary legislation to implement CRS and intends to commit to an exchange of information by September 2020.
It is expected that the funds which are treated as a financial institutions for CRS purposes are required (among other things) to carry out due diligence of the tax position of all its investors and, where an investor is identified as being resident in a country that has implemented CRS, provide information on that investor to the relevant authority in that jurisdiction.