Tax exemptions on income

Muscat: As part of our continuous endeavour to provide insight on tax matters concerning taxpayers in Oman, we have in this article discussed various aspects with regard to income currently exempt from tax.
Certain specific income earned by a taxpayer comprising dividends from any local company (irrespective of its form) and profits arising on disposal of securities registered with the Muscat Security Market (SAOC and SAOG companies) are exempt from tax. The word ‘securities’ is not defined in the tax law hence it is important to refer to the definition of ‘securities’ defined in the Capital Market Authority (CMA) Law. The CMA law defines securities to include shares and bonds issued by joint stock companies, government bonds, treasury bonds and other negotiable securities. Units issued by a fund are also exempt from tax if the fund complies with the relevant provisions mentioned in the CMA Law.
Income earned by Omani funds registered with CMA and from funds set up outside Oman dealing in MSM listed securities are also tax exempt. A person seeking this tax exemption is required to file an application to the Secretary General of Taxation (SGT) along with relevant information as stated in the Executive Regulations to the Income Tax Law (MD 30/2012) (ERs).
Income from carrying on shipping activity by an establishment owned by an Omani natural person or an Omani company is exempt from tax. Income realised by any other person from carrying on shipping and air transportation activities is also exempt provided the foreign country where the person is incorporated or effective management is based, provides the same treatment.
In addition to the above exemptions, it is possible to obtain tax exemptions under the tax law for establishments or Omani companies operating in specific fields (except management contracts and project execution contracts) comprising: a) industry, b) mining, c) export of locally manufactured goods d) hotels and tourist villages, e) farming and agriculture, f) fishing, g) education, and h) medical care by setting up private hospitals. Exemption is granted for a period of five years from the date of commencement of commercial activities provided the conditions specified in ERs are fulfilled.
The renewal of exemption for a further period of five year is granted only if the further conditions, as specified in the ER, which are quite stringent, are fulfilled. It is critical to note that only income earned from the principal activity is exempt. Moreover, one of the conditions to obtain tax exemption for these specific sectors is that income from the principal activity (i.e. the exempt activity) shall not be less than 90 per cent of the company’s annual gross income. Non-complianceof this condition may result in denial of exemption or revocation of tax exemption, if already granted.
In order to apply for an exemptionfrom income tax for activities carried out in the specified fields mentioned above,a prescribed form is required to be submitted to the concerned ministry (e.g. Ministry of Tourism if the tax exemption is being sought for a hotel) within eight months from the proposed date of commencement of tax exemption.
The competent authorities in the relevant ministry will review the form and upon having being satisfied that all the requisite information has been submitted, provide their opinion to the Ministry of Finance (MoF). The SGT at MoF reviews the application and provides its recommendations to the minister to issue a Ministerial Decision, specific to each company. Any delay in submitting the application in the prescribed form could result in the complete denial of the tax exemption.
As per the current practice of the tax authorities, any income other than the income realized from the principal activity which is exempted from tax shall be subject to tax even if a company is exempt from tax (example bank interest and scrap sale). Exemption from tax does not result in exemption from tax compliance obligations. Anentity which is exempted from tax shall be required to submit its tax returnsand fulfill its withholding tax obligations.
A company which has a tax exemption is not allowed to carry forward its tax losses incurred during the tax exemption period. However, as an exception, tax losses that are incurred during the first five years of exemption granted to companies carrying out specific activities mentioned above, can be carried forward indefinitely until they are fully set off.
Companies incorporated in free trade zones or special economic zones (commonly known as FZC or SEZ company) are also eligible for tax exemption for a period specified in the respective free zone law. The tax exemption to such companies is not automatic. To avail tax exemption, a FZC/SEZ company should write a letter to the respective free zone authorities seeking tax exemption from MoF. The free zone authorities upon being satisfied that the FZC/SEZ company fulfills all the requisite conditions, formally requests to MoF to issue a tax exemption in favour of the company.
The minister, upon recommendation of MoF, provides tax exemption through a specific Ministerial Decision.
In view of the prevailing economic environment, MoF is likely to narrow down the sectors that are eligible for tax exemption. The Oman government in its 2017 budget has stated that amendments to the tax law will be issued in 2017 and this will include reduction in the scope of tax exemptions.
Further, the current tax exemption provisions are being applied strictly by the tax authorities resulting in exemption being denied if any of the conditions, no matter how insignificant they may be, are not complied with.