A New Dawn for Foreign Direct Investment in Oman

Oman’s new Foreign Capital Investment Law came into force in January 2020. It is a highly significant legislative development, and marks a new dawn for inbound investment into the Sultanate. The new law removes most legal restrictions on the foreign ownership of Omani companies. Foreign investors are generally now free to establish a presence in Oman without a local partner, thereby reducing their costs and allowing them to manage their businesses with autonomy. Another key objective of the new law is to encourage foreign participation in projects of strategic importance to the Sultanate or that benefit Oman’s less developed regions. The new law seeks to achieve this by affording incentives to non-Omanis investing in this space. By creating an attractive environment for foreign investment, the new law is designed to create local jobs, increase revenues from taxation, reduce the burden of public spending, and enable new infrastructure projects to proceed expeditiously.

1.       Background to the 2019 FCIL

Oman’s new Law No. 50/2019 on Foreign Capital Investment (the “2019 FCIL”) was issued on 1 July 2019 and became effective on 1 January 2020. The executive regulations to the 2019 FCIL were issued on 14 June2020 pursuant to Ministerial Decision No. 72/2020 (the “Executive Regulations”). The Foreign Capital Investment Law No. 102/1994 (the “1994 FCIL”) and the executive regulations issued under it have as a consequence been repealed.

Oman’s ministries and governmental bodies were reorganised and streamlined on 8 August 2020. As part of this reorganisation, the Public Authority for Promotion of Investment and Development of Exports was absorbed within the Ministry of Commerce and Industry, and the latter was renamed the Ministry of Commerce, Industry, and Investment Promotion (“MoCIIP”). Consequently, the MoCIIP is now the primary regulator for matters pertaining to the 2019 FCIL.

2.      Application of the 2019 FCIL

A foreign investor wishing to carry on any investment activity in Oman must comply with the 2019 FCIL.

The 2019 FCIL does not, however, seek to cut across any laws or regulations regulating Oman’s “industrial areas”, “free zones” or “special economic zones”. Nor does it seek to override any reciprocal arrangements implemented within the GCC. The advantages and benefits conferred by all of the foregoing continue to be available to foreign investors.

3.      Relaxation of Foreign Ownership Restrictions

A.      Overview

Subject to certain exceptions, the 1994 FCIL capped foreign ownership at 49% of an Omani company’s share capital. This threshold was increased to 70% upon Oman’s accession to the World Trade Organization.

By repealing the1994 FCIL, the 2019 FCIL disapplies these foreign ownership restrictions. As a result, a foreign investor may generally now own 100% of an Omani company’s share capital.

B.      Negative List

Certain business activities remain closed to foreign investment. The Minister of the MoCIIP (the "Minister”) recently issued[1]a new list of activities that remain subject to foreign ownership restrictions (the “negative list”). This list may be amended from time to time by a further decision of the Minister.

The negative list includes activities such as hair dressing, tailoring, laundry, automotive repair, photocopying, translation/interpretation services, labour recruitment offices, certain care services, taxi services, and retail sale in certain industries[2].It appears therefore to be mostly designed to shield selected small Omani businesses that might be considered to be vulnerable to foreign competition.

Some industry sectors do not appear on the negative list, despite historically requiring a higher level of local ownership. Oman’s engineering law, for instance, requires engineering consultancy offices to have a minimum of 35% local ownership. The MoCIIP is likely to continue to apply any such industry sector restrictions until notice to the contrary.

C.      Application of the Negative List to GCC Investors

A negative list has for some time been in place for GCC investors taking advantage of reciprocal arrangements within the GCC, and the lighter touch approach to foreign ownership they confer. This GCC negative list is shorter than the negative list issued by the MoCIIP earlier this year, and different requirements apply.

D.      Practical Consequences of Relaxation

As a result of pre-2019FCIL foreign ownership restrictions, most foreign investors currently operate in Oman through a corporate or contractual joint venture with a local Omani partner, or through a branch office structure, or through a distribution/agency arrangement with a licensed Omani distributor/agent.

Joint ventures with local Omani partners will typically involve the payment of a fee or profit share to the local partner; and a distributor will generally receive a margin on its sales to customers in Oman. Joint ventures and distribution arrangements also both result in some loss of autonomy over the way in which the business is conducted and managed.

Branch offices can usually only be established to perform a qualifying government contract, and do not give access to the Omani market outside that government contract.

In many cases, therefore, a 100% foreign-owned company will offer a more attractive and permanent structuring option to the arrangements described above.

There has accordingly been a trend, since the 2019 FCIL came into effect, for foreign investors to revisit and reassess how their investments in Oman are structured. By way of example, where the foreign investor has a corporate joint venture with a local Omani partner, the joint venture arrangements may have been drafted so as to allow the foreign investor to exercise a call option over their local partner’s shares in the event of a relaxation of foreign ownership restrictions.

4.      Requirement for Licensed Presence

A.     Overview

It is a central pillar under Article 6 of the 2019 FCIL that:

Any foreign investment shall be carried out by an institution or a company in one of the permitted activities through the ownership of the wholly invested Foreign Capital or participation therein. A licence to this effect shall be issued by the Investment Service Centre.

In order to carry on business in Oman, therefore, a foreign investor is still required to establish a duly licensed presence in the Sultanate (or to operate through a duly licensed distributor).

A foreigner may not carry on any investment activity in Oman except in compliance with the 2019FCIL.[3]

B.     Investment Service Centre

In order to establish a duly licensed presence, a foreign investor must submit an application to the Investment Service Centre of the MoCIIP (the “Centre”).[4]One of the objectives of the 2019 FCIL is to streamline and expedite the application process, and the Centre is expected to perform a key role in this regard.

C.     Investment Guide

The Executive Regulations envisage that an “Investment Guide” will be issued, which will specify the conditions, rules, procedures and dates of issuance of permits, approvals and licences relating to investment projects.[5]

The 2019 FCIL’s definition of “investment project” is broad, and encompasses “any economic activity established by a foreign investor alone or jointly with another foreigner or an Omani in the Sultanate”.[6]We refer to these projects as “foreign investment projects” in this article.

At the time of writing, the Investment Guide has not yet been issued.  

D.     Application Process

In order to apply for a foreign investment licence, the Executive Regulations require the following information/documents to be submitted to the MoCIIP:[7]

·        the name of the foreign investor, his or her nationality, place of residence, banking information, and the type of activity he intends to carry on;

·        the foreign investor’s previous experience, if any;

·        the number of employees expected to be involved in the foreign investment project;

·        the timeline for execution of the foreign investment project, and the date operations are expected to commence;

·        an economic feasibility study for the foreign investment project;

·        a certificate from a qualifying third party that the necessary conditions have been satisfied;

·        any other information or documents specified by the MoCIIP.

A foreign investment licence is required in order to establish any foreign investment project (as defined above).[8]This is a developing area of practice, but we anticipate that the precise requirements of the MoCIIP will depend on the nature and scale of the foreign investment project that is the subject of the application.

The MoCIIP is required to issue the foreign investment licence within three working days of receipt of all necessary permits, approvals and licences for the foreign investment project.[9]

E.      Companies with 100%Foreign Ownership

To establish a100% foreign-owned company, the foreign investor must complete an application in the prescribed form. This form requires the investor to confirm (at a minimum) the details of the project, its capital cost, and a timeline. The amount of the application fee will be determined by the activities undertaken by the company, and at the time of writing will not be less than OMR 3,000.[10]

A company with only one shareholder must be established as a “single-proprietor company”. The single-proprietor company, or “SPC”, is a new type of corporate vehicle created by Oman’s Commercial Companies Law No. 18/2019, and shares many of the characteristics of the Omani limited liability company.

F.      Register

The MoCIIP is required to maintain a register containing details of all projects licensed under the 2019 FCIL.[11]

G.     Share Capital

The 2019 FCIL does not prescribe a minimum level of share capital, although the MoCIIP should be consulted to confirm any requirements prevailing from time to time in this regard. As with companies with domestic ownership, a minimum share capital will still be needed to carry on business in specified sectors/activities. Thinly capitalised companies receive a low grading by authorities in Oman, which maybe undesirable in certain circumstances.

5.      Incentives for Foreign Investment Projects

A.     Introduction

The incentives offered to foreign investors under the 2019 FCIL are generally aimed at new projects involving the contribution of considerable sums of foreign capital.

B.     Strategic Foreign Investment Projects

Article 10 of the 2019 FCIL establishes a new “one approval” process for certain strategic foreign investment projects as follows:

The Council of Ministers may, pursuant to a recommendation of the Minister of Commerce, Industry and Investment Promotion, pass a decision to grant an investment project that is established for setting up strategic projects that contribute in achieving development in the activities of public utilities, infrastructure, new or renewable energy, roads, transport and ports, on approval for establishment, operation and management of the investment project, including the construction and work force permits. Such approval shall be independently effective without any action in respect thereof.

Under the Executive Regulations, this expedited approval process is only available if thecost of the project is at least OMR 10 million and either:[12]

  •  participation in the strategic project involves the transfer of knowledge and modern technology, or uses 4IR technology; or
  • at least10% of the work related to the strategic project is outsourced to SMEs; or
  • at least10% of the products used by the strategic project are Omani.

This application must be submitted to the MoCIIP. The Minister may then recommend the application to the Council of Ministers, who will determine whether the application is approved.[13]

C.     Foreign Investment Projects in Less Developed Regions

Article 18 of the 2019 FCIL empowers the Council of Ministers to grant additional advantages to foreign investment projects established in less developed regions of the Sultanate.

A foreign investment project established in one of the less developed regions of Oman may be granted one or more of the following privileges with the approval of the Council of Ministers:[14]

  • an exemption from the rent or purchase price for any land/real estate allocated to the foreign investment project (see "Allocation of Land to Foreign Investment Projects” below), for a period not exceeding five years from commencement of operations;
  • an exemption from the applicable Omanisation percentage (see “The 2019 FCIL in Context” below), for a period not exceeding two years from commencement of operations;
  • an exemption from all or part of any governmental fees/charges; and/or
  • such other privileges as may be granted by the Council of Ministers.

A foreign investor who is granted a rent/purchase price exemption must provide a bank guarantee. A call will be made under the guarantee if the foreign investment project does not conduct activities during the exemption period for reasons attributable to the foreign investor.[15]

The privileges above will not be granted unless the foreign investment project is financed by foreign currency transferred into Oman in accordance with Central Bank of Oman rules and either:

  • the project results in the transfer of expertise, modern and modern technology and knowledge to Oman; or
  • at least 30% of the project’s production is exported outside Oman; or
  • at least 40 of the products used by the project are of Omani origin.[16]

D.     Tax Exemptions for Foreign Investment Projects

Article 22 of the2019 FCIL provides that “exemption of an investment project from tax shall be in accordance with the provisions of the Income Tax Law”. This is a reference to Oman’s Income Tax Law No. 9/2017(the “Income Tax Law”), under which an income tax exemption may be available for industrial/manufacturing activities. The Income Tax Law also sets out certain types of income that may be exempt from income tax. The Executive Regulations build on Article 22 of the 2019 FCIL and provide that, without prejudice to any reciprocal GCC arrangements in relation to customs duties, exemptions from “taxes, customs duties, and non-customs duties” may be available for the following foreign investment projects:[17]

  • integrated tourist projects;
  • projects related to information technology and telecommunications;
  • industrial projects with a cost exceeding OMR 10 million;
  • projects relating to the transport sector and seaports (logistics);
  • strategic projects (presumably either including or comprising those strategic projects contemplated by Article 10 of the 2019 FCIL);
  • projects employing not less than 200 Omani workers, or projects in which the Omanisation percentage exceeds 25% of the minimum Omanisation requirement; provided in each case that modern techniques and technology are used in the production or provision of services;
  • industrial projects which use raw materials from inside Oman; and
  • any other projects specified by the MoCIIP following the approval of the Council of Ministers.

In view of the wording of Article 22 of the 2019 FCIL, it seems likely that the terms of the Executive Regulations described above are designed to create new exemptions for taxes and customs duties other than income tax, and to complement existing provisions of the Income Tax Law in relation to income tax.

In order to take advantage of customs duties exemptions, the items to be imported must be necessary for the foreign investment project and must be imported in the name of or for the benefit of the foreign investment project.[18]This is also without prejudice to any reciprocal GCC arrangements in relation to customs duties.

E.      Allocation of Land to Foreign Investment Projects

The 2019 FCIL contemplates that land and real estate may be allocated to foreign investment projects. Any such allocation will involve the concerned authority granting either a long-term lease or a usufruct right.[19]The identity of the concerned authority will depend on the nature of the foreign investment project. For instance, if the project involves the construction of a desalination plant, then the concerned authority would be the Authority for Public Services Regulation.

The lease or usufruct may be granted for 50 years, extendable with the approval of the concerned authority.[20] We anticipate that the Ministry of Housing and Urban Planning would be also be a party to the agreement formalizing the lease/usufruct. Real estate typically needs to be registered with the land registry at the Ministry of Housing and Urban Planning.

The Executive Regulations provide that the circumstances in which the lease/usufruct may be prematurely terminated are strictly limited to defined circumstances in which there has been a breach or other failure by the foreign investor.[21]

An application for allocation of land/real estate must be submitted to the MoCIIP using the prescribed form. The concerned authority will take into consideration the size of the project, the nature of its activities, and its investment cost.[22]

The Law No. 5/81Regulating Usufructs over Sultanate Lands will also apply, with the 2019 FCIL and the Executive Regulations prevailing in the event of any inconsistency.

6.      Protections for Foreign Investments

Under the 2019 FCIL, foreign investment projects enjoy all the advantages, incentives and guarantees enjoyed by a national project under Omani law.[23]The Council of Ministers may, on the Minister’s recommendation, approve preferential treatment for a foreign investor in compliance with the principle of reciprocity.[24]

A foreign investment project may not be expropriated, except for public utility in accordance with applicable Omani expropriation laws and upon payment of a fair compensation.[25]It may also not be confiscated or its assets attached/frozen, except pursuant to a court judgment.[26]The licences of a foreign investment project may not be cancelled without due cause.[27]

The 2019 FCIL also enshrines the general principle that foreign investors are—subject to any conflicting Omani laws—free to make transfers to and from Oman with respect to the foreign investment project (for example, revenues generated by the foreign investment project and proceeds arising from the sale/liquidation of the foreign investment project).[28]

7.      Transfers of Ownership

Subject to complying with other applicable Omani laws, a foreign investor may transfer its ownership of a foreign investment project to another foreign investor or to an Omani. The foreign investor may also assign the foreign investment project to its investment partner in the case of a partnership, merger, acquisition or change of legal form. In each case, the incoming investor must accede to the rights and obligations of the outgoing foreign investor.[29]

8.      Settlement of Disputes

The 2019FCIL provides that the Omani courts have jurisdiction to resolve any dispute arising between a foreign investor and a third party, unless the parties have agreed to resolve the dispute through arbitration.[30]In other words, submission by the parties to a foreign court will not override the jurisdiction of the Omani courts. The 2019 FCIL requires all such disputes heard by the Omani courts to be determined expeditiously.

9.      Reporting

The Executive Regulations require a foreign investor to submit an annual report to the MoCIIP, containing various statements in relation to the foreign investment project, within 60 days following the end of each financial year.[31]In practice, it may be that some of these reporting requirements will only apply to foreign investment projects availing the incentives described above.  The MoCIIP should however be consulted on a case-by-case basis.

10.  Judicial Investigations

To ensure compliance with the 2019 FCIL, officials designated by the MoCIIP are empowered to enter the sites or premises of establishments and companies established under the 2019 FCIL; as well as to supervise and inspect such establishments/companies and inspect their records, documents and operating systems.[32]

11.  Administrative Procedures and Penalties

If the foreign investor breaches the 2019 FCIL and/or the Executive Regulations, the MoCIIP is required to notify the foreign investor thereof. If the foreign investor fails to remedy the breach, then the MoCIIP has the power to remove any or all of the incentives described above; to suspend the foreign investor’s activity for not more than six months; or to cancel the foreign investment licence, if the breach is not remedied or if there are repeated breaches.[33]

An investment licence may also be cancelled if the foreign investment project company is dissolved, or if there is a failure to commence operations within two years of such company’s incorporation.[34]

A committee has been established at the MoCIIP under Article 30 of the 2019 FCIL to consider any complaints against decisions made by the MoCIIP or other concerned authorities.

12.  Penalties

A foreigner who carries on investment activity in Oman other than in compliance with the 2019 FCIL maybe fined between OMR 20,000 and OMR 150,000. An Omani who participates with a foreigner in a foreign investment project other than in accordance with the2019 FCIL is subject to the same penalty.[35]

13.  The 2019 FCIL in Context

A.     Overview

Omani law prohibits the recruitment of non-Omani employees in certain sectors and roles.[36]For those sectors and roles that are, in principle, open to foreign workers, Omanisation conditions apply. These conditions demand that a prescribed percentage of a company’s workforce be comprised of Omani nationals; the applicable percentage varies depending on the sector and the role of the worker. Oman’s Ministry of Manpower (which has since been absorbed within the newly formed Ministry of Labour) has recently announced the launch of an initiative to increase the Omanisation rates across Oman’s tourism, industrial and logistics sectors for 2020. Increased FDI will naturally result therefore in new job opportunities for Omani nationals.

Historically, strategic projects in Omani have been primarily funded through public investment. This approach is changing. The objective now is to diversify Oman’s economy, to promote foreign investment, and to reduce the burden of public expenditure.

Law No. 51/2019 (the “Privatisation Law”)and Law No. 52/2019(the “PPP Law”) were both issued in July 2019 and came into force in the same month. It is no coincidence that the Privatisation Law, the PPP Law, and the 2019 FCIL were issued on the same date. All three laws complement each other and have been issued with the common goal of reducing the burden of public expenditure.

B.     Privatisation Law

There is an ongoing government programme to privatise several public utility companies and infrastructure projects. The Privatisation Law paves the way for the private sector (including foreign investors) to play a more important role in these projects and the development of Oman’s economy. The2019 FCIL complements the Privatisation Law by facilitating 100% foreign ownership in these companies and projects.

C.     PPP Law and MOF Circular No. 2/2020

Ministry of Finance Circular No. 2/2020 explicitly encourages the use of PPP structures. In very broad terms, Circular No. 2/2020 requires government companies and subsidiaries of government companies to give priority to the private sector (for example through a PPP structure) before conducting any new business activities and/or expanding any existing business activities. Some projects initially intended for government ownership may now therefore be redesignated as PPP projects. As with privatisations, the PPP Law is most likely to be applied to infrastructure projects and projects involving public utilities. The government has tendered a number of projects since the PPP Law came into force in January 2020, presenting opportunities to both foreign investors and local investors. Several of these projects may qualify for the incentives for foreign investment projects described above.

D.     Litigation Procedures Simplification Law

Law No. 125/2020 on the Simplification of Litigation Procedures for some Disputes (the “Litigation Procedures Simplification Law”) was issued on 12November 2020. The objective of the Litigation Procedures Simplification Law isto streamline and expedite litigation procedures for certain disputes, including disputes under the 2019 FCIL.

The article has been published in The MENA Business Law Review - Special Edition: Foreign Investment Law, January 2021

[1] Ministerial Decision 209/2020

[2] Ibid.

[3] 2019 FCIL, art. 3.

[4] Ibid., art. 6.

[5] Executive Regulations,art. 9.

[6] 2019 FCIL, art. 1(g).

[7] Executive Regulations,art. 8.

[8] Ibid., art. 6.

[9] Ibid., art. 12.

[10] Ministerial Decision No. 85/2020.

[11] Executive Regulations, art. 2

[12] Ibid., art. 13.

[13] Ibid., art. 14.

[14] Ibid., art. 17.

[15] Ibid. art. 29.

[16] Ibid., art. 18.

[17] Ibid., art. 19.

[18] Ibid., art. 20.

[19] 2019 FCIL, art. 19.

[20] Executive Regulations,art. 30.

[21] Ibid., art. 33.

[22] Ibid., art. 26.

[23] 2019 FCIL, art. 18.

[24] Ibid.

[25] Ibid., art. 24.

[26] Ibid., art. 23.

[27] Ibid., art. 25.

[28] Ibid., art. 26.

[29] Ibid., art. 27.

[30] Ibid., art. 17.

[31] Executive Regulations,art. 38.

[32] Ibid., art. 36.

[33] 2019 FCIL, art. 29; Executive Regulations, art. 39.

[34] Executive Regulations,art. 41.

[35] 2019 FCIL, art. 33.

[36] Law No. 35/2003 on the Promulgation of the Labour Law (as amended),art. 19.