Withholding tax on dividends – A bagful of uncertainties and complexities?

Muscat: One of the many changes that the Royal Decree 9 of 2017 (RD) has made in the Oman Income tax law is the introduction of withholding tax (WHT) on payment of ‘dividends on shares’ by Omani companies. This amendment requires Omani companies distributing dividends on shares to foreign persons on or after February 27 2017, to withhold tax from such dividends at the rate of 10 per cent on a gross basis.

A major uncertainty that arose from this amendment was whether dividends distributed by Omani Limited Liability Companies (LLCs) would also attract WHT? While a plain reading of the English translation of RD suggested that dividends distributed on shares of any companies – whether joint-stock companies (JSCs) or LLCs’ would attract WHT, it is the Arabic text which provided the necessary differentiation required to arrive at the correct view.

While the term “As’hom” has been used to include ‘dividends on shares’ within the WHT net, a different term “Hesas” was used earlier in law to exempt dividends from interest/parts or participation in the capital of any Omani company. These terms have different meanings – while “As’hom” has a restricted scope covering only ‘shares of JSCs’, “Hesas” has a wider scope representing shares in JSCs as well as ‘interests’ in LLCs. Much to the relief of shareholders in LLCs, the Oman tax authorities have informally confirmed the above distinction and clarified that the WHT on dividends has been introduced primarily to target dividends distributed by JSCs and not LLCs since members of LLCs only have an interest in capital, and not ‘shares.’ A formal confirmation by the Oman tax authorities on this position is still awaited to finally settle the dust on this matter.

Another burning issue relating to WHT on dividends is whether it covers dividend payments by Omani JSCs to (a) nationals of other member countries of the Gulf Cooperation Council (GCC), (b) GCC incorporated entities wholly/partly owned by such GCC nationals, and (c) foreign nationals/expatriates residing in Oman? In this context, newly introduced Article 194 of the tax law upholds the principles enshrined in “The Unified Economic Agreement between the Countries of the Gulf Cooperation Council, 2001” which inter-aliaprovides that the GCC nationals and companies should be treated at par when it comes to economic activity and movement of capital, including tax treatment. Therefore, it is possible to argue that since Omani nationalsand Omani companies are not required to pay tax on dividends distributed by Omani JSCs, the GCC nationals and their 100 per cent owned GCC incorporated companies should also not be subject to WHT on such dividend income. However, it is not clear whether GCC incorporated companies can avail this benefit solely on the ground that they are incorporated in the GCC (where it is difficult to trace their beneficial ownership or them being partly ownedby GCC nationals).

As per Article 53 of the Tax Law, taxpayersare required to withhold tax from the payments made to foreign persons at the earlier of (a) actual payment, or (b) crediting/accruing such payments to the account of such foreign person in the payer’s books. Further, as per the Executive Regulations of the Capital Market Law, declared dividends accrue to the shareholders on the date of the annual general meeting (AGM),in which such dividends are approved or any other date determined in such AGM. In all cases, dividend is reckoned to have accrued to the shareholders at the end of working hours on the specified record date. Hence, it would follow that dividends declared by the board of JSCs will accrue to its shareholders either on the date of its AGM or any other date determined by the AGM, but cannot exceed such specified record date and the JSC paying the dividends will accordingly need to undertake WHT compliance i.e. withhold tax from such payments and deposit the tax and WHT return within 14 days from the end of the month in which the specified record date falls.