Tax on overseas dividends

By James Harbridge

According to a recent Supreme Court judgment, dividends obtained by a company in respect of its shareholding in another company will not be taxable
 

Over the last couple of years, I have been working with two Omani corporate clients trying to ensure that, as per the Law, they are not taxed on overseas dividends which they received in 2002, 2003 and 2004.

I am pleased that the Supreme Court has now recently made a ruling in favour of both these two entities (i.e. they will not be taxed on the overseas dividends which they received in the above-mentioned tax years). In this way, the Supreme Court judgment has given effect to Article 8(bis) of Royal Decree 47/81 as amended, which states that dividends obtained by a company in respect of its shareholding in another company will not be taxable.

The effect of the Supreme Court ruling also makes it clear that the definition of “Company” in Article 2(4) of Royal Decree 47/81 (as amended) covers any company, regardless of whether it is an Omani or foreign company. As a result, the Supreme Court ruled that these dividends from overseas were not taxable in the hands of the Omani entities.

Another effect of the two recent Supreme Court judgments is that it is now clear that Supreme Court case 42 and 44/04 cannot be applied to the scenario of overseas dividends. This 2004 case was about management income received in tax years 1994, 1995 and 1996 by an Omani company for managing a UAE entity. The judgment in 2004 was that the management income was taxable pursuant to the general rule in Article 8 that income is taxable.

However, Article 8(bis) has always said that dividends are an exception to the general rule, and that is why I believe the Supreme Court decided in its recent judgments that the 2004 case could not apply to the respective cases of my two clients.

Furthermore, Article 8(bis) became effective law on January 1, 2000, which is another reason why the 2004 case about 1994-1996 could not be applied to the tax years 2002-2004. This is in accordance with the general rule that laws cannot be retroactive.

In addition, there was a 2008 Supreme Court judgment which declared that overseas dividends were taxable in the hands of Omani companies. However, like case 42 and 44/04, the tax years in question in the 2008 litigation were 1997 and 1998. In other words, the 2008 case, like the 2004 case, was about tax years pre-dating the creation of Article 8(bis).

It should be noted that these 2012 Supreme Court judgments can only apply to the end of tax year 2009, as the new Income Tax Law – effective for the tax year 2010 and beyond – states in Article 115 that, “…in determining the taxable income for any tax year, the following shall be exempted from tax: (A) Distribution of profits obtained…from the ownership of shares, parts or participation in the capital of any Omani company.”

As a result, dividends received from overseas in tax year 2010 and beyond will be taxable.
But the Supreme Court’s two recent judgments appear to have clarified the position in respect of the tax years up to and including 2009.

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