To help ensure that Omani companies maintain a solid financial position and are able to withstand shocks to their businesses, the Commercial Companies Law contemplates varies types of legal reserve funds for companies.
Mandatory legal reserve
The Commercial Companies Law requires that every Omani company, whether a joint-stock company or a limited liability company, must set aside 10% of its net profit after taxes each financial year, as a ‘legal reserve’ fund for the company, until the amounts held in the legal reserve reach one-third of the company’s capital. It is important to note that the increase or reduction of the capital of the company will impact the legal reserve as its threshold is determined as a percentage of the equity. For example, if an Omani joint-stock company reduces its capital, the company may, through an extraordinary general meeting, reduce its legal reserve if the legal reserve exceeds one-third of the new, reduced capitalization.
Omani companies are explicitly barred by the Commercial Companies Law from using the funds held in their legal reserve to pay dividends or other distributions to their shareholders. The legal reserve is required to be held by the company as a buffer against unusual or unexpected adverse shocks to the company’s business, such as a sudden increase in the company’s operational costs.
Other reserve funds
Some Omani companies may wish to hold reserves in excess of the mandatory legal reserve described above, for reasons such as the following:
- to accumulate funds in advance of a large anticipated project or contingency, in order to minimize the impact of this project or contingency on the company’s annual operating budget;
- to demonstrate the company’s solid financial position to lenders with the aim of obtaining bank financing and lower interest rates (reserve funds are one of the factors considered in credit evaluation of a company);
- to serve as guarantee to the company’s creditors; or
- to save for unfunded liabilities that will be required to be paid out by the company at future dates.
Article 106 of the Commercial Companies Law provides a framework for Omani joint-stock companies to hold excess reserves under an ‘optional reserve account’. The joint-stock company may set aside in this optional reserve account up to 20% of its annual net profits after the deduction of taxes and the legal reserve. The aggregate amount held in this optional reserve account may be up to 50% of the company’s capital, except in the case of banks and insurance companies, for whom the aforementioned 50% limit does not apply.
Finally, Omani joint-stock companies may issue shares at a value up to 2% above their par value. The excess amount collected from this issue premium (after deducting the issue expenses) must be added either to the legal reserve or to a ‘special reserve’ created for the purpose pursuant to Article 78 of the Commercial Companies Law.