On 12 May 2025, the General Department of Taxation (“GDT”) issued Instruction No. 14256 to provide detailed guidance on the documentation and interest rate framework for loans between related persons. This instruction clarifies the application of the arm’s length principle set out in Prakas No. 574 by clarifying the requirements for supporting documents and establishing clear parameters for interest rate determination.
The Instruction allows enterprises to mutually agree on interest rates for related-party loans without mandatory benchmarking studies, provided that adequate supporting documentation is maintained. It also expressly sets a cap on interest rates aligned with prevailing market rates, facilitating easier compliance and reducing administrative burdens.
About the Market Interest Rate
The interest rate cap referenced in the instruction is based on official market interest rates published annually by the GDT. For instance, Notification No. 5524, issued on 19 February 2025, fixed the market interest rates for related-party loans in 2024 at:
- 67% per annum for loans in Khmer Riels
- 79% per annum for loans in US Dollars
These rates are calculated based on the average annual lending rates of 12 major domestic commercial banks and serve as the maximum allowable interest rates for related-party loans under the current regulatory framework. Taxpayers can access these published rates via the GDT’s official communications and website.
Historical Background and Regulatory Evolution
Cambodia’s regulatory approach to related-party loans and transfer pricing has evolved significantly over the past decade. In 2014, the GDT issued Instruction No. 151, establishing official market interest rate benchmarks to guide allowable interest expenses. This foundational guidance set clear expectations for related-party loan taxation.
The country formalized its transfer pricing regime in 2017 with Prakas No. 986, which introduced the arm’s length principle and mandated documentation for related-party transactions, aligning Cambodia with international tax standards.
Between 2019 and 2021, the GDT narrowed market interest rate notifications to employer-employee loans for fringe benefit tax, while related-party loans became fully subject to transfer pricing rules, requiring detailed benchmarking studies. This shift was reflected in GDT enforcement and annual notifications.
Responding to taxpayer concerns over cost and compliance burden on documentation, the GDT reinstated market interest rate notifications for related-party loans in 2022 and 2023. These administrative notifications provided official benchmarks based on average lending rates from domestic banks, simplifying compliance and reducing disputes.
In 2024, Prakas No. 574 established a comprehensive transfer pricing framework, setting out detailed rules on income allocation, documentation requirements, and specific scenarios under Article 17(6) and (7) where related-party loans may be exempt from the arm’s length principle. Building on this foundation, the GDT issued Instruction No. 14256 in May 2025, which further clarified the documentation standards and formally expanded the scope of exemptions from the arm’s length principle for related-party financing arrangements. The Instruction also introduced interest rate caps, and replaces previously fragmented guidance and contributes to a more coherent and predictable regulatory framework for related-party loans.
Key Improvements in Instruction No. 14256
Instruction No. 14256 formally repeals Instructions No. 151 (2014), 11946 (2018), and 10979 (2022), consolidating fragmented and sometimes inconsistent guidance into a single, coherent framework. Its improvements include:
- Clarity and Consistency: Establishes a unified standard for documenting related-party loans and applying interest rates, reducing confusion.
- Reduced Administrative Burden: By allowing agreed rates to be capped at official market rate, it limits the need for costly benchmarking studies.
- Alignment with Transfer Pricing Framework: Provides practical steps complementing Prakas No. 574, improving legal certainty and transparency.
- Specific Exemptions: Clearly excludes short-term cash advances under one year from the arm’s length principle, addressing previous ambiguities.
- Streamlined Procedures: Removes prior notification requirements, simplifying compliance processes.
Therefore, Instruction No. 14256, together with Notification No. 5524 and Prakas No. 574, represents a comprehensive, pragmatic approach to managing related-party loan interest rates in Cambodia. However, while the capped market interest rate of approximately 9% may be reasonable for domestic related party loans, it may seem relatively high for cross-border related party loans. Should the lenders be a non-resident, they may implement the market rate to create a tax deduction within the Cambodian entity, consequently decreasing the effective tax rate of the entire group. This discrepancy may present tax planning opportunities, which may require further adjustments in tax policies.
It is important for taxpayers to maintain thorough records supporting their loan arrangements and to monitor annual market interest rate publications to ensure ongoing compliance.
This tax update is brought to you by Davies SM Attorneys-at-law.