Effective Date (18-Mar-2019): Following the introduction of Prakas 986 (transfer pricing regulations), Instruction Letter 151, which permitted interest-free loans between related parties, was withdrawn, and under Instruction 11946, such loans are required to bear interest on an arms-length basis.
On 18 March 2019 the GDT issued Instruction Letter 4909, which states that taxpayers with loans from related parties must have the following documentation:
- A loan agreement in which the terms of the loan are clearly stated;
- A business plan describing the needs for the loan and intended uses of the funds;
- A document explaining the basis used to determine the interest rate; and
- A Board of Directors’ resolution approving the taking of the loan.
The Instruction Letter also provides that the loan must be properly supported by transfer pricing documentation even if the interest applied is lower than the annual market rate issued by the tax authority.
We understand that in certain circumstances interest-free shareholder loans may still be permissible provided that the criteria outlined above are followed and that the loan is used for capital expenditure in Cambodia and not profit extraction.