In lease contracts, the landlord often grants the tenant a period for construction or renovation without charging rent (“grace period”). However, such arrangements are frequently scrutinized by the tax administration, which treats the grace period as taxable income and imposes VAT even though the property is not generating revenue during this time for either party. The situation may be even more complex in related-party transactions. Many argue that treating such grace periods as free disposal or gifts to third parties seems to contradict the intent of the tax law and basic principles of contract law.
This approach has shifted with the issuance of Instruction No. 33000 dated 18 September 2024, according to which the General Department of Taxation (“GDT”) now allows a grace period of up to 10% of the lease term without tax implications (namely income tax and VAT) for both parties. If the grace period exceeds 10%, prior approval from the GDT may be required. This business-friendly move represents a big win for both the government and taxpayers.
This tax update is brought to you by Davies SM Attorneys-at-law. For more information and guidance, contact our partners and explore the Library of Laws section on Aquarii’s online platform to stay informed on business and investment laws in Cambodia.