The Ministry of Economy and Finance (MEF) of Cambodia has recently issued new procedures to provide income tax incentives for Expanded Qualified Investment Projects (EQIPs) in the Kingdom under Prakas No. 313 MEF. PrK. PD (Dated May 10, 2024). This Prakas aims to provide additional definitions, clarifications and conditions for obtaining tax incentives for the EQIP to boost commercial growth and support industries benefiting the nation, under various circumstances as follows:

(1) Restatement of conditions for income tax incentives under Article 16 of Sub-Decree no. 139 on Investment

An expansion of QIP-EQIP may be entitled to income tax incentives in the following situations:

  • Expansion of the existing means of production;
  • Expansion via production line diversification within the same lines; and
  • Expansion via the use of new modern technologies which enhance productivity or protect the environment.

(2) Restatement of definitions of terms provided in Sub-Decree no. 139

Besides the restatement of some definitions of the Sub-Decree no. 139, such as investment capital, QIP expansion capital, and total investment capital, the Prakas defines the term “QIP’s initially registered investment capital” as “the investment capital effectively invested before the injection of QIP’s expansion capital taking into account the historical value of the assets invested. Invested assets include buildings and structures of the building, components of buildings, computers, electronic information systems, electronic devices, data storage equipment, vehicles, trucks, furniture and office equipment, and other long-term assets.”

This new definition is much narrower than the undefined term in the Sub-Decree, as “QIP’s initially registered investment capital” may be self-explanatory and should mean registered investment capital when the QIP was initially approved by the CDC. Therefore, using the terms “effectively invested” and “taking into account the historical value of the assets invested” would greatly impact the calculation of the income tax exemption.

(3) Restatement of the formula provided in the Sub-Decree no. 139

IETOI     =             TTI x (EC/TIC)

IETOI     =             Income that shall be exempted from Tax on Income

TTI        =             Total taxable income

EC        =             the QIP’s expansion capital which shall be incentivized

TIC       =             Total Investment Capital (IRC + EC)

IRIC      =             QIP’s initially registered investment capital

The example provided in the Prakas:

In case the QIP’s expansion capital is 100%

Enterprise A is a QIP with an initial registered investment capital (investment capital before requesting expansion) totaling 22 billion riels. At the beginning of 2022, Enterprise A proposed to expand its investment activities on existing production with the approval from the CDC an investment capital of 20 billion Riels and to be exempted from income tax for 3 years. The enterprise used 100% of its capital to expand the QIP during the tax year 2022 (100% effectively invested) and received total taxable income from the QIP and EQIP for 8 billion riels.

The calculation of the part of income entitled to tax exemption for the year 2022 of Enterprise A is as follows:

TIC          =            22 billion + 20 billion = 42 billion

EC rate   =             20 billion / 42 billion = 48%

IETOI      =             8 Billion x 48% = 3,840 million riels

The proportion of income entitled to the Income Tax Exemption Incentive for EQIP for the tax year 2022 is 3,840 million riels. Since the enterprise used 100% in 2022 (effectively invested), its EC rate of 48% must apply for 2023 and 2024, the same as in 2022. Conversely, if the EC is not 100% effectively invested in the first year, the pro rata formula would apply, meaning that different EC rates may apply throughout the incentive period depending on the EC effectively invested in each year (as outlined in example 2 of the Prakas).

What would the EC rate be if the definition of “QIP’s initially registered investment capital” were self-explanatory?

Assuming that Enterprise A is registered as a QIP in 2014 with an initially registered investment capital of 10 billion riels approved by the CDC. After 9 years of operation, its investment capital reaches 22 billion riels (investment capital before requesting expansion).  If we follow the example above with 20 billion EC in 2022, the final figure would be as follows:

TIC         =             10 billion + 20 billion = 30 billion

EC rate  =             20 billion / 30 billion = 66%

IETOI     =             8 Billion x 66% = 5,280 million riels

(4) Restatement of incentive on prepayment of TOI and minimum tax

The prepayment of TOI for the QIP and EQIP shall be exempt based on the proportion of the QIP’s EC rate for the period of income tax exemption of the expansion project, whereas minimum tax is exempt on the condition of having an independent audit report.

(5) Withdrawal of tax incentives

The tax incentives may be withdrawn from the EQIP if (1) the EC is not effectively invested in the EQIP following the plan of expansion, (2) the EC is not injected before the expiry of tax exemption status of EQIP, and (3) the EQIP fails to comply the tax laws and regulations in force.

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Source: Prakas No. 313 MEF. PrK. PD (Dated May 10, 2024), Translated by Davies SM