Market Info

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pricing regulations), Instruction Letter 151, which permitted interest-free loans between related parties, was withdrawn, and under Instruction 11946, such loans are required to bear interest on an arms-length basis.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.

Source: https://www.dfdl.com/resources/publications/investment-guides/cambodia-2020/

The limited liability company is the most common form of investment vehicle in Cambodia. It is usually established as a subsidiary of an investor’s offshore holding company. The limited liability company can be 100% Cambodian-owned, 100% foreign-owned, or have any combination of Cambodian or foreign shareholding, subject to certain restrictions. Find out more about our free business resources here

A limited liability company is formed with registration of its articles of incorporation (Articles) at the MOC, and receipt of a certificate of incorporation from the MOC. Any changes to the Articles and other corporate documents must also be registered in a timely manner at the MOC to be valid.

After establishment, a limited liability company must prepare and maintain, at its registered office, the following records:

• the Articles and the bylaws and all amendments thereto;
• minutes of meetings and shareholders’ resolutions;
• copies of all notices to be sent or filed in accordance with the LCE;
• a securities register; and
• accounting records

A limited liability company must issue a minimum of 1,000 shares with a par value of not less than KHR 4,000 per share (approximately one US dollar). The company has only one class of share unless the Articles specify other classes. Subject to differing class rights, shareholders have the right to vote at any meeting of the shareholders, receive any dividends declared by the company, and receive the remaining property of the company upon dissolution. If the Articles provide for more than one class of share, the rights of each class of share may (theoretically) be absolute, relative, or contingent, and the rights, privileges, restrictions, and conditions attaching to the shares of each class must be detailed in the Articles.

The board of directors has broad powers to manage the business and affairs of the company,

Including the powers to:

• appoint and remove officers and fix their salaries;
• issue, reissue or sell securities of the companies;
• adopt resolutions; and
• provide guarantees on behalf of the company.

Directors must act in good faith, within the scope of the company’s business objectives, within the framework of the company’s Articles and in compliance with applicable laws. Additionally, directors must comply with relevant registration, filing, and publication requirements of the company. Accounting books and records of the relevant financial year must be duly maintained at the registered office for ten more years.

At every annual shareholders’ meeting, the directors must present an annual financial statement to the shareholders. Annual financial statements must be approved by the board of directors and be accompanied by the auditor’s report (subject to limited circumstances whereby appointment of an auditor may be waived by shareholder resolution) before being issued, published and circulated.

Type of Limited Liability Company

Under the LCE, the types of limited liability companies permitted are listed below. The LCE describes in detail the distinction between these forms.

Form Characteristics:

– Single-Member Private Limited Company

A private limited company with one physical or legal person as the shareholder. Requires a minimum of one director.

– Private Limited Company

A limited liability company with two to 30 shareholders. Requires a minimum of one director. May have restrictions on the transfer of each class of shares as provided for by the Articles.

– Public Limited Company

A limited liability company authorized by the LCE to issue securities to the public. Requires a minimum of three directors.

Source: https://www.dfdl.com/resources/publications/investment-guides/cambodia-2020/

A foreign or local entity may operate its business in Cambodia through a branch office. Although relatively common in the banking community, the government’s policy, historically, was to limit branches to foreign investors that have executed contracts with the government. Such a limitation is not present under the current law. One notable consideration for branches is that the foreign parent company may be liable for the losses and debts of the branch. Branches cannot hold QIPs and do not have separate legal personality from their principal parent company.

Source: https://www.dfdl.com/resources/publications/investment-guides/cambodia-2020/

For some investors, the need to establish a subsidiary or branch of their offshore company, while foreseeable in the longer term, may not immediately be necessary. A more appropriate form may be that of a representative office. Representative offices are primarily used for the sourcing local goods and services and gathering local information for the parent company. They also serve as a vehicle for promoting and marketing the offshore parent’s products and services in Cambodia. They are thus best suited to assisting foreign investors wishing to gain entry to the Cambodian marketplace.

A representative office is not allowed to engage in active trading or provide services in Cambodia. It may not purchase, sell, or conduct any service or activity considered to be within the usual scope of the parent company’s business. It also may not engage in manufacturing, processing, or construction. Permitted activities include the right to employ local workers, and to market products and services at trade fairs. The representative office may negotiate commercial contracts on its parent company’s behalf, but the contract may only be entered into by the parent company.

The representative office is a non-taxable legal entity precisely because it is not permitted to engage in any sort of taxable activity. Doing so would expose the representative office to tax liability. The representative office, however, is required to withhold salary tax on salaries paid to employees and pay patent tax (an annual business operation tax). Representative offices cannot register for QIP status.

Source: https://www.dfdl.com/resources/publications/investment-guides/cambodia-2020/

A “general partnership” is a contract between one or more persons to combine their property, knowledge or activities to carry on business in with a common view to profit. They are jointly and severally liable for the obligations of the partnership to third parties.

A “limited partnership” is a contract of partnership between one or more general partners who are the sole persons authorized to administer and bind the partnership, and one or more limited partners, who are bound to contribute to the capital of the partnership. The general partners are jointly and severally liable for the debts of the partnership to third parties, whereas the limited partners are liable only to the extent of the sum of money or value of the property they agreed to contribute. While this form is common for local and small businesses it is less so for larger investments, as the processes used by the MOC for registering this business form are unclear given the lack of precedent to date.

Source: https://www.dfdl.com/resources/publications/investment-guides/cambodia-2020/

Cambodia places very few restrictions on the level of foreign participation in investments. As a result, a substantial proportion of investors choose to establish 100% foreign-owned limited companies. However, it should be noted that only a Cambodian company or citizen may own land and foreign ownership restrictions apply to certain sectors.

Source: https://www.dfdl.com/resources/publications/investment-guides/cambodia-2020/

Annual Taxes

• Tax on Income (“TOI”)
• Minimum Tax (“MT”)

Monthly Taxes

• Prepayment of Income Tax (“PIT”)
• Withholding Tax (“WHT”)
• Tax on Salary (“TOS”)
• Value Added Tax (“VAT”)

Other Significant Taxes

• Patent Tax (“PT”)
• Specific Tax on Certain Merchandise and Services (“ST”)
• Accommodation Tax (“AT”)
• Tax on Public Lighting (“TPL”)
• Tax on Unused Land (“TUL”)
• Tax on Immovable Property (“TIM”)
• Additional Tax on Dividend Distribution (“ATDD”)

Source: https://www.dfdl.com/resources/publications/investment-guides/cambodia-2020/

Businesses are required to pay PT upon business registration and every year thereafter for each business activity that they carry out.

In previous years the Government fee required to obtain a PT Certificate was approximately USD 285. The revised PT fees are as follows:

1. Small Taxpayer KHR 400,000 / USD 100
2. Medium Taxpayer KHR 1.2 million / USD 300
3. Large Taxpayer KHR 3 million or KHR 5 million* USD 750 or USD 1,250

*If the annual turnover of the Large Taxpayer exceeds KHR 10 billion (USD 2.5 million) then the PT payable will be USD 1,250. If the annual turnover of the Large Taxpayer is less than KHR 10 billion (USD 2.5 million) the PT payable will be USD 750.

The PT must be paid at the place where taxpayers have their specific/real business operation. A taxpayer which has a branch office, warehouse, factory and workshop with the same business objective in the same location (city-province) must only pay one PT fee.

Source: https://www.dfdl.com/resources/publications/investment-guides/cambodia-2020/

The ST is imposed on a number of local and imported products and services. The rates range from 3% to 45%. Goods subject to this ST include soft drinks, alcoholic beverages, cigarettes, and certain services such as entertainment, domestic and international air tickets, and telephone services.

Source: https://www.dfdl.com/resources/publications/investment-guides/cambodia-2020/

Tax penalties are imposed for violations of the LOT and its regulations. The level of the penalty depends upon the nature of the violation, and is determined as follows:

• Where a taxpayer or withholding agent is considered negligent (the amount of deficient tax paid is 10% or less than the amount of taxes due) the penalty is 10% of the unpaid tax;
• Where a taxpayer or withholding agent is considered seriously negligent (the amount of deficient tax is more than 10% of taxes due) or the taxpayer has failed to settle tax liabilities by the due date as stated in a tax notification on late payments issued by the GDT, the penalty will be 25% of the unpaid tax; and
• Where a tax audit conducted by the GDT exposes an underpayment of taxes, the penalty will be 40% of the unpaid tax.

In addition, penalties are imposed for late payment of taxes and late lodgment of returns, together with interest charged at 1.5% per month.

Source: https://www.dfdl.com/resources/publications/investment-guides/cambodia-2020/

Cambodia has signed Agreements for the Avoidance of Double Taxation (“DTAs”) with Singapore, China, Brunei, Thailand, Vietnam, Indonesia and Hong Kong. The DTA with Singapore and Thailand came into force on 1 January 2018 and those with China, Brunei and Vietnam entered into force on 1 January 2019. DTAs are expected to reduce barriers on cross-border investment and trade between the countries, along with the fostering of heightened future economic growth in Cambodia. Of note is the reduction in the standard WHT rates for payments made to non-residents whereby the standard Cambodian WHT rate of 14% with respect to payments of interest, royalties, service fees and dividends are reduced to 10% in most cases for those taxpayers who qualify and obtain approval from the GDT under the DTA.

Source: https://drive.google.com/file/d/1ZsnUB3DiybFaGG2FOmBZNWtVd6pVTF-M/view?usp=sharing

Withholding tax in Cambodia needs to be withheld on payments made by residents (and it seems only to those who fall under the self-declaration regime). The withheld tax constitutes a final tax when withheld in respect of resident and non-residents. The types of payments caught are as follows. WHT on payment to residents Interest: 15% (except payment to a Cambodian-registered bank or financial institution). Royalties: 15%. Rental: 10%. Interest (except local bank and financial institutions): 15%* Interest for fixed deposit: 6%* Interest for saving deposit: 4%* Services: 15% (except payments to a registered taxpayer and supported by a valid VAT invoice). WHT on payment to non-residents Under the Law on Financial Management 2017, which is effective from 1 January 2017 onwards, any resident taxpayer carrying on a business, including a PE of a non-resident person, who pays any Cambodian-source income as defined under Article 33 of the Law on Taxation to a non-resident taxpayer must withhold tax at 14% of the amount paid. WHT does not apply to property or risk reinsurance premiums in Cambodia. According to Article 33 of the Law on Taxation, Cambodian-source income includes: Interest paid by a resident enterprise, resident pass-through, or a governmental institution of Cambodia. Dividends distributed by a resident enterprise. Income from services performed in Cambodia. Compensation for management and technical services paid by a resident person. Income from movable or immovable property, if the property is situated in Cambodia. Royalties from the use, or right to use, intangible property paid by a resident person or paid by a non-resident person through a PE maintained in Cambodia. Gain from the sale of immovable property located in Cambodia or from the transfer of any interest in immovable property situated in Cambodia. Premiums from the insurance or reinsurance of risks in Cambodia. Gain from the sale of movable property that is part of a PE’s business property maintained by a non-resident taxpayer in Cambodia. Income from business activities conducted by a non-resident through a PE in Cambodia. WHT is due when the amount is paid. An expense is considered ‘paid’ when it is recorded in the accounting records. Except WHT on the rental of movable and immovable properties as stated in Article 25 and 26 of the Law on Taxation, small taxpayers are exempted from being the WHT agents for other WHT implications. * The data is from Deloitte tax guide 2020, page 20.

Source: https://taxsummaries.pwc.com/cambodia/corporate/withholding-taxes