Doing Business in Cambodia Indian Perspective

I. Introduction

Indian investment in Cambodia, Laos, Myanmar and Vietnam ("CLMV") was US$131.5 million in 2017-18 and India's total trade with CLMV countries grew from US$3.4 billion in 2008 to US$ 14.5 billion in 2017. Southeast Asia is one of the world's most promising regions and the CLMV nations are especially gaining growing interest. Among CLMV, Cambodia is developing as a major hub and invites some comparisons to Singapore for its liberal policies on taxation and foreign ownership.

Cambodia is actively promoting foreign investment and offering numerous incentives and tax considerations to qualified investors. The country's GDP is expected to grow at a rate of 7.3% for 2018. The expected GDP growth is spurred by development in various sectors, including the newly emerging sectors of retail, technology, e-commerce, and large scale infrastructure projects. The country's strategic location in the heart of ASEAN between Vietnam, Thailand and Laos along with a coastline providing easy regional accessibility makes it an attractive investment destination. Treating foreign investors and local investors equally provides access to ASEAN's 600 million strong consumer market. In this article, we have briefly elaborated the key sectors for investment and highlighted the process for formation of companies and related tax incentives.

II. Company Formation

In Cambodia, company formation is a requirement in order to establish a commercial entity and a foreigner can enter with 100% foreign ownership or as a Joint Venture with local registered entities. Registration of such entities must be done with the Ministry of Commerce ("MoC") and General Department of Taxation ("GDT"). Under Cambodian law, commercial entities can be established and operated in the forms of a limited liability company, branch office, representative office, partnership; and sole proprietorship.

III. Investment Incentives Granted to a Qualified Investment Project ("QIP")

To facilitate formation of commercial entities intending to do business on a bigger scope of operation and investment capital, those entities can be established in the form of QIPs. A QIP needs to be approved by the Council for the Development of Cambodia ("CDC"), which is a one-stop service for establishing the company as an incentive company and is exempted from profit tax up to a total period of 9 years or eligible for a special depreciation method at the rate of 40% as an allowance on the value of tangible properties used in production or processing. Moreover, a QIP is exempt from VAT, duty free imports which also includes exemption of imports for production equipment, construction materials, as prescribed by the ministry.

IV. Special Economic Zone ("SEZ")

Cambodia has promoted the SEZ concept and the regulation was introduced in December 2005 by "Sub-Decree No.147 on the Organization and Functioning of the CDC" issued on 29 December 2005 to restructure the organization of the CDC, where a new branch of ministry called the "Cambodian Special Economic Zone Board (CSEZB)" was established to manage the SEZ scheme. This is governed by "Sub-Decree No. 148 on the Establishment and Management of the Special Economic Zone" (the SEZ Sub-Decree). Additionally, the "Law on the Special Economic Zones" was drafted by the CDC in 2008 and is now under examination by the RGC.

V. Tax System in Cambodia

The Law on Taxation (1997, amended 2015) has been followed with various new notifications and circulars amending the law to keep step with development. The Law on Financial Management (2016 effective from January 2017) is more introduced a new tax system in Cambodia termed as "real regime" and classified three categories of taxpayers - small, b) medium, and large.

At present, Cambodia does not have a comprehensive personal income tax that requires individuals to file and pay tax to the GDT. The only applicable tax is corporate tax 20%, Minimum tax 1%, Value Added Tax 10%, Fringe Benefit Tax 20%. For tax on salary, an individual resident in Cambodia is liable for tax on salary on both foreign as well as Cambodian source bases on income slab and the rate of tax applicable is 0% to 20%, while a non-resident person is liable to the 20% tax on salary only on Cambodian source income.

Withholding tax in general is determined as follows:

a) Any resident taxpayer carrying on business and who makes any payment in cash or in kind to a resident taxpayer shall withhold, 15% on management, consulting, and similar services and royalties for intangibles and interest in minerals; income from movable and immovable property 10%; interest paid by a domestic bank or savings institutions for fixed term 6% and non-fixed terms 4%. 

b) Any resident tax to a non-resident taxpayer shall withhold 14% on interest, royalties, rent and other income connected with the use of property; compensation for management or technical services and dividends. Other notable taxes are accommodation tax, specific tax on goods and public lighting tax. So far, there is capital gain tax both long-term and short-term capital gains.

In addition, Cambodia has entered into Double Taxation Avoidance Agreements "DTAA" with Singapore and Thailand (already in effect), China (to be effective from January 1, 2019), Brunei and Vietnam (yet to be in force). Recently, transfer pricing provisions were also adopted for greater conformity with international tax practice.

VI. Labor Law

In recent years, the Ministry of Labor and Vocational Training (MOLVT) has introduced significant change in terms of labor law including minimum wage requirements for the garment and footwear sector and a mandatory requirement for work permit to foreign workers. It is mandatory for every business enterprise to register with the MOLVT before hiring any employees and workers must have a written employment contract i.e. Fixed Duration Contract ("FDC") & Unspecified Duration Contracts ("UDC").

Under the Cambodian Labor Law, a contract for work to be performed will be defined as a fixed duration contract (FDC) if it contains the exact commencement and termination dates, and that the contract duration, including any renewal period, does not exceed two years. If any of the conditions under FDC are not met, then the contract is defined as unspecified duration (UDC). In case, if any employee worked for an employee for more than 2 years, the contract will automatically be consideration as UDC.

Further, the law introduces National Social Security Fund ("NSSF") as mandatory for every entity that, as of December 2018, covers Work Related Accident and Health Care benefits to employees and also recent regulations regarding Seniority Payment based on the Seniority in the employment.

VII. Intellectual Property Law

Cambodia's 2004 accession to the World Trade Organization prompted the adoption of several laws regulating intellectual property rights. So far, the country has adopted laws relating to IPR which are Laws concerning marks, trade names, and act of unfair competition; Laws on Patents, Utility Models, and Industrial Design; Law on Copyrights and related rights; Law on Geographical Indication to Trade Marks.

VIII. Key sectors in Cambodia for doing business

1. Banking Sector
The banking sector in Cambodia has had vibrant growth. In Cambodia, banks comprise commercial banks, specialized banks, microfinance institutions, depositing taking microfinance institutions or leasing companies. The National Bank of Cambodia ("NBC") is the authority responsible for approval of banking licenses. There is no restriction on repatriation under The Foreign Exchange Laws, the ease in restriction is to encourage investments.

2. Insurance
The Ministry of Economy and Finance ("MEF") is the competent authority supervising and inspecting the insurance business and is empowered to issue licenses, revoke licenses, and control and supervise the insurance industry in Cambodia. Under the law, only insurance companies, agents and brokers are licensed to provide or sell insurance products. So far, there are two main types of insurance offered - life insurance and general insurance.

3. Energy Sector
Unlike other countries, there is no restriction on investment in power generation, transmission, and distribution sectors. A foreigner can have 100% ownership, or a joint venture with the local entities / government. China followed by Japan are the major investors in Cambodia's energy sector. Recently, investment in solar energy is on the rise and a large number of countries are looking to invest in solar farm and solar generation because this sector is an untapped market. Companies can obtain the following licenses--Transmission license, Distribution license, Bulk sale license, Generation license, Dispatch license, Consolidated license, Sub contractor license, and Retail license. Any power plant needs approval for generation, distribution, or transmission and to obtain approval from the MME, EAC, Ministry of Environment, Ministry of Commerce ("MOC"), CDC for investment incentives, and approval from Ministry of Land Management, Urban Planning, and Construction in case of construction is required.

4. Real Estate
The 2001 Land Law, the 2007 Civil Code and the 2011 Law on the Implementation of the Civil Code constitute the main framework applicable to real estate transactions. The constitution of Cambodia restricts foreigners owning land in Cambodia. However, foreign ownership in co-owned buildings, can be up to 70 percent of private units in coowned buildings or condominiums, excluding ground and underground floors. The law is applicable to both newly constructed co-owned buildings or existing buildings which are to be converted into co-owned buildings. The laws in Cambodia only allow Cambodian citizens or Cambodian entities to legally own land. A Cambodian entity is defined as a company having 51 percent or more of the voting shares held by Cambodian citizens or Cambodian entities. Therefore, most foreigners and foreign entities own land through a landholding company with local nominee shareholders. Other available ways for investment by foreigners in the real estate sector is by a long-term lease i.e. perpetual lease or entering into a concession agreement from the government in case of government land.

5. Securities Market
The Cambodian Stock Exchange (CSX), a joint venture between the government of Cambodia and the Korea Exchange, established in 2011 to access the equity capital markets in Cambodia. Non-government securities issued by public limited companies or other legal entities include equity securities, bonds or debentures, interests in a managed investment scheme, derivative instruments, and government securities including Treasury bills, Treasury bonds, and other instruments creating or acknowledging indebtedness and issued by or on behalf of the government. For doing business in securities relevant to securitiesrelated operators, including the securities market operator, securities depository, clearance and settlement of facility operators, underwriters, dealers, brokers, investment advisors, securities representatives, investment advisory representatives, securities-specialized accounting firms, cash settlement agents, securities registrars, securities transfer agents and paying agents needs to obtain license from Securities Exchange of Cambodia. The securities market is primarily governed by the Law on the Issuance and Trading of Non-Government Securities, dated October 19, 2007 (Securities Law) and its implementing Sub-Decree No. 54, dated April 8, 2009 (Securities Sub-Decree); implementing regulations issued by the SECC; and the Law on Government Securities, dated January 10, 2007 (Government Securities Law).

6. E-commerce
E-commerce is relatively undeveloped compared to other jurisdictions. Cambodia is undertaking efforts to introduce a new Law on E-commerce. The e-commerce markets are growing with various challenges related to limited internet infrastructure, delivery system challenges, and minimal credit card use and most transactions in ecommerce are now settled through cash-on-delivery. Cambodians are adopting e-Commerce both as consumers and merchants, and there is a significant untapped market potential in the sector fueled by exploding internet access, high smartphone penetration and a growing middle class. Despite lack of regulations in this market, a number of homegrown startups, increased. The e-commerce market with homegrown service providers like PassApp, Nham24, Pipay etc. is attracting more and more consumers. International service providers like Grab, Alibaba, Amazon are yet to grow to their full potential in Cambodia. Recently, Cambodia and China signed a Memorandum of Understanding E-commerce Cooperation to boost this sector.

7. Aviation
Aviation sector investment has been more than $3 billion in local air transport infrastructure, according to the State Secretariat of Civil Aviation (SSCA). While there are 11 airports in Cambodia, which include 3 international airports in Phnom Penh, Siem Reap and Sihanoukville. India's recent initiation to connect the North east of India with ASEAN would attract investment in this sector. Indian and Cambodia have entered into Bilateral Aviation Agreements, however, it is yet to be airborne between the two countries.

In addition to the above sectors, the other key sectors are garment sectors, hotels, agriculture, tourism, oil and gas exploration, health care, technology, education and others.

IX. Conclusion

The adoption of the 'Look East' Policy by India in 1992 was an initiative towards developing extensive economic and strategic relations with ASEAN nations. In 2014, India renewed its intentions with the Act East Policy. Further, India's Union Budget for 2015-16 proposed the setting up of a project development fund and tax incentive by establishing a special purpose vehicle (SPV) in order to catalyze investments from the Indian private sector to the region by providing tax incentives. India seeks to benefit from the emerging industrial power of the CLMV countries, by investing in sectors like textiles, pharmaceuticals, tourism, and high-tech agriculture. India has also proposed bilateral trade agreements with each CLMV country for major investments in coal, oil and natural gas followed by metals and financial service. It is expected that India will continue to play a growing role in Cambodia and the CLMV region.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.