D & M

Analysis of the Union Budget 2021-22

The Union Budget 2021 has brought with it a number of crucial reforms. This year’s Budget focused on healthcare, infrastructural development, education, divestment and attracting foreign investment. This was the country’s first paperless Budget, a positive step towards Digital India. While there were no new taxes introduced, the Budget included several tax reforms to ease the compliance burden faced by companies and encourage foreign investment. Take a look at our Budget Publication for the major updates in Union Budget 2021.

Investment basics:

Currency Khmer Riel (KHR)

Foreign exchange control- Payments for commercial transactions may be made freely between residents and nonresidents, provided they are made through an authorized bank. Funds transfers exceeding USD 10,000 must be declared to the National Bank of Cambodia before the transfer.

Accounting principles/financial statements- Publicly accountable entities are required to use full Cambodian International Financial Reporting Standards (CIFRS); companies subject to audit but not publicly accountable may use CIFRS for small and medium-sized entities or full CIFRS.

Qualified investment projects (QIPs) registered with the Council for the Development of Cambodia must have their financial statements audited by an independent external auditor registered with the Kampuchea Institute of Certified Public Accountants and Auditors. All other enterprises that meet at least two of the following criteria also must be audited: (i) more than 100 employees; (ii) annual turnover of more than KHR 3 billion; and (iii) total assets of more than KHR 2 billion.

Principal business entities- These are the sole proprietorship, partnership, limited liability company, branch of a foreign corporation and representative office.

Corporate taxation:

Rates

Residence- A company is resident in Cambodia if it is organized or managed in Cambodia or if it has its principal place of business in Cambodia.

Basis- Resident taxpayers are subject to tax on worldwide income; nonresidents, including branches, are taxed only on Cambodian-source income.

Taxable income- The tax on income is calculated on taxable profit. For resident taxpayers, taxable profit is the difference between total revenue (including capital gains and passive income, such as interest, rental and royalty income and insurance compensation) and allowable expenses paid or incurred to carry on the business.

Rate- The tax on income rate ranges from 0% to 30%, based on the business activity. The standard rate is 20%.

Enterprises operating in certain industries, such as oil or natural gas production or the exploitation of natural resources (including timber, ore, gold and precious stones) are taxable at a 30% rate.

Insurance companies that generate taxable profits from the insurance and reinsurance of general insurance are subject to a 5% tax rate on gross premiums. Profits from the insurance or reinsurance of life insurance schemes and from activities other than insurance and reinsurance are subject to tax at a rate of 20% of taxable profits.

Surtax- No

Alternative minimum tax- Enterprises that do not maintain proper accounting records, including those that incur losses, generally are subject to a minimum tax at a rate of 1% of total annual turnover inclusive of all taxes, except value added tax (VAT). QIPs and certain other companies are not subject to the minimum tax.

Taxation of dividends- Dividends paid to Cambodian shareholders are not taxable.

An enterprise that distributes dividends out of pretax income to a domestic or foreign shareholder (except a QIP that is in a tax holiday period) is subject to the advance tax on dividend distributions (ATDD), which equals the grossed-up dividend amount multiplied by the annual income tax rate of 20% (or 30% for income from oil or natural gas production or the exploitation of natural resources).

Capital gains- There is no separate capital gains tax. Any gain on the sale of assets/shares is subject to the tax on income at a rate of 20% on the higher of the contract price or the market value; the gains also are subject to the minimum tax.

New capital gains tax rules are expected to be issued in the near future, under which tax would be imposed on gains from the sale of movable and immovable property, investment property, shares, goodwill, etc. The rules would be effective as from the date of their release, which is expected to be in 2020.

Losses- Tax losses may be carried forward to offset taxable profit for up to five years after the year in which the losses are incurred, subject to certain conditions (e.g. no changes in ownership or business activity, and subject to unilateral tax reassessment). Tax losses may not be carried back.

Foreign tax relief- Cambodian companies may claim a foreign tax credit to offset the corporate income tax payable, limited to the amount of Cambodian tax payable on the foreign income. Supporting documents are required.

Participation exemption- No

Holding company regime- No

Incentives- Investment incentives for QIPs primarily consist of an exemption from minimum tax; either a profits tax holiday or special depreciation at a 40% rate in the first-year asset is placed in service; and exemptions from import duty.

A VAT exemption on the importation of raw materials is available for 100% export-oriented enterprises.

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