Introductory Guide. Taxation System in Cambodia

Introductory Guide Taxation System in Cambodia

* This guide is part of our publication series explaining the tax system in Cambodia. Subsequent publications can be subscribed for at info@bun-associates.com

TABLE OF CONTENTS Abbreviations 1 Introduction 2 Key Facts 2 Main Laws 2 Recent Developments 3 Regime System Of Taxation 4 Residency And Source Rules 5 1. Annual Tax Compliance For Real Regime Taxpayers 6 1.1 Corporate Income Tax/Tax on Profit 6 1.1.1 Tax Rate 6 1.1.2 Tax Depreciation 7 1.1.2.1 Tangible Asset 7 1.1.2.2 Intangible Asset 7 1.1.2.3 Depletion of Natural Resources 7 1.1.3 Deductible Expenses 7 1.1.4 Non-Deductible Expenses 8 1.2 Capital Gains Tax 8 1.3 Minimum Tax 8 1.4 Calculation of TOP Liabilities 8 1.5 Tax Relief for TOP 8 1.5.1 Foreign Tax Credit 8 1.5.2 Tax Losses 9 1.5.3 Withholding Tax Credit 9 1.5.4 Prepayment of Tax on Profit Brought Forward 9 2. Monthly Tax For Real Regime Taxpayers 10 2.1 Prepayment of Tax on Profit 10 2.1.1 1% PTP Exemption 10 2.2 Tax on Salary /Personal Income Tax 11 2.2.1 Rebate of Dependent Child and Spouse 11 2.3 Tax on Fringe Benefit 11 2.4 National Social Security Fund 12 2.5 Withholding Tax 12 2.6 Value Added Tax 12 2.6.1 VAT for Importation 12 2.6.2 VAT Input Non-Creditable 12 2.6.3 Duty Rate For Imported Product 12 2.6.4 Taxable Supplies 13

2.6.5 Non Taxable Supplies 13 2.7 Accommodation Tax 13 2.8 Public Lighting Tax 13 3. Other Taxes 14 3.1 Patent Tax 14 3.2 Property Tax 14 3.3 Stamp Duty Tax 15 3.3.1 Tax Exemption 15 3.3.2 Tax Deduction Allowance 15 3.4 Specific Tax 16 3.5 Indirect Tax 16 4. Qualified Investment Project 17 4.1 Type of QIP 17 4.2 Investment Incentive for QIP 17 4.3 TOP Incentive 17 4.4 Custom Duty Exemption Incentive 17 5. Tax And Statutory Audit 18 5.1 Tax Audit 18 5.2 Book Keeping 18 5.3 Statutory Audit Requirement 18 6. Dividends And Shareholder Current-Account 19 6.1 Dividends 19 6.1.1 Additional Profit Tax on Dividend Distribution 19 6.2 Shareholder Current-Account 19 7. Anti-Avoidance Provisions And Transfer Pricing 20 7.1 Introduction 20 7.2 Controlled Foreign Company Rules 20 7.3 Thin Capitalization 20 7.4 Permanent Establishment 20 7.5 Transfer Pricing 21 7.6 Double Tax Agreement 21 Practice Areas 22 Contact 23

Abbreviation ASEAN AT CDC GDT KICPAA LOI LOT MEF MT NSSF PE PLT PTP QIP STCMS SDT TOFB TOP/CIT TS VAT WHT WTO Association of Southeast Asian Nations Accommodation Tax Council for the Development of Cambodia General Department of Taxation Kampuchea Institute of Certified Public Accountants and Auditors Law on Investment Law on Taxation Ministry of Economy and Finance Minimum Tax National Social Security Fund Permanent Establishment Public Lighting Tax Prepayment of Tax on Profit Qualified Investment Project Specific Tax on Certain Merchandise and Services Stamp Duty Tax Tax on Fringe Benefit Tax on Profit/ Corporate Income Tax Tax on Salary Value Added Tax Withholding Tax World Trade Organization page 1

Introduction This guide sets out a brief introduction to the tax regulations of the Kingdom of Cambodia. Key Facts Membership of Economic Groups Cambodia is a member of the United Nations, the World Bank and the International Monetary Fund. Cambodia joined the WTO on 13th October 2004 and has been a full member of ASEAN since 30th April 1999. Website of Tax/Finance Authorities General Department of Taxation of Ministry of Economy and Finance Ministry of Commerce Ministry of Economy and Finance www.tax.gov.kh/en/ www.moc.gov.kh/ www.mef.gov.kh/ Main Tax Rates CIT/TOP rate 20% VAT/GST standard rate 10%/0% Personal Income Tax/TS top rate 20% WHT rate for resident taxpayers: 4-15% for non-resident taxpayers: 14% Main Laws The main law regarding taxation in Cambodia is the Law on Taxation ( LOT ). The LOT was adopted in 1997 and revised in 2003. In 2004, the Ministry of Economy and Finance ( MEF ) also issued the Prakas on Tax on Profit. This Prakas is extremely important for understanding most Cambodian tax regulations because it defines many terms used in the other tax regulations; meaning that the Prakas on Tax on Profit applies to more regulations than the TOP only. In parallel, the Law on Commercial Enterprises is amongst the main legal texts and is largely related to tax matters, so are the Law on Custom and the Law on Investment ( LOI ), establishing rules and incentives regarding the investment in Cambodia and foreign trade. page 2

Recent Developments Stamp Duty Tax and New Scheme ( SDT ) The Stamp Duty Tax was initially enacted by the Cambodian government in 1991, followed by an amendment in 1995. Currently, the National Assembly has amended Article 40 of the Financial Law 1995 which included the second amendment of the SDT which was promulgated on 26 December 2012 under the name Financial Law 2013. According to the SDT, the Royal Government of Cambodia has imposed a new tax at 0.1% of the value of the transferred share capital, and increased the flat tax rate from 100,000 (one hundred thousand) Khmer Riel (approximately US$25) to 1,000,000 (one million) Khmer Riel (approximately US$250) on legal documents (for example, registration letters, merging approval letters, and de-registration approval letters). Immovable Property Tax The Property Tax Law was promulgated in 2010, and was implemented in 2011. Under the Property Tax Law, the immoveable property tax is an annual tax to be collected every year at the rate of 0.1% of all property valued over 100 million (one hundred million) Khmer Riel (approximately US$25,000). For purposes of calculating one s tax liability under the Property Tax Law, the tax base is 80% of the property value (land value and building value), and the property value will be determined by the Property Evaluation Commission. Rice Enterprises Enterprises carrying on a business related to the growing and trading of paddy rice and exporting milled rice will obtain an investment incentive similar to that of a QIP. Under this tax incentive scheme, there is a MT and TOP exemption for a Trigger Period, plus 3 (three) years, with an additional Priority Period of 3 (three) years. Some VAT exemptions are also included in the investment incentives: supplies of paddy rice in Cambodia are taxable at a rate of 0% supplies of milled rice in the Cambodia are taxable at the rate of 10% exports of rice are taxable at the rate of 0% a tax credit is allowed for the input tax paid for growing, trading and exporting of rice. In addition to these tax incentives, there are additional VAT incentives for the agriculture sector. Generally, the VAT is not applied to supplies and the importation of certain products of the agriculture sector. The products included in this VAT exemption include fertilizer, seeds, animal medicines, animal feed, animals, and agricultural machinery and tools. Initial Public Offerings Another recent development, concerning the economic environment of Cambodia, has been the launch of the Cambodian Stock Exchange. Wanting to ease the flow of capi- page 3

tal and increase the economic development of the country, the MEF and the Korea Exchange have established the Cambodia Securities Exchange Co., Ltd, in 2010. There are two types of incentives in the Securities Sector: listed equity and/or debt issuing companies shall benefit from a TOP rate of 18% for 3 (three) years after the issuance of its securities. public investors shall receive a 50% reduction of WHT on interest and/or dividends for 3 (three) years starting from the launch of the securities market. Regime system of taxation The Cambodian Tax system is divided into three regimes: real regime simplified regime estimated regime Enterprises which are not registered as a sole proprietorship are taxable under the real regime system regardless of the type of business activity or the level of turnover. The sole proprietorship shall be classified under real regime system if one of following conditions is met: level of turnover exceeds a certain threshold type of business activities fall into certain categories Level of Turnover Business Activities Level of Turnover (Khmer Riel) Level of Turnover (US$) Note Supply of goods or mixed supply (i.e goods and services) 125 million or more 31,250 or more Within any period of 3 (three) consecutive months Supply of service 60 million or more 15,000 or more Within any period of 3 (three) consecutive months Government contract 30 million or more 7,500 or more Within any period of 3 (three) consecutive months page 4

Type of Business Activities A sole proprietorship engaging in import and export, or classified as a QIP will be taxed under the real regime system. Additionally, the simplified regime has not been implemented yet, and most of the companies fall under the real regime system. As such, only the tax obligations of the real regime taxpayers will be further elaborated upon. Residency and Source Rules Under the real regime taxation system, residency and source of income shall be a benchmark in determining the applicable tax rate on incorporated entities and physical persons income. In that, resident taxpayers are required to pay taxes on their worldwide income, and non-resident taxpayers shall be subject to pay taxes on their Cambodian source income. Cambodian source income for physical persons (i.e. salary) and incorporated entities are a bit different. Residency Rule for Physical Person There is no personal income tax applicable in Cambodia. Therefore, a natural person s income refers to salary and other benefits obtained under the scope of their employment activities only. This income shall be subject to Tax on Salary ( TS ). The residency of a natural person referred to as an employee shall be a benchmark in determining the applicable rate for TS. By law, a resident employee refers to an employee who has a residence or has a principle place of abode in Cambodia, or is present in Cambodia for more than 182 (one hundred and eighty-two) days in any period of 12 (twelve) months ending in the current tax year. A non-resident employee refers to an employee who is not a resident employee, and receives salary from a Cambodian source. For the details of TS, please refer to TS section. Residency Rule for Legal Entity/ Incorporated Entity For legal entities, the term resident taxpayers refers to an entity which is established, managed in, or has a principle place of business in Cambodia. An entity, which is not a resident entity, which maintains a Permanent Establishment ( PE ) in Cambodia, is referred to as a non-resident taxpayer. Additionally, a PE is required to pay tax on its Cambodian source income only. page 5

1. Annual Tax Compliance For Real Regime Taxpayer 1.1 Corporate Income Tax/Tax on Profit ( CIT )/( TOP ) TOP is imposed on all real regime taxpayers and is due within 3 (three) months of the end of the tax year. All resident companies, registered under the real regime system in Cambodia, are subject to TOP on their worldwide income. Non-resident taxpayers/ 1.1.1 Tax Rate companies will be subject to TOP on their Cambodian source income only. In general, TOP is calculated based on taxable profit, which includes active and passive income generated during the tax year. Description Tax Rate Note Insurance 5% Plus 0.5% contribution QIP 0% During Tax Holiday Period Oil or Natural gas production, natural resources exploitation including timber, ore, gold, and precious stone 30% Paddy Rice and Milled Rice Industry 0% Legal Entities 20% Enterprise cultivating paddy rice, trading paddy rice, and producing milled rice for exportation during incentive period Standard rate for incorporated entities page 6

1.1.2 Tax Depreciation Per tax regulation, depreciations are calculated according to a straight-line method for class 1 and declining balance method for classes 2, 3 and 4. The rates to be used are synthesized in the table below. Land is not a depreciable asset for tax purpose. 1.1.2.1 Tangible Asset Class 1 Class 2 Class 3 Buildings and structures and their basic components Computers, electronic information systems, software and data handling equipment Automotives, truck and office furniture and equipment 5% Straight-line 50% Declining Method 25% Declining Method Class 4 Other tangible properties 20% Declining Method 1.1.2.2 Intangible Asset For intangible property having a limited life, the depreciation rate of each property will be calculated based on the life of the property, using the straight-line method. For intangible property with an indefinite life, the intangible property shall be depreciated at the rate of 10%, using the straight-line method. 1.1.2.3 Depletion of Natural Resources Tax depreciation for the depletion of natural resources shall be determined by multiplying the balance of the account for the natural resource with the ratio of the quantity of natural resources produced from the natural resource in the tax year. 1.1.3 Deductible Expenses Under the current tax laws, any expenditure to carry on the business of a company is deductible in the tax year it was incurred and if that expenditure meets the 3 (three) conditions as follows: the expense is actually incurred with supporting documents (i.e. invoice, loan agreement, custom declaration, commercial correspondences, etc.); it is the result of economic activities; and the amount of the taxpayer s liability is precisely determined. Any expenditure that meets the general criteria shall be allowed to be deducted unless a specific provision prohibits such a deduction. page 7

1.1.4 Non-Deductible Expense Some expenses will not be allowed to be deducted for tax purposes. By law, the following payments will be non-deductible for tax purposes: entertainment, extravagant and/or unrelated business expenditures, non-charitable donations, TOP itself and WHT, TS & TOFB borne by a company, tax fines and penalties, various accrued expenses depending on stipulated conditions, and loss on any sale or exchange of property directly or indirectly between related persons. 1.2 Capital Gains Taxes There is no separate capital gains tax in Cambodia. By law, gains realized by an enterprise from all types of operations, including capital gains from the sale of various assets during the business operation or at the close of the business, will be subject to the TOP. As such, capital gains are considered profit and are subject to the TOP at the applicable rate. 1.3 Minimum Tax ( MT ) The MT is an annual tax, and is calculated at the same time as the TOP. The MT is imposed at the rate 1% of annual turnover inclusive of all taxes, except VAT, to all types of legal entities except for QIPs. The MT might become an annual tax liability of an incorporated entity if the MT is higher than the taxable profit multiplied by the applicable TOP rate. 1.4 Calculation of Annual TOP liabilities Having adjusted the taxable profit by nondeductible and deductible expense for tax purpose, legal/incorporated entities will be liable for annual TOP liabilities at MT or TOP 20% whichever is higher. 1.5 Tax Relief for TOP 1.5.1 Foreign Tax Credit A resident taxpayer who has received income from foreign sources and who has paid taxes according to foreign tax laws shall receive a tax credit to be applied against the TOP to be paid in Cambodia. However, receiving the tax credit is conditioned on the presentation of documents confirming the foreign tax payment. The foreign tax credit allowable by the Cambodia Tax Administration is the lower of: the tax amount paid in the foreign country, or the amount obtained by multiplying the total TOP from all sources for the same period calculated at the applicable TOP rate (i.e. 20%, 30%, 5%, or 0%) with the ratio of income from that foreign source to total income from all sources. page 8

1.5.2 Tax Losses Tax losses may be credited against the taxable profit for the following tax year, for a period of five (5) consecutive years, where the following conditions are met: the business activity of the company must not have changed; the ownership of the company must not have changed; no unilateral tax reassessment on the tax losses has been made by the tax administration; and the company files its tax losses in its annual tax return within the prescribed deadline. 1.5.3 Withholding Tax ( WHT ) Credit Any income having been withheld by a payer before making a payment will create a WHT credit for the payee to offset against annual tax liabilities by that withholding amount, where the payee has declared said income in gross amount (i.e. inclusive of WHT withheld by payer). 1.5.4 Prepayment of Tax on Profit ( PTP ) Brought Forward The PTP will be used to offset against annual tax liabilities, and if the PTP amount paid during the year exceed the annual tax liabilities, the PTP paid that exceeds the annual tax liabilities will be carried forward to offset against the annual tax liabilities of the following tax year. page 9

2. Monthly Ta x For Real Regime Taxpayer The following is an executive summary for monthly tax obligations, applicable tax rates, and prescribed deadlines for the submission and payment of taxes to the Cambodian Tax Administration for all taxpayers under the real regime. Type Of Tax Tax Rate Due Date Remark Prepayment of TOP 1% TS 0% - 20% TOFB 20% VAT 0%/10% WHT 4%-15% AT 2% Public Lighting Tax Specific Tax 3% Tax Rate based ontype of goods and service supplied. 15th of the following month 15th of the following month 15th of the following month 20th of the following month 15th of the following month 15th of the following month 15th of the following month 15th of the following month Tax rate: Exemption, 4%, 6%, 10%, 14%, and 15%. Refer to WHT Section below Hotel and Guest House Service Distribution of Cigarettes and Alcohol Please refer to the Specific Tax section 2.1 Prepayment of Tax on Profit ( PTP ) Resident taxpayers must pay monthly 1%PTP on monthly turnover inclusive of all taxes, except VAT. The PTP must be paid by the 15th day of the following month. The PTP can be used to offset against the annual TOP or MT liability, whichever is higher. page 10 2.1.1 1% PTP Exemption The following entities are exempt from paying the 1% PTP: QIP industry during the Tax Holiday Period any legal entities which purchase and cultivate paddy rice, and produce milled rice for exportation during the tax incentive period non-for-profit organization recognized by MEF

2.2 Tax on Salary ( TS )/Personal Income Tax There is no personal income tax applicable in Cambodia. However, there is TS applicable to an individual as an employee. A resident employee s salary is subject to a progressive tax rate from 0% to 20% per month. Specifically, a non-resident employee is subject to a flat rate of 20% on salary received from Cambodian sources. Monthly Salary (Khmer Riel) Monthly Salary (US$) 1US$ = 4,000 Khmer Riel TS Rate 0 to 500,000 0-125 0% 500,001 to 1,250,000 125.01 312.50 5% 1,250,001 to 8,500,000 312.51 2,125 10% 8,500,001 to 12,500,000 More than 2,125.01 3,125 15% Over 12,500,000 Over 3,125 20% 2.2.1 Rebate for Dependent Child and Spouse Only resident employees, with a minor dependent or spouse having only an occupation as housewife, are entitled to a rebate of 75,000 (seventy-five thousand) Khmer Riel (approximately 18.75 US$) for every dependent child and spouse of the employee. The minor dependent is defined as follows: a child of the employee who is less than 14 (fourteen) years old; or a child of the employee who is a full time student at a recognized degree granting educational institution and who is not older than 25 (twenty-five) years old. The education certificate of the child must be supported. 2.3 Tax on Fringe Benefit ( TOFB ) Fringe benefits provided directly or indirectly to physical persons in cash or in kind are subject to TOFB at a rate of 20% of the gross value of the benefits. The value of fringe benefit is the fair market value inclusive of all taxes. The following benefit will be considered fringe benefits: a vehicle of any kind; food; a house or housing; utilities; loan less than market rate of interest; discount on the sale of goods; educational assistance not related to the work of the employee; life and health insurance premium unless the same benefit is provided to each employee regardless of employment or job classification; page 11

un-reasonable and un-necessary expense to the business of the employer; contribution to social security funds in excess of the levels provided in law; pension plan in excess of 10% of the employees monthly salary exclusive fringe benefits; expenses on entertainment, amusement, or recreation which is not part of an employment relationship. 2.4 National Social Security Fund ( NSSF ) Companies employing 8 (eight) or more employees are required to contribute to the NSSF for work related accidents. Such a contribution is deemed to be a particular obligation of the company. The contribution rate is 0.8% of the average wage with a maximum contribution 8,000 (eight thousand) Khmer Riel (equivalent to 2 US$). The contribution payment is due on the 15th of the following month. 2.5 Withholding Taxes ( WHT ) Any resident taxpayers who make payments on interest, royalties, rental and other income connected to use property, dividend and compensation of technical or management services to non-resident taxpayers shall be required to withhold the WHT at 14%. Certain payments to resident taxpayers are also subject to WHT at the following rates: rental (10% WHT), interest (15% WHT, except payment to local financial institutions), services (15% WHT, except payment to registered taxpayers with a proper VAT invoice), and royalties (15% WHT). WHT is due whenever the payment is made or when the expense is recorded. 2.6 Value Added Tax ( VAT ) The Tax Administration imposes 2 (two) VAT rates. The standard VAT rate of 10% applies to all taxable supplies. Additionally, goods exported from Cambodia and services rendered outside of Cambodia will be subject to a VAT rate of 0%. The deadline for submission and tax payment shall be on the 20th of the following month. 2.6.1 VAT for Importation VAT base for the importation of products is as follows: CIF x Import duty = X (CIF + X ) x Specific tax rate = Y (CIF + X + Y ) = VAT base; [VAT = VAT base x 10% VAT] 2.6.2 VAT Input Non-Creditable It would not be allowed for claiming VAT input as credit for the following payment: entertainment (except for VAT taxpayer holding such entertainment business) car which is equipped with less than 10 (ten) seats (except for business of car trading or car rental) gasoline (except for gasoline trading) 2.6.3 Duty Rate for Imported Products Before releasing the imported goods from Customs, import duties will be levied on all imported goods, except for qualified goods page 12

which are specifically exempted by law and regulation. There are three types of duties and taxes that will be imposed on imported goods: Customs Import Duties at an ad-valorem rate; Special Tax for certain goods; VAT. The tariff bands: 0% for exempt goods such as medical and educational materials (covering 5% of tariff lines) 7% for primary products and raw materials 15% for capital goods, machinery and equipment, and locally available raw materials 35% for finished products, alcohol, petroleum products, vehicles, precious metals and stones 2.6.4 Taxable Supplies Taxable supplies for real regime taxpayers include the following: the supply of goods or services by a taxable person in Cambodia the appropriation of goods for his own use by the taxable person making a gift or supply of goods or services at below cost by the taxable person importation of goods into the custom territory of Cambodia 2.6.5 Non Taxable Supplies Supplies that meet the following criteria will be considered non-taxable supplies: public postal service hospital, clinic, medical, and dental services and the sale of medical and dental goods incidental to the performance of such services service of transportation of passenger by wholly owned government entities insurance services primary financial services importation for personal use that exempt from custom duties non-profit activities recognized by MEF 2.7 Accommodation Tax ( AT ) The AT is imposed at 2% of the accommodation charge/fee in a hotel while including other taxes and service charges except VAT. In addition, Hotel refers to Hotel, Hotel Apartment, Suite Hotel, Resort Hotel, Motel, Bungalow, Guesthouse, Tourist Camping, and other accommodation services. Incorporated entities who supply accommodation services are responsible for the payment of this tax to the tax administration by the 15th of the following month that the supplies were made. 2.8 Public Lighting Tax ( PLT ) The PLT is imposed at the rate of 3% on the supply of all alcoholic drinks and cigarettes. Appropriation for personal purpose, for employees, or third parties of such a product shall be also subject to PLT. The person who supplies these products is responsible for the payment of this tax to the tax administration by the 15th of the following month the supplies were made. page 13

3. Other Taxes 3.1 Patent Tax A new company that is registered during the first 6 (six) months of the tax year will be required to pay the Patent Tax of 1.14 million (one million one hundred and fourty thousand) Khmer Riel (approximately US$285) of for the whole year, but a company registered during the last 6 (six) months of the tax year will only be required to pay half of the Patent Tax. Existing company shall be required to pay the annual Patent Tax of US$285 by 31 March of the following year. A taxpayer who has branches, warehouses, factories or workplaces for the same business activity in one jurisdiction is only required to make one Patent Tax payment. However, if the taxpayer has branches, warehouses, factories or workplaces in different jurisdictions or different business activities, then the taxpayer will be required to pay the Patent Tax in each jurisdiction it operates and for each business activity. 3.2 Property Tax Immoveable property means land, houses, buildings, and other construction attached to the land. The immoveable property tax is an annual tax to be collected every year by the end of September. The immovable property tax is applied to 80% of the property valued above 100 million (one hundred million) Khmer Riel (approximately US$25,000) at the flat rate of 0.1% of the value of the property. The property value will be determined by the Property Evaluation Commission. Certain properties are exempt from the immoveable properties tax. Those properties include: agricultural land land owned by the state or government institutions land owned by the community or a person for the purpose of: religious and charitable activities, and no part of the property or earnings of such property is used for any private interest land owned by the diplomatic and consular missions, international organizations and agencies of technical cooperation of other governments building that are less than 80% completed The following calculation demonstrates how the immovable properties tax is to be calculated: Immovable properties tax = [(total properties value x 80%)-100,000,000] x 0.1%. page 14

3.3 Stamp Duty Tax ( SDT ) The Financial Law 2013 provides that the SDT will be applied in the following situations: Transaction Tax Rate Value of immovable property for the transfer of ownership or possession right constituting a building and/or land, or capital contribution into company in the form of immovable property Value of vehicles or other means of transportation for the transfer of ownership or possession right of vehicles or other means of transportation Value of the transferred share capital 0.1% Value of goods or service agreement by using government s budget 0.1% 4% 4% Legal documents (for example: registration letter, merging approval letter, and de-registration approval letter) 1,000,000 Khmer Riel (250US$) 3.3.1 Tax Exemption Any transfer of ownership or possession of a land concession which has been granted by the government is exempted from the SDT. 3.3.2 Tax Deduction Allowance Any transfer of ownership or possession of immovable property between relatives is allowed a deduction from the price before calculating the SDT liability. The amount allowed to be deducted from the price of the property is as follows: 200,000,000 (two hundred million) Khmer Riel ( approximately 50,000US$) in an immovable property transfer in the form of a succession; 100,000,000 (one hundred million) Khmer Riel (approximately 25,000US$) in an immovable property transfer in the form of a donation. page 15

3.4 Specific Tax on Certain Merchandise and Services ( STCMS ) STCMS is an excise tax which imposes various tax rates to the importation or local production or supply of certain merchandise and services. The local taxpayer producing or supplying the merchandise or services is responsible for paying this tax to the tax administration by the 15th of the following month that the supplies are made. STCMS shall be applied, but not limited to the following: Product/Service Tax rate Beer 25% Wine 10% All kind of Cigarette 10% Motorcycle cylinder volume of more than 125 CC 10% Entertainment services such as massage, karaoke, snooker, discotheque, and spa 10% Air ticket 10% Telecommunication services 3% 3.5 Indirect Tax VAT is an applicable indirect tax under the Cambodian taxation scheme. For more details on the VAT, please refer to the VAT section (i.e. 2.6. Value Added Tax) page 16

4. Qualified Investment Project ( QIP ) The CDC functions as a one-stop service office for licensing QIPs. After obtaining the Final Registration Certificate, QIP will be duly established and will benefit from the investment incentive and investment guarantee. However, all QIPs are required to submit documents to the CDC annually in order to receive a Certificate of Compliance. The required documents must be submitted to the CDC within 90 (ninety) days after financial year end. If such documents are not submitted, and no Certificate of Compliance is issued, then the enterprise might lose its QIP status. 4.1 Type of QIP The QIP shall be categorized as follow: Domestic QIP means a QIP that does not produce goods or services for the purpose of exporting them. Export QIP means a QIP that does product goods or services for the purpose of exporting them. Supporting Industry QIP means a QIP that produces goods or services with the aim of supplying to export QIPs as substitution for regularly imported raw materials or accessories. 4.2 Investment Incentive for QIP An enterprise that qualifies as a QIP can choose only one of the three options as below: a. TOP Incentive and Investment Guarantee b. Special Depreciation and Investment Guarantee c. Investment Guarantee (investor does not require any incentives) All of these choices still benefit from custom duties exemptions. Generally, most investors select option a. 4.3 TOP Incentive A QIP is entitled to an exemption from the TOP imposed under the LOT by obtaining a profit tax exemption period as below: the tax exemption period (tax holiday period) is composed of a Trigger Period + 3 (three) years + Priority Period. Normally, Priority Period of QIP shall be determined by the type of project and capital investment. 4.4 Customs Duty Exemption Incentive Customs incentives will be based on the type of QIP, as mentioned above: Domestic QIP: Production Equipments and Construction Materials-Domestic QIP are exempt from Customs Duty. Export QIP: Customs Duty Exemptions for Production Equipments, Construction Materials, and Production Inputs-Export QIP are exempt from Customs Duty. Supporting Industry QIP: Customs Duty Exemptions for Production Equipments, Construction Materials, and Production Inputs. page 17

5. Tax And Statutory Audit 5.1 Tax Audit The tax authority has the power to perform tax audits within three 3 (three) years of the date of submission of the tax returns. within ten 10 (ten) years of the date of submission of the tax returns if there is evidence of obstruction of the implementation of the law. at any time with the written consent of the taxpayer. Type of Tax Audit Desk Audit/Limited Audit Comprehensive Audit Description Conducted by Department of Large Taxpayers for all large taxpayers; or conducted by Tax Branch for medium taxpayers and covers some types of tax issue. Conducted by the Department of Enterprise Audit for large and medium taxpayers, and covers all details of all tax compliance obligations. 5.2 Book Keeping All legal entities are required to keep all their documents related to the performance of business in Cambodia for at least 10 (ten) years. 5.3 Statutory Audit Requirement Legal entities located in Cambodia, that meet 2 (two) of the following criteria, are required to have their financial statements audited by an independent auditor registered with the KICPAA: annual turnover of 3 billion (three billion) Khmer Riels (approximately US$750,000) and above. total assets of 2 billion (two billion) Khmer Riels (approximately US$500,000) and above, based on the average value of assets held during the year subject to audit requirements. number of employees of 100 (one hundred) and above, based on the average number of employees employed during the year subject to audit requirements. page 18

6. Dividends And Shareholder Current-Account 6.1 Dividends Under the LOT, a dividend means any distribution of money or property that a legal entity distributes to a shareholder, with the exception of stock dividends and distributions in complete liquidation of the company. Dividend income received from a resident taxpayer, by a resident taxpayer shall be exempt from TOP and WHT, however, dividend income received from a resident taxpayer, by a non-resident taxpayer is subject to a 14% WHT. 6.1.1 Additional Profit Tax on Dividend Distribution ( APTDD ) APTDD is levied at a different rate where the enterprise distributes the dividend to its shareholders. The APTDD will be due on the 15th of the month following the dividend distribution. Type of Entity Type of Annual TOP Rate APTDD Rate Legal Entity 20%/30% 0% Legal Entity: TOP rate 0% 20% Remarks Based on Dividend Distribution Based on Dividend Distribution If an enterprise receives a dividend from another enterprise that has paid APTDD already, it shall record the amount of that dividend into its dividend account. When that enterprise subsequently distributes dividends to its shareholders, the amount distributed which is taken out of the dividend account shall not be subject to APTDD. 6.2 Shareholder Current-Account In the case of one or several shareholders lending money to its/their company, the interest rate must be determined at the market rate. The tax department may challenge the interest rate by comparing the rates used by different commercial banks or different legal entities in arm s length principle. page 19

7. Anti-Avoidance Provisions And Transfer Pricing 7.1 Introduction Currently, there is no specific anti-avoidance provision in the law of Cambodia; however, there are several penalties being developed that will apply in the case of violations of tax provisions, including tax avoidance. These penalties are under the form of a 10% to 40% additional tax based on the seriousness of the negligence involved in the violation of tax provisions. Tax evasion (generally defined as the systematic and repeated violation of tax provisions with the intention of reducing or eliminating the tax amount required to be paid by tax provisions) is considered serious negligence and falls under the scope of the penalties being developed. Penalties are also planned for obstruction of the implementation of the law. In other words, the obstruction of any requirements of the law which are not respected (for instance not maintaining proper records of account or other documentation or failing to issue invoices on transactions, etc.). The obstruction of the implementation of the law can be considered a criminal violation and subject to different additional taxes and further prosecution. For example, tax evasion can be punished by a fine from 10 million (ten million) to 20 million (twenty million) Khmer Riels (approximately 2,500US$ to 5,000US$), or imprisonment from 1 (one) to 5 (five) years or both. 7.2 Controlled Foreign Company Rules There are no specific rules regarding Controlled Foreign Companies. 7.3 Thin Capitalization Currently, there is no thin capitalization rule in Cambodia. However, the interest expense is limited to specific deductibility calculations. For more details, please refer to the Interest Expense section. 7.4 Permanent Establishment ( PE ) By law, the PE is considered a fixed place of business or a resident agent in Cambodia through which a non-resident taxpayer carries out business wholly or partially in Cambodia. A PE also includes any other association or connection or means through which a non-resident taxpayer engages in economic activities in Cambodia. Additionally, PEs are subject to TOP, but only on their Cambodia source income. page 20

7.5 Transfer Pricing Currently, there are no transfer pricing rules in Cambodia. However, tax regulations provided the tax authority with wide powers to reallocate income and expenditures between related parties. Related parties are considered taxpayers with 20% or more common ownership. Transactions between related parties may be subject to redetermination by the GDT for the purpose of preventing tax avoidance and evasion. Therefore, related party transactions must be conducted at arm s length. 7.6 Double Tax Agreement According to the LOT, the provision of international treaties related to taxation which have been ratified by the National Assembly shall take precedence over provision of LOT. However, currently, Cambodia has no double taxation agreements with any countries yet. page 21

Practice Areas Our firm meets the diverse needs of domestic and international clients with extensive, wide-reaching services. In particular, we offer comprehensive advice and services to foreign investors throughout all stages of the investment process, from building a business structure to maximizing incentives, forging key partnerships and managing operational challenges. We are the leaders in the banking & finance and insurance practices and have developed an outstanding reputation in all other major practice areas, such as commercial contracts & trade, corporate, real estate and tax. We also offer private client services, legal translations and certifications. We Practice in the Following Key Areas: Banking & Finance Commercial Contracts & Trade Corporate Insurance Intellectual Property & Telecommunications Labor & Employment Litigation & Dispute Resolution Real Estate & Construction Regulatory Reform & Administrative Law Tax & Customs Combining international business acumen and local legal knowledge, our approach ensures optimum results. page 22

Contact For any enquiries, please contact: Mr. Antoine Fontaine Partner Bun & Associates T +855 (0) 23 999 567 F +855 (0) 23 999 566 E fontaine@bun-associates.com #29, Street 294, P.O. Box 2326 Phnom Penh, Cambodia, www.bun-associates.com Disclaimer: This guide is intended to provide general information only and is not meant to be exhaustive, comprehensive or authoritative. The information in this guide should not be treated as a substitute for specific legal advice concerning particular situations. Legal advice should always be sought before taking any action based on this guide. Bun & Associates does not provide investment advice and nothing in this guide should be taken as investment advice. Bun & Associates does not warrant the accuracy or completeness of this guide nor accept any liability for any loss or damage arising from any reliance. Views expressed are personal to the authors and do not necessarily reflect views of the respective firms. page 23

#29, St. 294, P.O. Box 2326 Phnom Penh, Cambodia T +855 (0) 23 999 567 F +855 (0) 23 999 566 E info@bun-associates.com www.bun-associates.com