1. Investing In Cambodia

Like a lot of developing countries, investment regulations in Cambodia is a attempt to balance protection of domestic resources with the need to attract foreign investors. Investing in Cambodia can be as easy as forming a company through registration of the corporate documents at the Ministry of Commerce. However, to enjoy the benefits of the tax incentives offered under the Law on Investment of August 1994 and the Sub-Decree on the Implementation of the Investment Law, promulgated on December 29, 1997, the investment project will need to obtain approval from the Council for the Development of Cambodia (CDC).

The incentives offered provide a significant financial benefit to approved projects. Nearly all approved projects will receive a corporate profit rate of 9% (as compared to the standard rate of 20%). Import of raw materials and other materials used for the investment project is duty free. Depending on the size, location and other criteria of the project, a tax holiday of up to eight years may be granted.

The CDC, however, will impose certain conditions. The CDC requires that the project be undertaken in a timely manner. To ensure that such progress is made, a performance guarantee must be deposited at the National Bank and the investment enterprise must periodically report to the CDC on its progress. Failure to meet the CDC requirements may result in loss of incentives and the calling of the performance guarantee. Investors should note that the Sub-Decree only applies to projects approved by the CDC. Investors who form a company at the Ministry of Commerce without obtaining a CDC investment license need not comply with the terms of the Sub-Decree.

2. Sectors Not Eligible for Investment Incentives

Only projects within promoted sectors are eligible for investment incentives. In addition, only projects with an investment capital over a certain amount are eligible for incentives. Most sectors require a minimum of US$1 Million of investment capital. Promoted sectors range from agriculture to manufacturing, construction, civil works and hotels.

Activities for which incentives are not available are trading activities, transportation services, duty free shops, restaurants and entertainment venues, business centers, media activities, retailers and wholesalers, and professional services. Investments can still be made by a foreign or Cambodian investor in these ineligible sectors or in other non-promoted sectors, but such investments are not eligible for an investment license and the incentives from the CDC.

3. Investment Guarantees

The Investment Law and Sub-Decree contain a number of important guarantees for the investor, such as:

• Equal treatment of all investors.
• No nationaliation that adversely affects the property of investors.
• No price controls on products or services produced by licensed investors.
• Ability to remit foreign currencies abroad.

4. Investment Incentives

The following incentives are available to approved investment projects:

• Nine percent corporate profit tax.
• Up to eight year exemption from corporate profit tax.
• Five years loss carry-forward.
• Possible exemption from import duties for the period of construction of the project and first year of business operation.
• Tax free repatriation of profits.
• Tax free distribution of dividends and profits.
• Employment of foreign expatriates where no qualified Cambodians are available.

The exemption from import duties and the eight year tax exemption are only available, either in total or in part, upon the investor presenting a strong case to the CDC to obtain the maximum benefit available under the law.

The Government is currently reviewing the investment incentives and it is quite possible that some of the current incentives may be changed or removed.

5. Available Forms of Business Enterprise

The most popular form of business entity for foreign investors in Cambodia is the company limited by shares. Unlike many regional countries, Cambodia does not place formal restrictions on the level of foreign participation in Cambodian companies. As a result, a greater proportion of investors choose to establish 100% foreign-owned limited companies in Cambodia than in many other developing countries.

The usual forms are summarised in the accompanying chart below It is important to note that although partnerships are permitted under a Instructional Circular, their actual registration does not appear to be in practice.

6. Work Visas

Persons wishing to enter Cambodia must apply for a visa at a Cambodian embassy or consulate overseas. There are seven categories of non-immigrant visas. The most common are the Tourist Visa (category “K”), Diplomatic Visa (Category “A”), Official Visa (Category “B”) and the Ordinary Visa (Category “E”). The ordinary visa is the visa under which most business persons would enter Cambodia. Person entering Cambodia to undertake a technical assistance contract would obtain a Category B visa. Tourist Visas and Ordinary Visas may be issued at the Airport. However, Diplomatic and Official Visa must be obtained through the Ministry of Foreign Affairs and International Cooperation Office at a Cambodian embassy.

The period of authorised stay for any foreigner entering Cambodia is one month for Tourist and Ordinary (i.e. business) Visas, and three months for Diplomatic and Official Visas.

Extensions of non-tourist visas are possible upon application to the Department of Foreigners, Ministry of Interior or at the Ministry of Foreign Affairs for United Nations staff and those employed by humanitarian organisations. Extensions can be obtained for most categories of visas for up to one year. Repeated extensions are permitted for certain categories – such as Ordinary Visas for business persons. For expatriate employees, the individual must present his/her labor permit and work card as issued by the Ministry of Labor, as well as proof of employment.

The Cambodian Investment Board (CIB) has an office to assist investors in obtaining long term Ordinary Visas for their employees. However, it is also possible to obtain the visa directly from the Ministry of Interior. The fee will vary depending on the length of the extension. At present, it is not possible to obtain a long term employment visa outside Cambodia as the required formalities have to be done within tbe country. These documents include the labor books and work permits, as well as a Health Certificate issued by the Health Department of the Ministry of Labor. These requirements must be met regardless of whether the employee obtains a visa through the CIB offices or from the Ministry of Interior.

Once the required documentation is submitted, and the fees paid, a visa extension is usually obtainable within two weeks.

7. Foreign Employees

The 1994 Investment Law allows businesses approved under that Law to employ foreign nationals and bring in their dependents. However, permission will be granted only where the qualification and expertise needed cannot be found in Cambodia.

The employment of foreign nationals is also regulated by the 1997 Labor Law. Only foreigners satisfying the following conditions may be lawfully employed:

• Hold a “Labor Book” and “Work Permit” issued by the Ministry of Labor;
• Have entered Cambodia legally;
• Have the right to reside in Cambodia;
• Hold a valid passport;
• Have good reputation and good behavior;
• Have the physical qualifications for the job;
• Have no communicable diseases.

The Ministry of Labor has established a labor book and work permit mechanism and employers are required to submit various documentation needed to have the Ministry of Interior issue long term visas to foreign workers. There are no limitations on appointing foreign workers to higher level positions. However, a ceiling of 10% foreigners in an employer’s total workforce is enforced, with exceptions being made if justified to the Ministry of Labor.

8. Labour Regulations

a. 1997 Labour Law

According to the 1997 Labor Law, businesses must submit written notice to the Ministry of Labor when starting and terminating their operations and when hiring and dismissing employees. The Law details this process and the Ministry of Labor has issued form notices for meeting these requirements. All businesses must maintain a “Book of Labor Charges”, a “Declaration of Personnel” and a “Book of the Establishment”. The format for each of these is suggested by the Ministry of Labor (although some modifications may be made) and each must be approved by the Labor Inspector. In addition, each enterprise with eight or more employees must have established Internal Rules which address issues such as application procedures, salary information, leave policies, disciplinary matters and the like. These Internal Rules must also be approved by the Labor Inspector.

The terms of employment, such as compensation, maximum working hours, vacation leave, maternity leave, family leave, employee complaint process, night and holiday work, medical care, and special rules governing child and women employees, are stipulated by law. Maximum working hours are normally eight hours per day and 48 hours per week, with overtime to be compensated at 1.5 to 2.0 times the normal wage. Some variation in the number of hours worked is permitted by regulation under certain circumstances, provided that certain maximum numbers of hours worked per day are enforced.

Annual leave is set at one and a half days for each month of employment, resulting in 18 days of leave per year, with an additional day for each additional three years of employment. Maternity leave is mandatory for 90 days during which the employee receives half salary if she has worked for at least one continuous year. Special leave, to meet an employee’s family needs (such as weddings, funerals, etc.), is set at a maximum of seven days per year. These leave days can be deducted from the employee’s annual leave (if such is available) or can be compensated for through extra hours of work for which overtime payment is not required.

Employers with at least 100 women employees must either provide a nursing room and child care center for babies or pay for child care if such a facility cannot be installed.

b. Employment Contracts

Both written and oral employment contracts are valid under Cambodian law for Cambodian nationals. Employment of foreigners requires a written contract. A written contract cannot be for more than two years or it becomes a contract of unlimited duration. The probationary period for new employees cannot be longer than one month for non-specialised labor, two months for specialised labor and three months for regular staff.

The employment contract may be terminated by either party if proper notice is given, subject to a number of exceptions detailed in the Law. The employer must have reasonable cause to terminate the contract. The Law sets out various notice requirements based on the length of employment, ranging from four days to three months.

The employer may be liable to compensate the employee upon termination, depending on the circumstances of termination. First, the employer is responsible for paying the employee’s salary during the statutory notice period. Second, severance pay is owed when an employer dismisses an employee, except where the employee has committed a “serious offense” or the employment contract permits dismissal, in an amount ranging from seven days’ to six months’ salary. The length of the notice period and the amount of termination benefits depend upon the length of the employee’s service with the employer. The employee may also be entitled to additional compensation for unreasonable (“wrongful”) termination, if so decided by a court.

Collective layoffs are permissible due to a reduction in business or an internal reorganization. Labor Inspectors must be consulted on collective layoff procedures and criteria used. The Labor Laws specifies the order in which employees must be laid off.

Finally, employers must issue the employee an employment certificate upon termination. The employment certificate describes the nature of the work performed.

c. Labour Union

The 1997 Labor Law explicitly grants workers and employers the right to form employee associations. Employers are forbidden to discriminate against employees because of their membership in employee associations. Employees are entitled to elect shop stewards, with their number dependent on the number of employees. Certain procedures must be followed by employers and employees for the election of shop stewards.

The 1997 Labor Law gives workers the right to strike. However, the decision to strike must be made by workers through a secret ballot. Seven days notice of the strike must be given to both the Ministry of Labor and the Employer. The strike must be conducted at the work premises in a peaceful manner and non-strikers must be allowed to work without restraint and threat.

Currently no minimum wage has been established except for the garment industry. In that industry, the minimum wage is set at US$45 per month. For all other employers, the wage must ensure “a decent standard of living compatible with human dignity” but no further specificity has been put into place.

Disputes arising from an individual employment relationship should be brought before the Labor Inspector before any legal action is taken. The Labor Inspector will act as arbitrator and attempt to reconcile the parties. If a satisfactory solution cannot be found, then the dispute can be taken to the courts.

In the event of a collective dispute, the Labor Inspector is notified and the Ministry of Labor is required to appoint a mediator within 24 hours of learning of the dispute. Mediation can last up to 15 days. If mediation fails, the dispute is resolved through the provisions in the collective bargaining agreement. If there is no such agreement, then the dispute must be resolved by an Arbitration Panel appointed by the Ministry of Labor within three days of mediation failing. The Panel is required to reach a decision within 15 days. Its decision may be appealed, but the Labor Law is unclear if the appeal is to the Ministry of Labor or to the courts.

Although the 1997 Labor Law allows for the creation of Labor Courts with jurisdiction over labor matters, this has not yet been done. Until the formation of such specialized courts, the provisional and municipal courts must be used as final forum for adjudication of Labor disputes and issuance of labor rulings.

d. Workplace Safety

Employers are required to keep all work areas clean and safe and ensure workers’ health. They must comply with a number of specific regulations governing the work place, including the number and standard of toilets and the provision of hygienic drinks. If there are accidents in which an employee is injured, either at the work site or in a direct commute between the home and work site, the employer is responsible for arranging and paying for all medical care. In addition, the employer is required to report all work place accidents to the Ministry of Labor to enable the Ministry to investigate its circumstances and determine means by which to prevent a re-occurrence.

If an employee is off work for more than four days due to an injury or illness, the employee is entitled to compensation, but the amount is not specified. If an injury is crippling or results in permanent disability, the employee is entitled to an annuity. In cases of disability, the employer must make all payments due within five days of the accident. A Ministry of Labor regulation sets out the procedure for determining the level of disability, and the resultant amounts due based on the employee’s average wage, for various types of injuries. The proportionate amount due to a surviving spouse and/or dependents is also specified.

Although employers in Cambodia are considered responsible for work place accidents, the Labor Law also allows a court to reduce the amount of payment to a worker if it determines the accident was largely caused by the employee’s own “serious fault.” Conversely, the amount paid to the employee can be increased if the employer was at “serious fault.”

9. Personal Income Tax (Salary Tax)

Any payment of salary from an employer to an employee resident in Cambodia is taxable. The tax is collected through a monthly withholding procedure by the employer at the time of each salary payment. Both employee and employer are jointly responsible for the payment of the tax regardless of whether the salary is paid in Cambodia or overseas. If no withholding is made by the employer, the employer will be held liable even if the tax is subsequently paid directly by the employee. If the employer is overseas, the fiscal representative of the employer in Cambodia is charged with ensuring the withholding of the salary tax before the salary is paid to the employee.

10. Taxation

a. “Real-Regime” Taxpayers

This only provides an overview of the various taxes applicable in Cambodia. As in all investment situations, the investor should consult an expert in developing its tax planning structure for Cambodia.

Please note that this section only address taxes affecting “real regime” (ie. large and/or incorporated) taxpayers since nearly all investments will be classified as subject to the “real regime”.

Following is a chart of the major taxes that are likely to impact a business in Cambodia:

b. Liability to Pay Cambodian Taxes

All individuals or legal entities defined as being a “resident taxpayer” under the law are liable for Cambodian taxes. A physical person is a “Resident Taxpayer” when any one of the following three criteria exist:

• The person is domiciled in Cambodia
• The person has a principal place of abode in Cambodia, or
• The person is physically present in Cambodia for at least 182 days

A legal person is a “Resident Taxpayer” when any of the following criteria exist:

• has a principal place of business in Cambodia;
• is organised or managed in Cambodia;
• is a fixed place of business, the branch of a foreign company or agent resident in Cambodia through whom a non-resident carries on its business in Cambodia (a “Permanent Establishment”); or
• any other association through which a non-resident engages in economic activity in Cambodia (a “Permanent Establishment”).

A “Permanent Establishment”, as defined in the third and fourth criteria above, is only taxable on Cambodian Source Income.

All “Resident Taxpayers” are required to be registered with the Taxation Department, Ministry of Economy and Finance. A resident taxpayer includes legal persons satisfying the above criterion, whether or not such taxpayer is officially recognized in Cambodia. A “Resident Taxpayer” may also be government institutions, charitable organizations or non-profit organizations.

c. Profit Tax

A profit tax is levied on all businesses and is calculated on the basis of either actual profit or estimated profit, depending on the tax regime applicable to the taxpayer. Companies are all classed under the real regime of taxation and are subject to a flat profit tax rate of 30% (solely for natural resource exploitation), 20%, 9% or 0%. The standard corporate rate is 20%. A 9% rate may be awarded to certain investments promoted by the Cambodian Investment Board. The Investment Board may also grant a tax holiday to certain projects for a maximum of eight years, thus reducing the investor’s effective profit tax rate to 0% for that period.

Taxable profit is defined under Cambodian law as the net profit obtained from all results of all types of operations realized by the taxpayer, including capital gains from the sale of various parts of the assets during the operation or at the close of the business, as well as income from financial or investment operations and interest, rental and royalty income.

The following are the applicable profit tax rates as of January 1999:

Allowable deductions include legitimate expenses incurred in the operation of a business, including:

• rent
• interest
• compensation to employees
• payments or reasonable fees paid for services to an officer, director, partner or relative
• fixed tangible assets that are deductible through depreciation
• charitable contributions (up to 5% of taxable profit)

Expenses that are specifically not allowed to be taken as deductions include:

• any expense on activities of amusement, recreation or entertainment
• personal or living expenses (except fringe benefits subject to withholding tax under tax on salary)
• losses on the sale or exchange of property between related persons

d. Withholding Taxes

A series of new withholding taxes were introduced by the 1997 Tax Law. All withholding taxes are payable by the 15th day of the following month.

Withholding taxes arising from local transactions made by a resident enterprise or a resident individual (when the payment by such individual is made in the course of carrying on a business in Cambodia) to a resident person include:

• 15% on payment made to individuals for services provided (management, consulting, etc.);
• 15% on payment of royalties for intangibles, oil, gas, minerals and interest (except interest paid to domestic banks or savings institutions);
• 10% on payment for rental of movable or immovable property; and
• 5% on interest paid by local bank to resident individual with non-fixed term account.

No withholding is levied on payments to tax exempt entities such as charitable associations.

A flat rate of 15% must be withheld from any payment of Cambodia source income to non-residents, whether overseas or within Cambodia. For payments to entities that are not registered in Cambodia, i.e., the entity is not “carrying on a business” or does not have a permanent establishment in Cambodia, the 15% withholding requirement is applicable. This withholding tax does not apply to dividends which are taxed separately.

Income that is considered as “Cambodia source income” is defined as:

• interest on debt obligations issued by a resident or by the government;
• dividends received from a resident enterprise;
• income received from services provided in Cambodia;
• income received from the rental of real or personal property for use in Cambodia;
• royalties from the use or the right to use intangible property in Cambodia;
• gains from sale or transfer of interest in immovable property in Cambodia;
• gains from sale of movable property (other than inventory) when seller is resident in Cambodia; and
• premiums for insuring or reinsuring risk in Cambodia.

e. Dividends

Cambodian enterprises making a distribution of dividends to shareholders must retain for payment to tax authorities a percentage of the dividends to be distributed. This percentage will be equivalent to the profit tax rate applicable to the enterprise. Thus, most enterprises will have a dividend tax liability of 20% while those enterprises granted profit tax investment incentives by the Cambodian Investment Board will have a dividend tax liability between 0 – 9%.

All advance dividend tax payments may be credited against the profit tax liability of the withholding enterprise for the fiscal year in which the tax is withheld. If the credit exceeds the tax on profit it may be carried forward and become a tax credit for the following year. The dividend tax is actually deemed an “advance profits tax”, not a withholding tax. It is intended to be an advance payment of annual profit tax for companies which distribute interim dividends. The tax withheld on dividends is a final tax and the individual or enterprise receiving the dividend is not required to pay a tax on the dividend received.

f. Value Added Tax (VAT)

Value Added Tax (VAT) was implemented for “real regime” taxpayers on 1 January 1999. Under the VAT system, “output tax” is collected from a customer by adding VAT to the amount charged. However, a business also pays an “input tax” to its suppliers on purchases made. The business must pay the output tax after deducting the input tax paid to its suppliers. In theory, the business therefore pays tax on the value that it adds in the supply chain. The tax is ultimately borne by the consumer or a business that is exempt from the tax, as consumers/exempt businesses cannot recover input tax paid. Scope of application Cambodia’s VAT system is currently restricted to the business activities of real-regime taxpayers producing taxable supplies and certain importers. VAT also applies to the duty-paid value of imported goods. There are concessions, however, for exporters, certain tax-exempt bodies, and cigarette, alcoholic and automotive products imported for the purposes of re-export. Imported goods may be treated as including associated services. The importer must pay VAT to Customs at the same time as the importer pays Import Duties. VAT may be payable on the appropriation of goods for personal use and on gifts.

VAT is not payable on a number of listed activities. If a business sells exempt goods or services, it will be unable to recover any input tax paid on its purchases. This contrasts with “zero rating”, where sales are within the VAT system (albeit at a VAT rate of zero), and hence input tax can be recovered. Where a business generates both taxable and exempt sales, it will only be able to claim a deduction of input for that portion of inputs used in the taxable activity.

g. Customs Duties

All goods imported to or exported from Cambodia are subject, in principle, to import and export duties as set by the Customs Department and to a consumption tax. Duties are collected regardless of the point of entry or exit on all goods crossing the border, except those specifically exempted from customs duties by law or proper authorities. Exempted goods include:

• personal effects of individuals when being transferred to their normal residence;
• goods exempted from duties by international treaty;
• humanitarian aid;
• goods imported for a wedding or funeral;
• goods related to international relations; and
• certain donations to senior monks.

Import duties are set by the Year 2000 Customs Tariff Schedules. Duty levels are typically 0%, 7%, 15%, 35% and 50%. Most duties are between 7% and 35%. Under AFTA, duties will be gradually reduced to 5% or less over 10 years.

At present there are no export duties applied in Cambodia other than those levied on restricted export products, such as timber, rubber, some forms of seafood and other special items.

h. Specific Tax on Certain Merchandise and Services

The Specific Tax on Certain Merchandise and Services is levied in addition to import duties. For imported goods, it is assessed at the time of importation of those goods; for domestically produced goods, it is assessed in the month following sale of those goods.

11. Currency and Foreign Exchange

Cambodia is primarily a cash based economy with checks and credit cards only rarely accepted commercially. The national currency of Cambodia is the Cambodian Riel which has remained fairly stable since the 1997 at about 3,800 to the U.S. Dollar.

In spite of a 1992 sub-decree prohibiting transactions denominated in foreign currencies, the U.S. Dollar remains in common circulation and is freely traded throughout the country.

There are currently no restrictions on the repatriation of profits or capital derived from investments made in Cambodia nor on most transfers of funds abroad. The 1994 Investment Law guarantees that investors may freely remit foreign currencies abroad for the purposes of:

• payment for imports and repayment of principal and interest on international loans;
• payment of royalties and management fees;
• remittance of profits; and
• repatriation of invested capital on dissolution of an investment project.

Under the Foreign Exchange Law of 1997, foreign currencies may be freely purchased through the banking system. The Law specifically states that there shall be no restrictions on foreign exchange operations, specifically including the purchase and sale of foreign exchange, transfers and all types of international settlements. However, the Law does require that these transactions be performed solely by authorized intermediaries. These intermediaries are the lawfully established banks in Cambodia which are required to report to the National Bank of Cambodia transactions in excess of US$10,000. There is no requirement that the investor sending or receiving the funds make a report on the transaction. The burden rests solely on the bank as the authorized intermediary.

It is important to note that while foreign exchange transfers are not currently restricted, the Law does allow the National Bank to implement exchange controls in a foreign exchange crisis. The events that would constitute such a “crisis” are not specified.