1. Introduction
1.1. Cambodia’s economy grew with a GDP of 7.1%
in 2016 and expects growth of 7.3% for FY 2017-18. The expected growth in GDP
resulted rapid in development in various sectors, namely retail, technology,
e-commerce, infrastructure projects etc. Cambodia’s strategic location
in the heart of ASEAN between Vietnam, Thailand, Laos along with coastline
having an easy regional accessibility makes it an attractive investments
destination. By treating foreign investors and local investors equally it gives
an access to ASEAN’s 600-million-strong consumer market. The present foreign
policy allows a foreign investor to incorporate or establish with 100 % foreign
ownership an entity any kind. The only restrictions are in respect of land
ownership. Further, there are no restrictions on repatriation of money.
2. Structuring of entity
2.1 For establishing a business in Cambodia, a
Private Limited Company (“PLC”) is always advisable and to process the
incorporation, the Ministry of Commerce (“MoC”) is the regulatory authority and
it takes approximately 7 days, after the necessary documents are submitted for
incorporation. After obtaining the approval from MoC within 15 days, the
documents along with the certificate of incorporation must be submitted to
General Department of Taxation (“GDT”) to obtain Value Added Tax Certificate
(“VAT”) and Patent Tax Certificate (PTC) which can be obtained within 30 days
from the date of submission of documents. The Patent Tax Certificate is issued
for a specific business activities only and need to be renewed on an annual
basis.
3. Taxation in Cambodia
3.1 The Law on Taxation (“LoT”) in Cambodia is
very simple. The only chargeable tax is the withholding tax and value added
tax, while there is no capital gain tax but tax on profits are applicable.
4. Structure of entities
4.1 The following are the entities recommended
for doing business in Cambodia
a) Private Limited Company
The number of shareholders in the private
limited company ranges between 2 to 30 shareholders. The shares or securities
cannot be offered to the public but can only be offered to the shareholders,
family members and managers.
b) Public Limited Company
Unlike Private limited companies, it can
have more than 30 shareholders and the shares or securities can be offered to
the public. In Cambodia, only Public Limited Companies can conduct banking
business, insurance business or be a financial institution.
c) Representative Office:
An eligible foreign investor may establish
a Representative Office to facilitate the sourcing of local goods and services
and to collect information for its parent company.
d) Branch Office:
A Branch Office is an office opened by a
company for conducting a commercial activity. All activities of the Branch
office are like that of Representative office but in addition, it may purchase,
sell or conduct regular professional services or other operations engaged in
production or construction in the country.
e) Subsidiary Company:
A subsidiary is a company that is
incorporated with either 100% or at least 51% percent of its capital being held
by a foreign company.
5. Tax System in Cambodia:
5.1 Previously, the Cambodian tax system was
divided into three regimes: real regime, simplified regime and estimated
regime. Recently, all the three regimes have been merged into one regime called
the “Real Regime” and divided into three categories (a) Small Taxpayers (b)
Medium Taxpayers and (c) Large Taxpayers.
5.2 The following are the categories that are
sub categories under which an individual or an entity can be taxed.
– Tax on Salary
An individual resident in Cambodia is
liable for tax on salary on both foreign as well as Cambodian source, while a
non-resident person is liable to the tax on salary only on Cambodian source.
– Withholding Tax (“WHT”)
The general withholding tax shall be
determined as follows:
Any resident taxpayer carrying on
business makes any payment 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 10%. Interest paid by a
domestic bank or saving institutions for fixed term 6% and non-fixed term 4%.
Any
resident taxpayer 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.
6. Fringe Benefits Tax(“FBT”)
The employer is required to withhold
and pay tax at the rate of 20% of the total value of FB given to all the
employees.
7. Value Added Tax (“VAT”)
7.1 VAT is only a charge on taxable supply i.e.
supplies of good for tangible property and supply of services for something of
value other than goods, land or money.
7.2 The rates of VAT are as follows:
i) 0% for any goods exported from the Kingdom of
Cambodia and services consumed outside Cambodia
ii) 10% is the standard rate which applies to all
supplies other than exports and non-taxable supplies.
8. DTAA Singapore – Cambodia (yet to be
ratified):
8.1 On May 20, 2016, an agreement was entered
into between Government of Republic of Singapore and the Royal Government of
Cambodia for prevention of evasion of taxes on income and to avoid any resident
being taxed twice on the income earned. This agreement applies to taxation of a
resident of Cambodia, in respect to taxes on profit including Tax on Salary,
Withholding Tax, Additional Profit Tax on Dividend Distribution and Capital
Gains Tax, while in terms of Singapore applies to the Income Tax.
8.2 Resident (Art. 4)
Under Article 4 of the DTAA,
“resident” means any person or individual or entity liable to pay tax based on
their domicile, place of incorporation, place of management, principal place of
business or any other activities of similar nature but
also includes State and any local authority or statutory body.
The article further defines the term
“resident”, by prescribing the following conditions:
a) only of the state where he has a permanent
home available; or
b) If there is a permanent home in both the contracting
states, then it is to be determined based on personal and economic relations
are closer i.e. centre of vital interest; or
c) In the absence of centre of vital interest,
then the place where he has a habitat abode; or
d) If habitat abode of both the states, then to
be determined based on nationality; or
e) If otherwise, then the competent authorities
of the contracting states shall settle by agreement mutually.
8.3 Permanent Establishment (Art. 5)
The term Permanent Establishment “PE”
is defined under Article 5 includes place of management; branch; an office;
factory; workshop; warehouse; mine, an oil or gas well, a quarry or any other
place of extraction of natural resources; and (h) farm or plantation.
The terms have been further elaborated
by including:
(a) Any activities that last for more than 6 months
in terms of a building site, a construction, assembly or installation project,
or supervisory activities in connection;
(b) Any activities that last for more than 183 days
within any period of twelve months about any furnishing of services, including
consultancy services, by an enterprise of a Contracting State through employees
or other personnel engaged by the enterprise for such purpose, but only if
activities for same or connected project within the other Contracting State;
(c) The carrying on of activities (including the
operation of substantial equipment) for more than 90 days in any twelve months’
period in the other Contracting State for the exploration or for exploitation
of natural resources.
The Law on Taxation in Cambodia
defines PE under Article 3 (4).
8.4 Immovable Property (Art. 6)
The term “immovable property”,
shall be defined under the law of the Contracting State in which the property i
is situated. But also, includes property accessory to immovable property,
livestock and equipment used in agriculture and forestry, but not include
ships, boats and aircrafts.
In addition, any income earned by a
resident from immovable property including agriculture or forestry and applies
to income from the direct use, letting, or use in any other form of immovable
property situated in the other Contracting State may be taxed in that other
State.
There is no specific provision under
the Law on Taxation for immovable property.
8.6 Dividends (Art. 10)
The terms as defined under this
agreement means income from shares, mining shares, founders’ shares or other
rights, but does not include debt claims, participating in profits, as well as
income from other corporate rights and be taxed to a resident of other
contracting state. .
If beneficial owner of the dividend is
a resident of other contracting state, then tax on dividend not to exceed 10%
of the gross amount.
Under Cambodian law, there is Tax on
Profit and Article 3 (8) defines the term dividends. Recently a new regulation
with respect to dividend distribution from a resident taxpayer in Cambodia to
their non-resident shareholders.
8.7 Capital Gains (Art. 14)
Any gains derived by the resident of
the Contracting State to be taxable:
a) Alienation of Immovable property in other
contracting state taxable in other state unless it is related to the Permanent
Establishment of the enterprise situated or any independent personal service to
be taxed in other state.
b) Alienation of ships or aircrafts or movable
property pertaining to such operation of ships or aircraft shall be taxable in
the state where it is alienated.
c) Alienation of Shares of more than 50 % of
their value directly or indirectly from immovable property situated in other
state, to be taxable in the other state.
d) Alienation of any other property other than
above, to be taxable in the contracting state of which the alienator is a
resident.
Under Cambodian Law on Taxation, no
specific provisions but 0.1 % tax is to be paid on transfer of shares.
8.8 Associated Enterprise (Art. 9)
The term “associated” means an
enterprise that participates directly or indirectly in the management, control
or capital of other enterprise or a person or individual directly or indirectly
in the management, control or capital of an enterprise of a Contracting State
and an enterprise of the other Contracting State,
The term associated enterprise has not
been defined but the “related person” under Article 3(10) which includes
families or any enterprise which controls or is controlled or is under the
common ‘control’. The term control means ownership of 51% or more in value or
voting rights. Article 18 of the Law on Taxation (“LoT”) provides, subject to
certain conditions, a wide power to the General Department of Taxation (“GDT”)
in Cambodia to adjust the allocation of income and expenses between related
enterprises. According to the applicable law, two or more enterprises are under
common ownership, if a person owns 20% or more of the equity interests of each
enterprise. In the event, a parent company provides either services, a loan or
any other transaction that will result in remuneration from the owned company,
the GDT will usually verify that the so-called transactions are real.
8.9 Royalties (Art.12)
The term ‘royalties’ means payments of
any kind received as a consideration for the use of, or the right to use, any
copyright of literary, artistic or scientific work including cinematograph
films, or films or tapes used for radio or television broadcasting, any patent,
trade mark, design or model, plan, secret formula or process, or for the use
of, or the right to use, industrial, commercial, or scientific equipment, or
for information concerning industrial, commercial or scientific experience.
Any income arising in a Contracting
State, paid to a resident of the other Contracting State may be taxed in that
other State and be taxed in the contracting state as per the local laws, if the
beneficial owner is a resident of the other then the tax not to exceed 10% of
the gross amount.
Otherwise, if the beneficial owner of
the royalties carries a business through a permanent establishment or has a
fixed place of business in the other contracting state in which the royalties
arise, the same is to be treated as an income earned from the connected PE or
fixed place.
In case the amount of royalties
exceeds the amount that was agreed by the payer or beneficial owner, the amount
of tax shall not exceed 10 % of the gross amount. Any excess amount is to be
taxed as per the local laws in which the income accrued.
There is no specific provision about
royalties, but as defined in the Intellectual Property Laws.
9. DTAA
India – Singapore (1994) 209 ITR 1 (St)
9.1 Immovable properties (Art. 6)
The term “immovable
property” shall mean the term as defined under the law of the contracting
state and shall also include property accessory to immovable property,
livestock and equipment used in agriculture and forestry, rights to which the provisions
of general law respecting landed property apply usufruct of immovable property
and rights to variable or fixed payments as consideration for the working of,
or the right to work, mineral deposits, sources and other natural resources.
Ships and aircraft shall not be regarded as immovable property. Income from the
direct use of or letting or any other form of use of immovable property is
taxed in the country where the property is located, including real-estate
enterprises.
9.2 Dividends (Art. 10)
The term “dividends” means
income from shares or other rights not being debt-claims, participating in
profits, as well as income from other corporate rights of which the company
making the distribution is a resident. Any dividends paid to a recipient’s
country of residence from the other country to be taxed in the country
received. The dividend taxed in the source country is as follows:
a) 15% of the gross amount of the dividends
only while the tax rate reduced to 10 % of the gross amount the 25% of the
shares are owned by the recipient’s company.
b) No dividend tax to be paid by Indian
resident shareholders who derive any profit from the Singapore or Malaysian
resident company in Singapore.
The dividend income article does not
apply if the company paying is a resident or performs independent personal
services from a fixed base situated in the country and will be treated as
income of the permanent establishment.
Case Laws Referred:
1] Roop Rasyan Industries (P.) Ltd. vs. ACIT [2014] 150
ITD 193 (Mum.) (Trib.).
Dividend was not taxable in Singapore of which company paying
dividend was resident and, therefore, para 2 of article 10 of DTAA was not at
all relevant. Moreover, in terms of Article 10 of DTAA, dividend received by an
Indian company from a Singapore based company was subjected to tax at normal
rate of 30 %.
9.3 Capital gains (Art. 13)
A resident of one contracting state
from the alienation of immovable property situated in other contracting state
to be taxed in that state. A resident with PE or fixed base in other
contracting state to be taxed for any gains derived from alienation of movable
property. Recently India and Singapore signed the third protocol on December
30, 2016 to amend the DTAA and the amendment is along the lines of India and
Mauritius DTAA that was also recently entered. The Protocol amends the
prevailing residence based tax regime under the Singapore Treaty and gives
India a source based right to tax capital gains which arise from the alienation
of shares of an Indian resident company owned by a Singapore tax resident.
(i) Taxation
of capital gains on shares
Under 2005 Protocol any capital gains derived by a Singapore
resident from alienation of share of Indian resident company to be taxable only
in Singapore after complying with limitation of benefit “LOB” clause. However,
the Protocol marks a shift from residence-based taxation to source-based
taxation. Consequently, capital gains arising on or after April 01, 2017 from
alienation of shares of a company resident in India shall be subject to tax in
India. The change is subject to the following qualifications: –
(a) Grandfathering Clause
Any capital gains arising from sale of shares of an Indian
Company acquired before April 01, 2017 shall not be affected by the Protocol
and would enjoy the treatment available under the Treaty.
(b) Transition
period
The Protocol provides for a relaxation of capital gains
arising to Singapore residents from alienation of shares acquired after April
1, 2017 but alienated before March 31, 2019 (“Transition Period”). The tax rate
on any such gains shall not exceed 50% of the domestic tax rate in India (“Reduced
Tax Rate”).
(c) Limitation of benefits
The Protocol provides that grandfathered investments i.e.
shares acquired on or before 1 April 2017 which are not subject to the
provisions of the Protocol will still be subject to Revised LOB to avail of the
capital gains tax benefit under the Singapore Treaty, which provides that:
– The benefit will not be available if the
affairs of the Singapore resident entity were arranged with the primary purpose
to take advantage of such benefit;
– The benefit will not be available to a shell
or conduit company, being a legal entity with negligible or nil business
operations or with no real and continuous business activities.
Case Laws:
1] Praful
Chandaria vs. ADDIT [2016] 161 ITD 153 (Mum.) (Trib.)
Capital gain could not be held to be taxable in India in
terms of para 6 of article 13 of India-Singapore DTAA under which taxing right
has been given to resident State, that is, State of alienator, which in this
case was Singapore.
2] Credit Suisse (Singapore) Ltd. vs. Asstt
DIT. [2012] 53 SOT 306 (Mum.)(Trib.)
Gain earned on cancellation of foreign exchange forward
contracts is a capital receipt and must be treated as capital gains.
The Indian companies/ enterprise can look forward for
investment in emerging sectors like Information Technology & Ecommerce,
Infrastructure, venture capital, health care for supply of medical equipment’s,
tourism, education, technology transfer etc.
11. Conclusion
To encourage India’s Act East Policy,
India and Cambodia signed a Bilateral Investment Treaties (BIT) to promote and
protect investments. In the absence of any such bilateral agreements or DTAA,
by incorporating company in Singapore. Indian entities could make an entry into
ASEAN Market or Cambodia and would be able to obtain the reliefs available
under the DTAA between Singapore – Cambodia DTAA using either of the countries as
a PE. In addition, the Cambodia grants tax holiday up to nine (9) years and
also 100 % exemption on export.
