Tax incentives for businesses in Cambodia.

The Cambodian government offers a variety of tax incentive programs based on the nature of one’s business, with different incentive schemes available depending on the registration and location of the proposed activity.

This article reviews the most significant tax incentives in Cambodia and assesses their benefits and costs, along with their likely effectiveness in attracting capital and in boosting the diversification strategy.

Qualified Investment Project (QIP) tax incentives

A Qualified Investment Project (QIP) is a project approved and registered by the Council for Development of Cambodia (CDC)/a Municipal-Provincial Investment Sub-Committee. A QIP will be eligible for tax incentives and the duty-free import of construction materials, production equipment, and raw materials endorsed under the Master List.

To obtain QIP status, businesses must submit a feasibility study, investment proposal, Environmental Impact report and other essential registration documents to the CDC/a Municipal-Provincial Investment Sub-Committee for assessment and approval.

QIP status offers companies the following tax incentives in Cambodia. The company can elect one of two options:

Option 1:

• Tax holiday: A QIP is exempt from Tax on Income (TOI)/Corporate Income Tax (CIT) from three to nine years depending on the sector and investment activity. The tax holiday is comprised of a trigger period followed by three consecutive years, and then a priority period.

The trigger period begins on the date that the CDC issues the Final Registration Certificate and ends on the final day of the taxation year preceding the earlier of:

• If the QIP generates a profit: the taxation year in which the profit is first generated
• If the QIP generates the income from the investment activity, the third tax year after the tax year in which the income is first generated.

The priority period is up to three years depending on the invested capital.

After the tax holiday period, a QIP is entitled to pay TOI at a progressive rate proportionate to the total tax payable as follows:

• 25% for the first two years
• 50% for next two years
• 75% for last two years

The QIP is also entitled, during the tax holiday period, to:

• Monthly Prepayment of Tax on Income (PTOI) exemption
• Minimum Tax (MT) exemption if there is an independent audit report.
• Export Tax exemption provided that it is stated in separate laws and other legal documents.

Option 2:

• 40% special depreciation in accordance with the tax provisions: a QIP can opt for a 40% special depreciation allowance on the value of the new or used tangible properties employed in production, especially for capital-intensive projects.
• Eligibility of up to 200% deduction on specific expenses up to nine years.

• PTOI exemption for a specific period of time based on sectors and investment activity.
• MT exemption if there is an independent audit report.
• Export Tax exemption provided that it is stated in separate laws and other legal documents.

In addition to the above incentives, a QIP is also eligible for the other incentives as below:

• Import duty exemption: a QIP will be able to import duty-free production equipment and construction supplies, as well as raw materials in production for export and local supply.
• Value Added Tax exemption for the purchase of production input, which is locally produced, for the implementation of the QIP.
• 150% deduction from the tax base for some activities such as research, development and innovation, human resource development through the provision of vocational training and skills to Cambodian workers/employees, machinery upgrade for the production line etc.

It is important to note that the CDC license is optional (with exception of a few major, politically sensitive projects) and only applies to the projects that do not come under the negative list. The following are some of the projects mentioned in the negative list:

• Export and import activities, commercial activities and transportation services (for the exception of the railway sector)
• Financial services and currency
• Newspapers and media-related activities
• Tobacco product manufacturing
• Value-added services of all types of telecommunication services
• Real estate development

A CIT exemption period of up to nine years (option 1), or special depreciation (option 2), along with the import duty exemptions are among the current investment incentives applicable to QIPs registered with the CDC/a Municipal-Provincial Investment Sub-Committee. However, not all QIPs are eligible for all incentives.

A QIP must acquire a Certificate of Compliance (CoC) from the CDC/ a Municipal-Provincial Investment Sub-Committee annually to ensure that its investment incentives are guaranteed. The CoC’s objective is to verify that the QIP acted in accordance with the applicable regulations.

The Sub-Decree No.111 establishes the minimum amount or other conditions for awarding incentives to investment projects in various sectors.

A list of some of these conditions is shown in the table below.

SME tax incentives

A small or medium enterprise (SME) is an entity that has an annual turnover of between USD 62,500 and USD 1 million and less than 100 employees.

The incentives apply to SMEs that operate in priority sectors of the economy which include:

• Agriculture or agricultural products
• Food manufacturing and processing
• Manufacturing of local consumable goods, waste recycling and production of goods for the tourism sector
• Manufacturing of products or parts to supply other manufacturers
• R&D associated with IT or the supply of IT-based services

In addition, any enterprises that are located in a SME Cluster Zone or any enterprises developing a Cluster Zone shall be automatically eligible for the incentives.

The tax incentives provided to qualifying SME’s include:

• An exemption from TOI for three years for newly registered enterprises or from the date of tax registration update for existing enterprises
• An exemption from TOI for five years for newly registered enterprises or from the date of tax registration update for existing enterprises, that meet one of the following criteria:
  • The enterprise uses at least 60% local raw material
  • The enterprise increases its number of employees by 20%
  • The enterprise is located in the SME Cluster zone
• An exemption from the monthly 1% pre-payment of TOI and annual MT during the Tax on Income exemption period

There are further incentives for deductible expenditure include:

• A 200% weighted tax-deductible expense for IT-based accounting software and training and staff technical training
• A 150% weighted tax deductible expense for equipment or new technology that increases productivity.

Incentives for the securities market
The Sub-Decree no. 42 dated 24 February 2022 was issued by the Royal Government of Cambodia to provide tax incentives to companies/enterprises that are mentioned on the Cambodian Stock Exchange (CSX), as well as to public investors (residents/non-residents) that hold or are trading in government, debt securities, or equity on the securities market.

The tax incentives under the Sub-Decree include:

• A 50% reduction of the annual CIT/TOI liability during the first three years or during any period endorsed by the MEF.

• Listed companies/enterprises are initially eligible to tax liability waivers of full TOI/CIT, WHT, VAT, accommodation tax, Specific Tax on Certain Merchandises and Services, and public lighting tax (liabilities for a specific number of years prior to being listed on the CSX for the first time)

• WHT incentives: Starting from the implementation date of this Sub-Decree, public investors are entitled to a 50% reduction in the WHT payable on interest and/or dividends obtained from holding and/or trading in government, debt securities equity within three years.

During the tax holiday, the annual tax liability reductions or exemptions in points one and two mentioned above do not apply to Qualified Investment Project (QIP) businesses. Other companies/enterprises that have already been registered on the CSX but have not yet received tax incentives are also eligible for tax incentives, such as those mentioned in point one above.

Under certain conditions (e.g., when companies/enterprises fail to file monthly and annual tax returns or pay taxes on time, refuse to allow tax authorities to audit accounting data or other related documents, or fail to pay taxes, additional taxes, and interest), the GDT has the authority to request that the MEF forfeit the tax incentives that were originally provided to those listed companies/enterprises.

Additional tax incentives for rice cultivation, paddy rice purchase, and of milled rice exporters

The MEF has approved Prakas to provide additional tax incentives to any rice cultivation, paddy rice purchase, and milled rice exporting businesses, as follows:

VAT:

• Domestic paddy rice supply: 0%
• Domestic milled rice supply: 10%
• Milled rice export: 0%
• Milled rice supply or production services to rice exporters (subject to certain conditions): 0%
• Milled rice supply or production services to the local market: 10%
• Input VAT on rice cultivation, paddy rice purchase, and milled rice export can be creditable or refundable
• Input VAT on the import of production inputs and equipment used in milled rice production for export is provided by the government (subject to certain conditions)
• Local purchases of production inputs, with the exception of paddy rice: 10%

Conclusion

Like its regional peers, Cambodia offers a wide variety of tax incentives to investors to increase the country’s competitiveness and foster social and economic progress. But although the above-mentioned incentives are readily available, acquiring registration from certain offices is not always attainable. Additionally, a significant amount of post-registration compliance is required in order to maintain a legitimate tax exemption.

Acclime provides advice and helps maximise incentives for your company and maintain compliance afterwards. Our tax accountants can assist in preparing all the necessary documentation, monitoring each organisation’s approved standards and more.