Foreign Ownership of Immovable Property (Jul, 2024)

Under the 1993 Cambodian Constitution and the 2001 Land Law, only those with Cambodian nationality are permitted to own land in Cambodia. The subsequent years have seen various methods to allow foreign control over immovable property, beginning with nominee arrangements, developing into land holding companies, and now, with the introduction of the Law on Trusts in 2019, trusts. This newsletter will provide the readers with an overview of the different mechanisms for foreign control over immovable property in Cambodia, their benefits and drawbacks.

II. Methods for Foreigners to Control Immovable Property in Cambodia

1. Nominee Arrangement

In terms of market practice, historically foreigners buying real estate in Cambodia have implemented the nominee structure, as follows:

Step 1: A foreign buyer (i.e. a non-Cambodian individual(s)) (“Foreign Investor”) shall choose a Cambodian individual (“Cambodian Nominee”) whom the buyer trusts. The Cambodian Nominee is the legal owner of the land purchased by the Foreign Investor.

Step 2: The Foreign Investor funds the purchase of the land or building, and the new title is transferred to the Cambodian Nominee’s name.

Step 3: After the title is transferred to the Cambodian Nominee, the Foreign Investor and the Cambodian Nominee entered into a loan secured by a hypothec (creating a legally binding charge which, crucially, is registered with the land authorities).

• Loan Agreement and Hypothec Agreement: Accordingly, the Foreign Investor documents a loan from the Foreign Investor as the lender to the Cambodian Nominee as the borrower. The Foreign Investor loans the purchase monies needed to purchase the real property to the Cambodian Designee pursuant to a loan agreement. The Cambodian Designee and the Foreign Investor would enter into a hypothec agreement pursuant to the legal title to the land to be acquired was subject to charge in favour of the Foreign Investor. Notably, the Foreign Investors interest in the land is formally registered with the Provincial/Municipal Department of Land Management, Urban Planning, Construction and Cadastre (“Department of Land Management”), via the registration of a hypothec securing repayment of funds loaned to the Cambodian Nominee to acquire real estate. Practically, after hypothec registration, they have another agreement allowing the Foreign Investor to keep the original copy of the land title to the acquired land. The Cambodian Nominee is prevented from transferring the land to a third party, without the original land title[1]; or
• Long Lease Agreement/Perpetual Lease: the nominee is the lessor, and the foreign buyer is the lessee. They may create a long-term lease with period of time from 15 years to 50 years​ and shall register​ the lease at the Department of Land Management in accordance with Article 244, Article 246 and Article 247 of the Civil Code. The foreign buyer may keep the certificate of long-term lease to assert against the third party in case the nominee disposes the land to the third party.

2. Land Holding Company

Pursuant to Article 101 of the Law on Commercial Enterprise (“LCE”) and Article 3 of the Law on Investment (“LI”), a company is considered to have Cambodian nationality when 51% of the shares are owned by Cambodian shareholders and a maximum of 49% of the shares are held by foreign shareholder(s).

A minority foreign shareholder (MFS) can be either an individual or a foreign company. The majority Cambodian shareholder (MCS) can be any Cambodian individual, Cambodian company or nominee(s) of the foreign shareholder. Therefore, should the foreigners choose this method of land holding, then they would incorporate a company, with the foreigner(s) holding 49% of the shares and one or more Cambodian nationals nominated would hold the remaining 51% of the shares.

The creation of a land holding company creates certain corporate responsibilities, such as the requirement for monthly tax filings to the General Department of Taxation along with other matters of compliance, including, but not limited to, the renewal of its Patent Certificate each year.

3. Perpetual Leases (“PL”)

For foreign individuals or investors who would like to control land in the long term for either their investment or for business purposes may choose the mechanism of long-term lease or perpetual lease in accordance with the land law, investment law and Civil Code of Cambodia. A long-term lease provides a period of time for lease from 15 years to 50 years and it may be renewed in accordance with Article 244 and Article 247 of Civil Code 2007. The foreigners shall register their long-term lease at the Department of Land Management to assert against the third party in accordance with Article 246 of the Civil Code.

The steps for the establishment and registration of the lease are as follows:

Step 1: the PL is made between the foreign lessee and the landlord on the land which already registered (Land with Certificate of Ownership over the Land).

Step 2: Fulfil the required documents to register the PL at the Department of Land Management

Step 3: the Department of Land Management issues a Certificate of PL for the foreign lessee.​ The foreign            lessee may hold the certificate of PL to assert against the third party.

Upon registration with the Department of Land Management, the Department of Land Management issues a lease certificate which gives the perpetual lessee a legal right in rem over the land.  The registration of the PL also puts any third party on notice of the perpetual lessee’s interest.

Finally, the registration of the PL is commercially useful since upon registration the PL may be used as collateral for secured lending[2].

4. Economic Land Concession (“ELC”)

Pursuant to Article 3 of​​ Sub-Decree No. 146 ANK/BK of the Royal Government of Cambodia on Economic Land Concession dated 27 December 2005 (“Sub-Decree No. 146”), economic land concessions may be granted to achieve the following purposes:

• To develop intensive agricultural and industrial-agricultural activities that requires a high rate and appropriate level of initial capital investment.
• To achieve a specific set of agreements from the investor for developing the land in an appropriate and perpetual manner based on a land use plan for the area.
• To increase employment in rural areas within a framework of intensification and diversification of livelihood opportunities and within a framework of natural resource management based on appropriate ecological system,
• To encourage small as well as large investments in economic land concession projects, and
• To generate state revenues or the provincial or communal revenues through economic land use fees, taxation and related services charges.

To limit the ELC term and size of land for ELC, the Law on Management Usage and Handling of State Properties (Article 53), sates that ELC shall not exceed 50 years and the size of the land for economic land concession shall not exceed 10,000 hectares.

According to Article 29 of Sub-Decree No. 146 the Minister of Agriculture, Forestry and Fisheries is authorized and responsible for granting economic land concessions with a total concession land area of 1,000 (one thousand) hectares or more. The relevant provincial/municipal governor is authorized and responsible for granting economic land concession with a total concession land area of less than 1,000 (one thousand) hectares.

5. Co-owned Building (Strata Title)

Pursuant to Art. 5 of Law on Providing Foreigners with Ownership Rights in Private Units of Co-owned Buildings (“LPFORPUCOB”), legally qualified foreigners have ownership rights in private units of co-owned buildings and rights to use and enjoy the benefits of the common areas. Article 6 of LPFORPUCOB also added that foreigners have ownership rights in private units of co-owned buildings only from the first (1st) floor up. The ground floors and underground floors cannot be owned by foreigners.

However, to limit the above ownership right, on 29 July 2010, the Government issued Sub-Decree No. 82 on Determination of Proportion and Calculation of Percentage of Private Units That Can Be Owned by Foreigners in a Co-Owned Building (“Sub-Decree No. 82”).  According to Art. 2 of this Sub-Decree No. 82, legally qualified foreigners can have ownership rights in private units of a co-owned building not exceeding 70 (seventy) percent of the total surface size of all private units of the co-owned building.

To get the Strata Title for certifying ownership over a unit of the co-owned building, the foreigner may:

Step 1: Contact to the Developers to buy a unit of Co-Owned Building

Step 2: Make a Sale-Purchase Agreement (“SPA”) with the Developer or an owner of the unit

Step 3: Fulfil the required documents at the Department of Land Management to register the unite and pay registration tax of 4% of the unit value to the General Department of Taxation (“GDT”) in accordance with Prakas No 273 on Registration Tax Collection.

6.Trust

The Trust mechanism may be the most reliable form of foreign land control in Cambodia since the Trust Law (“TL”) was promulgated in 2019.

The concept of the trust is imported from common law jurisdictions, which has its roots in the Courts of equity going back centuries in England. The principle behind the trust as conceived in England is that it separates legal ownership rights from so-called “beneficial” ownership rights (or economic ownership rights).

In its Cambodian form the TL encapsulates a separation of legal ownership rights to land (conferred on a trustee) with economic ownership of right in land that are vested in an investor in land (who might be a foreign citizen or a foreign owned or controlled company) (beneficiary).  In Cambodia, the principle has been modified to fit a civil law legal system and has a specific character.  Notably any trust must be registered (so the privacy enjoyed under the common law concept is missing) and there are mandatory obligations that apply to trustees intended to ensure that trustees act fairly (with statutory obligations).  The law on trust in England has evolved through case law.  We cannot guarantee statutory legislation will be implemented in a way which fairly protects trustor, trustee and beneficiaries safeguarding their respective interests in an equitable way.

Pursuant to Article 9 of the TL, there are four types of trusts:

• Commercial trust: earn the profit for the benefit of contributor or other specific persons.
• Public trust: established for the benefit of Cambodian citizens.
• Social trust: non-profit and non-commercial enterprise which established for general interest of society such as culture, education, religion, human-being or scient.
• Individual trust: created for trustor in his/her own accord or for the benefit of any specific person.

As mentioned above, a trust shall be registered with the Trust Regulator (“TR”) in accordance with Article 28 of TL and Sub-Decree No. 114 AN.Kr.BK on Trust Registration dated 02 August 2019 (“Sub-Decree No. 114”).

The foreigner may choose the individual trust and create the trust deed with the trustee and register the trust with the TR as follows:

Step 1: Contact a Trust Company as a trustee who has received a license from the TR.

Step 2: Make a trust agreement with the trustee. The trust agreement shall clearly identify the rights and obligations of trustor, trustee and beneficiary. The trustor and the beneficiary may be as one, therefore, the foreign buyer can be the trustor and beneficiary at the same time.

Step 3: The trustee shall register the trust at the trust regulator in accordance with the TL and Sub-Decree No. 114.

Step 4: the TR after reviewing the documents, will issue a trust certificate over the trust property. With a certificate issued by the TR, the foreigners’ property may be safe because the trustee cannot dispose that property without any approval from the Trustor and TR.

Tax Implications: The use of a trust structure is relatively new, and the tax implications have yet to be settled. However, it is clear the transfer of the legal title from one person to the trustee prior to the investment in Cambodian real estate might give rise to a taxable event.  Will the trustee need to pay stamp duty on the transfer? Secondly, while the trust’s asset is held under trust, will the trustee be liable to property tax?  Thirdly, upon realizing an investment, will the acquirer pay stamp duty on real estate transferred to the acquirer by the trust.  These questions and more remain to be answered to the satisfaction of investors.

III. Conclusion

1. Legally, the safest vehicle through which foreigners may invest in land in Cambodia is using a registered trust. There is an exception for foreign investors proposing to acquire units in co-owned property pursuant to the LPFORPUCOB.  The trust mechanism is the highly recommended form for foreign control over property in Cambodia. The trust agreement is made among the trustor (establishing the trust), trustee (that holds legal title to land) and beneficiary (which owns the economic interest in land), and is registered at the TR. The property may be safe because the trustee cannot dispose of the property without the consent of the trustor and the TR. So far, the tax implications of buying land using a trust lack a degree of clarity, although we expect this may change in the near future.
2. The nominee arrangement is the simplest form for foreign land control, however it creates a high degree of risk for a foreign investor as the ownership is transferred to the nominee. This arrangement is becoming less common in practice, as when conflict occurs among the parties, it is problematic for the Foreign Investor to claim their rights over the property since it is contradictory to both the constitution and the land law. BNG Legal does not endorse the use of nominees for foreign investors considering investment in Cambodian land.
3. A land holding company is legally recognized, but it still gives rise to risks to Foreign Investors since the law permits foreigners to only hold 49% of the total shares. To mitigate these risks, there are agreements made among the company’s shareholders on the minority control over the property. The use of a land holding structures is expensive, and estate agent fees or legal fees may be excessive in practice. As such the use of land holding companies involves a high level of trust, not just in the nominee shareholder but also in the intermediaries that implement the arrangement. For these reasons, BNG Legal does not endorse or recommend the use of land holding companies.
4. A perpetual lease is legally recognized, but it has only a 50-year maximum period, although it may be renewed many times. The risk is that a foreigner may need a longer period for the investment or business purposes whilst the lessor may not intend to renew the lease.
5. An ELC is the common form for foreign land control in Cambodian for the purposes of investment on agricultural production. An ELC application may be complicated because it takes many steps to negotiate with the relevant authority. The authority shall grant an ELC to one person of only 10,000 hectares and the same person may not be granted over 10,000 hectares. The maximum duration of an ELC is 50 years and it is renewable.
6. A foreigner may own units of co-owned buildings (Condominium), but the ownership shall not exceed 70% of the total size of the building. They may purchase the units from the developers and be issued with strata titles from the Department of Land Management.

________________________________

[1] A variation on this arrangement is the use of so-called “land holding companies” in which the arrangement is supplement by various documentation intended to create addition al security for the Foreign Purchaser, including powers of attorney in favour of the Foreign Purchaser.  This arrangement proved popular in the past since at one level might be construed as legally compliant and legal risk was more than off-set by commercial returns in Cambodia.  There was always question mark owing to Sub-Decree (2005) on the Implementation to the Amendment to the Law on Investment (“Sub-Decree 111”).  Article 3.2 of Sub-Decree 111 expressly prohibits the use of Cambodian nominees (which would also cover nominee shareholders in a landholding company. This casts doubt over the legality of nominee arrangements irrespective of whether a land holding company is used, or it is a straightforward nominee arrangement.  We note that Sub-Decree 11 relates to the incentives given to companies registering registered with the Council for Development of Cambodia.  As such it is not relevant.  In practical terms, the use of nominees through the use of land holding companies has been widespread and this has not been challenged in Cambodia, to date so far as we are aware.

[2] The practical value for lender’s receiving collateral by way of hypothec over perpetual lease rights is not without risk.  Any lender upon enforcement of a hypothec over a PL must acquire a land valuation. The land valuation of a PL is subject to market conditions.  In a suppressed market without investors this form of collateral may be insufficient to cover the liabilities secured by a PL.