1. INTRODUCTION
As of 2021 there were stated to be 54 Special Economic Zones (“SEZs”) in Cambodia, spanning the entirety of the country, with zones in Sihanoukville in the south, the capital Phnom Penh and in border towns such as Bavet. SEZs were created in two pieces of legislation promulgated on the same day; Sub-Decree 147 on the Organisation and Function of the CDC and Sub Decree 148 on the Establishment and Management of Special Economic Zones, which both came into force on 29 December 2005. The function of these special economic zones is to stimulate growth in the Cambodian economy by incentivising investment, primarily in the manufacturing sector, by providing tax incentives, improved infrastructure and a simplified method of operation in Cambodia. This newsletter will set out the procedures of setting up a company in an SEZ as well as the investment incentives available.
2. PROCEDURE
To set up in a Special Economic Zone, a company must become a Qualified Investment Project (“QIP”), the status of which is granted by the Council for the Development of Cambodia (“CDC”). Most SEZs have a one stop shop within its own borders, enabling an investor to complete the entire process with the SEZ administration rather than dealing directly with the CDC. In general, the application procedure follows the following steps:
- Submission of an Investment Proposal to the CDC
- Issuance of the Conditional Registration Certificate (“CRC”)
- Company registration with the Ministry of Commerce (“MOC”)
- Obtaining all necessary licenses from the relevant ministries as listed in the CRC, on behalf of the Applicant
- Registration with the General Department of Taxation (“GDT”)
- Construction plan approval from the local authorities and the Ministry of Land Management, Urban Planning & Construction
- Environmental Impact Assessment as performed by the Ministry of Environment
- Environmental Impact Assessment as performed by the Ministry of Environment
- Issuance of the Final Registration Certificate
3. BENEFITS UNDER THE NEW LAW ON INVESTMENT
The new Law on Investment, promulgated on 15 October 2021, aims to establish an open, transparent, predictable and favourable legal framework to attract and promote quality, effective and efficient investment by Cambodian nationals or foreigners. This is to enable socio-economic development in the Kingdom of Cambodia, by increasing Cambodia’s competitiveness, increasing the productivity of local industries, establishing an investment incentives regime and providing protection to investors’ rights. The new Law states that a project set up in a SEZ is considered as a Qualified Investment Project (“QIP”) and therefore is entitled to the investment incentives outlined in the legislation. The incentives available to projects in an SEZ are referred to as basic and additional incentives.
3.1. BASIC INCENTIVES
The Basic Incentives available to those who set up inside an SEZ take the form of two (2) options, as follows:
* Option 1: Tax Exemption Period
An income tax exemption for 3 to 9 years, depending on the sector and investment activities, commencing from the time of first earning income. The period of income tax exemption that each sector and investment activity will receive shall be determined by the law on financial management and/or the future LoI Sub-Decree. After the income tax exemption period has expired, the QIP’s income tax will increase gradually over 6 years, at a progressive rate proportional to the total tax due as follows: 25% for the first 2 years, 50% for the next 2 years and 75% for the final 2 years.
- A Prepayment Tax exemption during the income tax exemption period;
- A Minimum Tax exemption, provided that an independent audit report has been carried out;
- An Export Tax exemption, unless otherwise provided for in other laws and regulations
* Option 2: Special Depreciation
- Deduction of capital expenditure through special depreciation, as stated in the tax regulations in force;
- Eligibility of deducting up to 200 (two hundred) percent of specific expenses incurred for up to 9 (nine) years. Sectors and investment activities, specific expenses, as well as the deductible period, shall be determined in the Law on Financial Management and/or the Sub-Decree (as of May 2023, the annual Laws on Financial Management have not determined these, and the sub-Decree is yet to be issued);
- Prepayment Tax exemption for a specific period of time based on sectors and investment activities to be determined in the Law on Financial Management and/or the Sub-Decree;
- Minimum Tax exemption, provided that an independent audit report has been carried out;
- Export Tax exemption, unless otherwise provided in other laws and regulations.
Additionally, both an export QIP and a supporting QIP are eligible to receive customs duty exemptions and excise tax and VAT exemptions for the import of construction equipment and materials, production equipment and materials and production inputs. A domestic QIP is only eligible for customs duty exemptions and excise tax and VAT exemptions for the import of construction equipment and materials and production equipment and materials.
3.2. ADDITIONAL INCENTIVES
In addition to the basic incentives, investment activities registered as QIP receive additional incentives, as follows:
- Value-added tax exemption for the purchase of locally made Production Inputs for the implementation of the QIP.
- Deduction of 150% (one hundred and fifty percent) from the tax base for any of the following activities:
- Research, development and innovation;
- Human resource development through the provision of vocational training and skills to Cambodian workers/employees;
- Construction of accommodation, food courts or canteens where reasonably priced foods are sold, nurseries and other facilities for workers/employees;
- Upgrade of machinery to serve the production line; and
- Provision of welfare for Cambodian workers/employees, such as comfortable means of transportation to commute from their homes to factories, accommodation, food courts or canteens where foods are sold at reasonable prices, nurseries and other facilities.
- Entitlement to income tax exemption for an Expanded QIP (“EQIP”) which will be determined in the Sub-Decree, which is yet to be issued.
4. ADVANTAGES OF OPERATING IN AN SEZ IN CAMBODIA
There are SEZs in operation in much of the developing world, and thus attracting foreign investment of this kind is highly competitive. In addition to the simple one stop shop procedure, reasonable time frame for establishment and the investment incentives outlined above, there are other advantages for choosing to operate in a Cambodian SEZ:
- Cambodia has some of the most competitive labour costs in South-East Asia.
- There has been significant investment in infrastructure in recent years, with a new highway connecting Phnom Penh to Sihanoukville now operational as of 2023 and the deep seaport in Sihanoukville becoming a major distribution hub.
- The geographical locationof Cambodia enables it to be a gateway to South-East Asia, and the abovementioned seaport means manufactured goods can be distributed throughout the world with relative ease.
- In recent years the supply of powerhas become far more stable in Cambodia, with certain SEZs possessing their own power stations within their own confines. Whilst the price of power is still higher than some other SEA nations, with the development of more hydroelectric plants and the governments recent push towards renewable energy, both supply and price competitiveness should improve moving forwards.
5. CONCLUSION
The rapid growth of SEZs in Cambodia since their introduction in 2006 demonstrates their enduring ability to attract investment. With the relatively simple and speedy set up process combined with the additional benefits conferred upon QIPs by the recently promulgated Law on Investment, operating within an SEZ can become an even more attractive proposition. With its improving infrastructure and its central geographical location, Cambodia is positioning itself as a major manufacturing hub for the next decade and beyond.
The information provided here is for information purposes only and is not intended to constitute legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations. For more details or any question related to the Special Economic Zones in Cambodia, please contact our professionals via [email protected].
TABLE OF CONTENTS
| 1. | Introduction |
| 2. | Procedure |
| 3. | Benefits under new LOI |
| 4. | Advantages |
| 5. | Conclusion |
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