Update on Investment Law in Cambodia (Apr 2022)

2.1. Preferential Market Access

As a WTO member state, having joined in October 2014, Cambodia benefits from preferential access to a number of developed markets around the world. Cambodia has also benefited from very low tariffs on most goods traded with its neighbors as a result of its ASEAN membership and the AFTA (ASEAN Free Trade Area) Agreement. Cambodia has also concluded over a dozen multilateral agreements and bilateral investment protection agreements.

2.2. Open Economy

Cambodia offers investors one of the most liberal incentive schemes in Southeast Asia, with low tax rates, tax incentives, a one-stop service for investment applications, and the ability to develop new businesses within Special Economic Zones.

2.3. Competitive Assets

Tourism has traditionally attracted the majority of foreign investment. Led by the world-class destination of Angkor Wat, Cambodia draws millions of international visitors a year. Whilst temple tourism has already drawn significant foreign investment; significant potential remains in eco-tourism and other areas. Furthermore, the Cambodian labor office offers a competitive advantage for many firms. It is not just investment in tourism that can benefit from this, as with low labor costs and rapidly increased education levels, the country can offer lucrative returns for investors in labor-intensive manufacturing.

3.1. Sole Proprietorship

A sole proprietorship is an enterprise established and operated by a single natural person who owns all of its capital and is responsible for all obligations and liabilities related to the business operations solely and exclusively.

3.2. Partnership

The partnership is the favored method of business organization for many professionals, such as doctors and accountants. The partnership can be either a general partnership or a limited partnership.

3.3. Limited Company

A Limited company in Cambodia has three different forms; a Private Limited Company, a Single Member Private Limited Company and a Public Limited Company, in order to carry out business in the Kingdom of Cambodia.

3.4. Foreign Business in Cambodia

According to the Law on Commercial Enterprises, a foreign business is a legal person, formed under the laws of a foreign country, which conducts business in Cambodia. It is subject to registration at the Ministry of Commerce. Existing foreign businesses can enter Cambodia without setting up the entities by creating either a representative office, a branch office or a subsidiary

4.1. The Sectors for Investment Incentives

There are 18 sectors that are entitled to be incentivized as QIPs, which are contained in Article 24 of the new legislation. They include high-tech industries involving innovation, research, agriculture, environment, green energy alongside other sectors such as education, health, tourism and special economic zones.

The investment projects in Article 24 which are not on the Negative List of ANNEX 1 (“Negative List”) of the “Sub-Decree No. 111” shall receive basic tax and/or customs duty incentives, in whole or in part, after their Registration Certificate certifying their QIP status has been issued.

The investment incentives that are provided under the new law, are classified into three types; basic incentives, additional incentives and special incentives.

4.2. Basic Incentives

Investors who register as a QIP have the right to choose between two (2) packages of basic incentives, which are:

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. Furthermore, this option includes:

• A Prepayment Tax exemption during the income tax exemption period;
• A Minimum Tax exemption, provided that an independent audit report has been carried out, and;
• 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;
• 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.

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% 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 the Expansion of QIP which will be determined in the Sub-Decree.

4.4. Special Incentives

Any specific sector and investment activities having high potential to contribute to Cambodia’s national economic development may receive specific special incentives. The eligible sectors and activities are to be set out in the Law on Financial Management.

• Comparison between the Previous Law and the New Law on Investment
  Both laws indicate some important clarifications in the Articles which still remain and change as below:

Similarities:

• Investment incentives: Any investment project that wishes to receive QIP status must not be on the Negative List (Sub-Decree 111).
• Investment guarantees: Both laws contain similar protection focusing on a non-discriminatory approach to foreign investors, other than that relating to foreign ownership of land, which is barred as per the Constitution of the Kingdom of Cambodia. In addition, the State cannot undertake any nationalization action that would affect the assets of the investors, and cannot fix the price of products or services. Investors also have the right to purchase foreign currencies through the bank system and can hire foreign employees .
• The approved incentives: The approved incentives granted by the CDC cannot be transferred or assigned to a third party by an investor, but they can be transferred through acquisition, sale and merger of the investment project.
• Dispute settlement: The new law does not provide a significant change in the dispute settlement mechanisms. When a dispute occurs between investors, the process is settled through conciliation by the CDC or the Municipal-Provincial Investment Sub-Committee and in accordance with the written request of the parties. The CDC or the Municipal-Provincial Investment Sub-Committee will begin the process of conciliation within 30 days. If the dispute cannot be settled, the process will be referred to national or international arbitration, or the relevant courts of the Kingdom of Cambodia.

Differences

Differences	Old LOI	New LOI
Investment incentives	Provides incentives to encourage investment in only 9 important fields.	Provides increased priorities and encouragement for 18 different fields, mostly focusing on research, development and innovation.
Tax exemption	Provides a tax exemption from 3 years to 9 years.	Provides a tax exemption from 3 years to 9 years, and after the expiration of that term the new law provides an additional 6 years and other special incentives.
Investment guarantees	Provides less investment guarantees. The investors have the right to hire foreign employees but it does not provide the additional rights to obtain a temporary long-term stay permits for oneself, a spouse and children.	Provides more investment guarantees. There is compensation for losses as a result of civil war, armed conflict and a state of national emergency, fair treatment for domestic and foreign investors, protection against expropriation, and intellectual property protection. Furthermore, the new law states that investors have the right to hire foreign employees and investors have additional rights to obtain a temporary long-term stay permits for oneself, a spouse and children who are minors during the period that the investment project is operating. They have the same right to request temporary long-term stay permits for foreign employees and their spouse and children who are minors during the valid period of the employment contract.
Registration procedures	The registration procedure for a QIP was made through the submission of a hard copy application to the CDC for review and a decision, with a maximum period of 31 working days.	The new law introduces an online registration process for the submission of an application of a QIP. Investors shall submit application to the CDC or a Municipal-Provincial Investment Sub-Committee. The new law provides duties to MPIS to handle this with the CDC in order to lighten the load of pending work for the registration process. The timeline to issue a registration certificate is now 20 working days.
Small and medium- sized enterprise (SMEs)	The previous law did not mention or encourage small and medium enterprises to cooperate with big industries.	The new law will provide more opportunities for SMEs, which can encourage them to process raw materials or semi-finished products to supply the large-sized industries that are operating in Cambodia, or will be coming to invest in Cambodia in the future. Therefore, the small and medium enterprises will have increased chances to develop their business, and will create more job opportunities and therefore potentially benefit the national economy of Cambodia. The minimum criteria of an SME will be stipulated in an additional Sub-Decree. There is no clear definition of an SME at this stage, but several factors will be considered including the industry, the size and the turnover. The priority sectors of SMEs are to be clarified in a further Sub-Decree, however the expectation is they will be similar to the other sectors listed in Article 24.
Small and medium- sized enterprise (SMEs)	The previous law did not mention or encourage small and medium enterprises to cooperate with big industries.	The new law will provide more opportunities for SMEs, which can encourage them to process raw materials or semi-finished products to supply the large-sized industries that are operating in Cambodia, or will be coming to invest in Cambodia in the future. Therefore, the small and medium enterprises will have increased chances to develop their business, and will create more job opportunities and therefore potentially benefit the national economy of Cambodia. The minimum criteria of an SME will be stipulated in an additional Sub-Decree. There is no clear definition of an SME at this stage, but several factors will be considered including the industry, the size and the turnover. The priority sectors of SMEs are to be clarified in a further Sub-Decree, however the expectation is they will be similar to the other sectors listed in Article 24.
Green Energy	The old law does not provide tax incentives for activities related to green energy.	Green energy producers are now eligible for these tax incentives, an area where there has been a lack of investment due to, among other factors, the high start-up costs. The expectation is that being incentivized in the new law will accelerate green energy investment in Cambodia.