Chapter 3: Provisions for the Tax on Value Added

Section 1:    General Provisions

Article 55:     Charge to Tax 

Article 56:     Definitions      

Article 57:     Non Taxable Supplies          

Article 58:     Non Taxable Supplies for Diplomatic Missions and International Organizations

Section 2:     General Principles for the Tax on Value Added

Article 59:      Taxable Person 

Article 60:      Taxable Supply 

Article 61:      Taxable Value  

Article 62:      Time of Supply 

Article 63:      Location of Supply      

Section 3:     Tax Rate and the Calculation of Tax

Article 64:      Tax Rate    

Article 65:      Input Tax Credit and Non Taxable Supplies          

Article 66:      Determination of Tax   

Article 67:      Capital Assets that Cease to be used in the Business          

Article 68:      Necessary Documentation to Claim an Input Tax Credit  

Article 69:      Input Tax Not Allowed as a Tax Credit       

Chapter 1: Provisions For The Tax On Profit

Section 1: General Provisions

Article 1:    Change to Tax

The provisions for the tax on profit as stated in the Finance Act of 1994 promulgated by the Royal Kram No. 02NS dated 28 December 1993, the Amendment to the Finance Act of 1994 promulgated by the Royal Kram No. 08NS dated 30 November 1994, the Finance Act of 1995 promulgated by Royal Kram No. 11NS94 dated 31 December 1994, and the Amendment to the Finance Act of 1995 promulgated by Royal Kram No. CS/RKM/0995/01 dated 01 September 1995 shall be amended as follows for the benefit of the State budget.

Article 2:    Object of the Tax

The tax of profits is the debt of a resident person on income from Cambodian sources and income from foreign sources and of a non-resident person on income from Cambodian sources.

Article 3:    Definitions

For the purposes of the tax provisions:

1.         The term “resident taxpayer” means:

a.         any physical person who is domiciled in or has a principal place of abode in, the Kingdom of Cambodia, or who is present in the Kingdom of Cambodia on more than 182 days during the calendar year;

b.         any legal person or pass-through organized or managed in the Kingdom of Cambodia, or having its principal place of business in the Kingdom of Cambodia. A permanent establishment shall be considered a resident legal person with respect to its Cambodian source income only.

2.         The term “non-resident” means not a resident of Cambodia.

3.         The term “legal person” means any enterprise or organization carrying on a business whether or not officially recognized by the competent institutions of the Royal Government. The term “legal person” includes any government institution, religious organization, charitable organization, or non-profit organization. For a non-resident person, the term “legal person” means any permanent establishment in the Kingdom of Cambodia. The term “legal person” does not include a pass-through or a sole proprietorship.

b.         an enterprise which controls or is controlled by, or is under common control with, the taxpayer. The term “Control” means the ownership of 51 percent or more in the value or voting power of the equity interests in the enterprise. For determining the degree of control of a taxpayer who is a physical person, shall be taken into consideration all equity interest owned by the taxpayer and those owned directly or indirectly by the taxpayer’s spouse.

Article 4:      Tax Regimes

The tax regimes are as follows:

1.         The assessment of the tax on profit shall be made according to the real regime, simplified regime, or estimated regime system of taxation.

2.         The rules and procedures for the assignment of taxpayers to one of the three regimes as above will be determined by sub-decree and shall be based on the form of the business, the type of business activity, and the level of turnover.

Section 2: Taxable Profit and Tax Rates

Article 5:       Tax Year

The tax year shall be determined as follows:

1.         The tax on profit for the real regime system of taxation is calculated from the balance sheet results realized in the previous tax year.

2.         If there is no closing balance sheet during any one year the tax to be paid for the following year is assessed on the profit made in the previous period from the end of the last taxable period. For new enterprises the calculation is made from the start of business operations up to the 31st of December of the year for which the tax is calculated.

3.         If many successive balance sheets are drawn up during the same year the results of these balance sheets are added up to have the base for the tax to be paid.

4.         The tax on profit for the simplified and estimate regime systems of taxation shall be calculated on a cash method of accounting on the past calendar year.

5.         Directives on the reporting and the filing of a final declaration for enterprises that cease activities, are reorganized, or are sold or transferred during the calendar year shall be determined by prakas of the Ministry of Economy and Finance.

Article 6:    Accounting Rules

Accounting rules shall be determined as follows:

1.         For a taxpayer under the simplified regime system of taxation using cash method of accounting, income is reported in the year that cash or other property is actually received even if as payment pertaining to other years, and expenses or deductions are taken in the year in which the expenses or other items are actually paid except for prepaid expenses and depreciation allowances.

2.         For a taxpayer under the real regime system of taxation using the General Chart of Accounts method of accounting, income is reported in the year it is earned whether that income is already paid or not.  The deduction for an expense may be taken when all facts determining the taxpayer’s liability have occurred, the results of economic activities with respect to the item has occurred, and the amount of the taxpayer’s liability can be actually determined.

3.         For real regime taxpayers, expenses incurred to a related person under the simplified regime system of taxation is not allowed as a deduction before actual payment.

4.         Domestic banks and savings institutions shall be allowed to establish provisions for bad debts for the determination of the taxable profit. The rules and procedures on deductions shall be provided by sub-decree.  

Article 7:   Taxable Profit

The taxable profit is the net profit obtained from all the results of all types of operations realized by the enterprise including capital gains from the sale of various parts of the asset during the operation or at the close of the business, as well as income from financial or investment operations and interest, rental, and royalty income.

Article 8:    Determination of Taxable Profit

The taxable profit is made up of the excess gross product realized on the expenditure that is made with the view of acquiring and preserving  profit.

Article 9:    Income Exempt from Tax

Income exempt from tax shall be as follows:

1.         Except for contrary provisions and for income that is taxable under article 22 of this law the tax on profits shall not apply to:

a.         the income of the Royal Government and institutions of the Royal Government;

b.         the income of any organization that are:

 ·          organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes;

·           no part of the assets or earnings of which is used for any private interest;

c.         the income of any labor organization, or any chamber of commerce, industry, or agriculture, in the case where the income of these organizations is not used for the private benefit of any shareholder or physical person.

d.         The profit from the sale of agricultural produce that a person who is not a real regime system of taxation taxpayer has produced by himself whether the produce is sold in its raw state or after transformations that are an extension of habitual agricultural work. Operations by industrial means including transformation, preservation, and commercial packaging are not considered part of habitual agricultural work.

2.         The Ministry of Economy and Finance shall define by prakas the procedures for the application for tax exemptions, the loss of tax exemptions, for tax declarations, and for registration.

Article 10:    Determination of Income of a Pass-Through

The income of a pass-through shall be determined as follows:

1.         With regard to a pass-through, each member in determining one’s income for a taxable year shall take into account separately one’s distributive share of the items of income, gain, loss, deduction, credit, and charitable contributions for such year. For this purpose each item shall retain its character and shall be treated as distributed during the taxable year whether or not actually distributed. The loss to be carried forward will be determined after the items have been distributed.

2.         The rules for determining the amount distributed, the treatment of contributions, and the adjustment to each member’s base distributive share in the pass-through in any taxable year shall be determined by sub-decree.

Section 3: Deductions

Article 11:    Allowable Deductions

Allowable deductions shall be as follows:

1.         Except as provided in articles 12 through 18 of this law, expenses that are allowed as a deduction include expenses that the taxpayer has paid or incurred during the tax year to carry on a business.

2.         Any rent, interest, compensation, payments, or fees paid to an officer or director of an enterprise, a partner, a member of a pass-through, a member of the taxpayer’s family or other related person where there is proof that the payment is for services actually performed and to the extent that such payment is reasonable.

3.          Amounts paid on new buildings and other tangible assets, permanent improvements or betterments including any construction or acquisition period interest and taxes. These amounts are to be recorded in the relevant asset account and shall be deductible as depreciation as provided in article 13 of this law.

Article 12:   Interest Expense

There shall be allowed as a deduction interest expenses paid or incurred by the taxpayer during the tax year to carry on a business but not in excess of an amount equal to the sum of the taxpayer’s interest income and 50 percent of the taxpayer’s net noninterest income in the tax year.

The “net noninterest income” is the gross income other than interest income, reduced by the allowable expenses except for interest expense.

Any interest expense remaining from the above mentioned deduction shall be treated as an interest expense for the next tax year and the deduction shall be made according to the content of this same article.

Article 13:   Depreciation of Tangible Property

Conditions for the depreciation of tangible property are as follows:

1.         The allowance for depreciation shall be calculated using the straight-line method or the declining balance method. Depreciable tangible property is tangible property used

in a business which is likely to lose value because of use or obsolescence. Land is not

depreciable property.

2.         All tangible property shall be divided into four categories.

a.         Category 1 shall include buildings and their basic components. Each asset in this category shall be depreciated according to the straight-line method at a rate of 5 percent per year.

b.         Category 2 shall include property having a useful life of up to 4 years and have a straight line depreciation rate of 25 percent on each property.

c.         Category 3 shall include property having a useful life of greater than four years through eight years and have a straight line depreciation rate of 12.5 percent on each property.

d.         Category 4 shall include all other tangible property and have a straight line depreciation rate of 10 percent on each property.

3.         Those taxpayers electing the declining balance method of depreciation shall use a rate of depreciation equal to 200 percent of the straight line method rate and shall apply it to the aggregate remaining undepreciated value of all assets in each category. The declining balance method shall be allowed only for category 2, 3, and 4 property.

4.         Enterprises under the Law on Investment shall use the straight line method for all categories.

5.         Procedures for establishing property categories, adding a new asset to a category, disposing of an asset from a category, and the treatment of repairs and various expenses shall be determined by sub-decree.

6.         A taxpayer subject to the tax on profit prior to 1 January 1997 must make an irrevocable election to depreciate either by the straight line method or the declining balance method the remaining undepreciated value of property by 31 December 1997.  For a new taxpayer the election must be made by the 31st of December of the year of registration.

Article 14:   Depreciation of Intangible Property

For intangible property including patents, copyrights, drawings, models, and franchises, having a limited life the depreciation rate on each property shall be calculated on the life of that property according to the straight line method of depreciation. If the life of the intangible cannot be determined the annual depreciation deduction shall be at the rate of 10 percent of the value of the intangible property.

Article 15:   Depletion of Natural Resources

Depletion of natural resources shall be determined as follows:

1.         The allowance for the depletion of any natural resource, including any oil and gas, shall be determined as follows.

a.         All exploration and development costs, including interest attributable to these costs, shall be added to the asset account of the resource.

b.         The amount of the depletion for each natural resource deductible for the tax year shall be determined by multiplying the balance of the account for the natural resource with the ratio of the quantity produced from the natural resource during the year to the estimated total production from the natural resource.

2.         Procedures for the determination of the estimated total production shall be provided by sub-decree.

Article 16:   Charitable Contributions

A deduction shall be allowed for charitable contributions to an organization as provided in article 9 of this law. But it shall not exceed 5 percent of taxable profit determined before taking the charitable contribution deduction.

The criteria for charitable contributions shall be determined by sub-decree.

Article 17:   Carry Forward of Losses

In case of a loss in any one tax year, this  loss is considered as a charge to the following tax year and shall be deducted from the profit realized in that following year. If this profit is not sufficient to definitively settle it, the remaining part of the  loss is carried over successively to  following tax years until the fifth tax year.

When losses occur in more than one year, this article shall be applied to the losses in the order in which they arose.

Article 18:   Allocation of Income and Deductions Among Taxpayers

In the case of two or more enterprises, whether incorporated or organized in or outside of the Kingdom of Cambodia, which are under common ownership, the tax administration may as may be necessary distribute, gross income, deductions, or other benefits among such enterprises and their owners in order to prevent the avoidance or evasion of taxes or to clearly reflect the income of such enterprises, or their owners.

For purposes of this article, two or more enterprises are under common ownership if a person owns 20 percent or more in the value or the equity interests of each enterprise.

Article 19:   Not Allowed as Deductions

For the provisions for the Tax on Profit, expenses that shall not be allowed as a deduction are:

1.         Any expense on activities generally considered to be amusement, recreation, or entertainment or the use of any means in connection with such an activity.

2.         Personal living or family expenses except for fringe benefits in cash or in kind subject to withholding tax according to the provisions for the Tax on Salary,

3.         Any tax imposed by the provisions for the Tax on Profit or withholding tax imposed by the provisions for the Tax on Salary.

4.         For the loss on any sale or exchange of property, directly or indirectly, between related persons.

5.         For any expense except for expenses already incurred and for which the taxpayer can establish the amount of the expense, and the business purpose of the expense in a manner as determined by sub-decree.

Section 4: Tax Rates and Tax Due

Article 20:   Determination of Tax Due

The tax rates on the annual profit are as follows:

1.         20 percent for the profit realized by a legal person.

2.         30 percent for profit realized under an oil or natural gas production sharing contract and the exploitation of natural resources including timber, ore, gold, and precious stones.

3.         9 percent for an investment enterprise after the period of tax exemption.

4.         0 percent for an investment enterprise during the period of tax exemption.

5.         According to the progressive tax rate by tranche for the table below for the profit realized by the physical person and the distributive share to each member of a pass-through that is not classified as a legal person.

Article 21:    Tax on Insurance Companies

The tax on an insurance company shall be determined as follows:

1.         For an enterprise having principal activity in the insurance or reinsurance of life, property, or other risks, the tax on profit shall be determined as follows:

a.         5 percent of the gross premiums received in the tax year for the insurance or reinsurance of risk in the Kingdom of Cambodia,

b.         according to the rates in article 20 of this law for other of activities that are not insurance of reinsurance.

2.         The rules and procedures for the payment of the tax on profit for an insurance company shall be determined by prakas of the Ministry of Economy and Finance.

Article 22:    Tax on Unrelated Business Profit

For an unrelated business the tax on profit shall be determined as follows:

1.         The tax on profit shall be fixed at 20 percent of taxable income from unrelated business income of organizations as stated in article 9 of this law.

2.         For purposes of the tax on profit, the term “unrelated business taxable income” is the gross income realized from an unrelated business regularly carried on by any organization, reduced by the deductions which are directly related to the carrying on of such business and which are allowed by the provisions of tax on profit.

3.         The term “unrelated business” means any commercial or industrial business, or any other business of the organization aiming to obtain profit or funds and which are not substantially related to the purpose or function constituting the basis for tax exemption as stated in article 9 of this law.

Article 23:     Advanced Tax on Dividend Distributions

The advanced tax on dividend distributions shall be determined as follows:

1.         If an enterprise distributes dividends to its domestic and foreign shareholders during the tax year, it shall withhold and pay as tax an amount equal to the product of the amount of the dividend grossed up by the tax on profit rate and multiplies by the appropriate annual tax rate as stated in article 20 of this law.

2.         The above mentioned withheld tax shall become a tax credit against the tax on profit of the dividend distributing enterprise for the tax year in which the withholding takes place. If the tax credit exceeds tax on profit such excess shall be carried forward and shall become a tax credit for the following year. The tax withheld on dividend distributions made by an insurance enterprise taxable under article 21 of this law cannot be used for tax credit.

3.         An enterprise (hereinafter called the “first enterprise”) owning 20 percent or more in value of the equity in a second enterprise shall establish a dividend account. Whenever the first enterprise receives a dividend on which the tax has been paid from the second enterprise it shall record the amount of that dividend into its dividend account. When the first enterprise subsequently distributes dividends to its shareholders the amount distributed which are taken out of the dividend account shall not be subject to withholding tax under paragraph 1 of this article.

4.         A physical person or enterprise receiving a dividend from an enterprise required to withhold tax under paragraph 1 of this article or a dividend from a dividend account described in paragraph 3 of this article shall not include such dividend in income.

Section 5: Other Taxes

Article 24:     Minimum Tax

A minimum tax is imposed on taxpayers subject to the real regime system of taxation. The minimum tax is a separate and distinct tax from the tax on profit. This tax is payable by a taxpayer subject to the real regime system of taxation even if the taxpayer has been granted the status of an investment enterprise. The minimum tax is imposed at the rate of 1 percent of the annual turnover inclusive of all taxes and is payable at the time of the annual liquidation of the tax on profit.

The minimum tax may be reduced by the annual tax on profit that is actually paid according to the rules found in articles 37, 38, and 39 of this law.

Section 6: Withholding Taxes and Prepayment of Tax on Profit