On 5 April 2019, the Ministry of Economy and Finance issued Prakas 372 to introduce new rules on dividend withholding tax (“WHT”). This Prakas replaces Prakas 518, which was issued on 5 May 2017, and expands the definition of what is considered a dividend distribution, and thus subject to WHT.
Readers should be reminded that, in accordance with Articles 26 (new) and 33 (new) of the Law on Taxation, only dividends paid to non-resident shareholders are subject to WHT, at the rate of 14%. Dividends paid to resident shareholders are not subject to WHT.
The main features of Prakas 372 are best illustrated by answers to the following series of questions:
Is the conversion of retained earnings into share capital subject to WHT?
The new Prakas confirms that the conversion of a part or all of a company’s retained earnings (“RE”) into registered share capital is not considered to be a dividend distribution, and thus not subject to WHT. Such conversion must be accompanied by a resolution of the board of directors or shareholders and must be approved by the competent authorities, such as the Ministry of Commerce.
Sale of shares: Is WHT applicable on the sale of shares previously converted from RE?
Article 7 of Prakas 372 states that the sale by an existing shareholder of shares that were previously converted from RE is treated as a dividend distribution. The amount treated as a dividend distribution will NOT exceed the previously converted RE.
Similar to the share transfer tax (at 0.1% of the share value), the 14% WHT due on the dividend distribution must be paid to the General Department of Taxation (“GDT”) during the process of updating the company’s articles of incorporation with the Ministry of Commerce.
After the payment of all the required taxes to the GDT, the shares acquired by the buyer will be treated as normal paid-in share capital.
Sale of shares: Does the sale of shares trigger any other tax?
Article 7 of the Prakas states that when a shareholder sells some or all of their shares, then the RE (even though undistributed) attributable to such shares is treated as a dividend distribution.
For example, if a non-resident shareholder holds 100% of a company’s shares and sells 40% of them to a third party, then 40% of the RE as of the transaction date is treated as a dividend distribution to the existing shareholder and subjected to WHT at 14%.
Capital reduction: Is WHT applicable?
Any reduction in the registered share capital where such shares were previously converted from RE is also considered to be a dividend distribution under Prakas 372, and therefore subject to WHT. A capital reduction involving shares that were NOT previously converted from RE is NOT considered as a dividend distribution.
WHT Agent: Who has the legal obligation to withhold?
Article 8 of Prakas 372 requires that the company act as the WHT agent to collect the WHT on behalf of the GDT from either the buyer or the seller, depending on the terms agreed between them, and remit it to the GDT. Thus, even though WHT is a tax on the income recipient (i.e. the seller), and the company may now be owned only by the new shareholder (the buyer), it still has the legal obligation to make the WHT payment to the GDT. Therefore, it is highly recommended that both parties make it clear in the sale and purchase agreement as to who will bear the cost of such WHT.
How is this accounted for in the financial statements?
Prakas 372 has introduced several types of deemed dividend distributions, however for accounting purposes, these will not be treated as dividend distributions.
Accountants should be mindful of how WHT payments relating to deemed distributions are recorded to reflect the substance of the terms in the sale and purchase agreement.
VDB Loi comments
We can foresee a number of issues that may arise as a result of this expansion in the definition of a dividend distribution, particularly in cases where the non-resident shareholder is a resident of a country with which Cambodia has a double taxation agreement (“DTA”). DTAs contain definitions of dividends, and a detailed technical analysis of these will be necessary to determine whether the deemed dividend distributions introduced by this Prakas should be considered as dividends as defined in a relevant DTA.
Another issue on the horizon is how the provisions of this new Prakas will interact with future capital gains tax and personal income tax regulations, when these are eventually issued.
There are obvious opportunities for foreign investors to mitigate the impact of this Prakas when establishing new companies. Among the strategies that may be appropriate will be the use of special purpose holding companies to hold shares in the new Cambodian entity. Future changes in ownership in the Cambodian entity may be affected by the sale of the holding company rather than the sale of the Cambodian company’s shares.
We highly recommend that you consult with the undersigned or your usual VDB Loi adviser to help identify the optimal tax structure for new investments, or to understand in more detail the impact of this new Prakas on existing companies.
VDB Loi is a network of leading law and tax advisory firms with offices in Cambodia, Indonesia, Laos, Myanmar and Vietnam. We provide the highest quality solutions for transactions and taxation. Our general areas of practice are corporate, finance, licensing and disputes. Our principal specialized areas of practice are energy, infrastructure, real estate and construction, telecom, and taxation.
You can find more information on our Cambodia office here.
Tepwinuth Chhim | Tax Manager
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Phnom Penh 120101
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