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Incentives Under Draft Amended Law on Investment

Incentives Under Draft Amended Law on Investment

July 29, 2021

The Royal Government of Cambodia (“RGC”) has taken a number of actions to promote foreign investment in Cambodia, notably among them is amending the Law on Investment (“LOI”). The amended LOI has gone through several drafts and is now under review by the National Assembly and the Senate – the last step before it can be signed off and becomes effective. We expect it is to be finalized by the end of this year or beginning of next year. Based on the latest draft version, the amended LOI will provide a better environment for investors in terms of:

  • Inclusion of additional priority sectors (digital industry, logistics industry, small and medium enterprises in priority sectors) that can be qualified as Qualified Investment Project (“QIP”)
  • Provision of more efficient registration process i.e. can be done online with a faster approval turnaround time (from 31 days to only 20 days)
  • Provision of better legal framework – no expropriation or other similar measures taken by the RGC that could affect the investment project, faster action to resolve dispute i.e. within 30 days rather than within 2 months as before, etc.
  • Provision of additional incentives to investors such as extra reduction of Tax on Income (“TOI”) payables after the end of exemption period, Specific Tax (“ST”) and Value Added Tax (“VAT”) as state-charge on importation, allowance for deduction of certain expenses up to 200%, etc.

Although the amended LOI is not yet in effect, we want to give you a heads up regarding the new incentives that will be available to QIPs under the draft amended LOI as compared to the existing LOI:

Draft amended LOI

Existing LOI
1. Option (i): Tax exemption period

3 to 9 years (based on the industry sector and investment) counted from when the first revenue is generated.

Trigger period + 3 years + Priority period

Exemption from the monthly Prepayment of Tax on Income (“PTOI”) during the tax exemption period.

Same

Exemption from Minimum Tax when there is an independent audit report.

Exemption from Minimum Tax if confirmation of proper accounting records is obtained.
 

Other incentives

After the tax exemption period, QIP is entitled to a gradual phase in of the percentage of the TOI payable it must pay, as follows:

  • 25% for the 1st and 2nd years
  • 50% for the 3rd and 4th years
  • 75% for the 5th and 6th years
  • 100% from the 7th year on

N/A
 

2. Option (ii): Special depreciation – if the QIP does not choose the tax exemption period

Depreciation at 40% for the 1st year for tangible assets

Same

Exemption from the monthly PTOI for a certain period based on the industry sector and investment, which will be determined by the Financial Law or Sub-Decree.

N/A

Exemption from Minimum Tax when there is an independent audit report.

Exemption from Minimum Tax if confirmation of proper accounting records is obtained.
 

Other incentives

Deduction of up to 200% of certain expenses allowed for up to 9 years – the type of expense, allowed percentage, and number of years are based on the industry sector and investment and will be determined by the Financial Law or Sub-Decree.

N/A
 

3. Importation

Export-oriented QIPs and QIPs that are part of a supporting industry for export-oriented QIPs can import construction materials, construction equipment, production equipment, and production inputs with customs duty (“CD”), ST and VAT as state-charge

Export-oriented and supporting-industry QIPs are entitled to a CD exemption for importation of the same items.  For ST and VAT, a separate approval needs required to be obtained.

QIPs selling products locally can import construction materials, construction equipment, and production equipment with CD, ST, and VAT as state-charge. For production inputs, the incentive will be determined by the Financial Law or Sub-Decree.

Local QIPs can import the same items with a CD exemption. For ST, a separate approval is required to be obtained.
 
4. Additional incentives

VAT exemption on purchases of production inputs produced locally

N/A

Deduction of 150% of the following expenses allowed:

  • Research, development, and innovation
  • Professional development and skills training for Khmer employees and workers
  • Construction of dormitories, nurseries, canteens or restaurants with reasonable selling prices, and other nutritional support to employees and workers
  • Costs to upgrade machines for the production line
  • Provision of welfare to Khmer employees and workers such as transportation from dormitory to factory and vice versa, to canteen or restaurant, to nursery, etc.

 

N/A

Exemption from TOI for expansion of QIPs, which will be determined by Sub-Decree.

On a case-by-case basis

AUTHOR

An ACCA-qualified adviser, Sivila is an expert in Cambodian taxation with over 10 years of tax consulting experience, including several years with Big 4 firm KPMG.

At VDB Loi, he advises on tax structuring, disputes, and controversy, and conducts tax due diligence for clients across a range of industry sectors, including financial services, telecommunications, real estate, and garment manufacturing.

Sivila is also an associate member of the Kampuchea Institute of Certified Public Accountants and Auditors (KICPAA).


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