Registered taxpayers in Cambodia are now in the process of completing their Annual Tax on Income (“TOI”) declarations for the 2018 tax year. This applies equally to those entities that hold real estate in Cambodia and we provide below some of the key tax issues that those entities should be aware of when submitting their TOI declarations.
– Implications on Land and Share Arrangements Under Landholding Companies
Most landholding companies are structured under loans between the foreign shareholder and the landholding company and/or between the shareholders in the landholding company. As reflected in our Tax Alert of 23 August 2018, Instruction 11946 issued by the General Department of Taxation (“GDT”) on the 21st of August 2018 (“Instruction 11946”) had important implications on the qualification of related party loans. Indeed, Instruction 11946 provided an essential clarification regarding the determination of interest rates between related parties so that the interest rate to be charged on related party loans should be determined based on the rate of interest that would have been charged between independent parties under similar circumstances.
Instruction 11946 has now put the speculation to rest by clearly stating that when Cambodian taxpayers lend to, or borrow money from, related parties, the rate of interest to be applied to those loans must adhere to the “arm’s length principle” as set out in the Transfer Pricing regulation – Prakas 986.
In light of the above development, where loans between related parties have been used to acquire land in Cambodia these loans may be impacted by transfer pricing rules and may have to be updated.
When completing the TOI declaration all taxpayers are now required to complete the schedules at the back of the declaration which require all related party transactions to be listed and a declaration to be signed that the taxpayer has contemporaneous transfer pricing documentation in place to support those transactions.
In recent discussions with the GDT they have confirmed that the loan between related parties should adhere to the transfer pricing regulations. The GDT has further clarified that interest-free loans or low interest rate loans between related parties may still be acceptable in some cases provided they are supported with proper documentation.
In order to confirm that the interest rates used are in line with the taxpayer’s risk profile (credit rating), or to support the application of interest free or low interest rate it is suggested that an independent economic benchmarking study be prepared and included in the taxpayer’s transfer pricing documentation in accordance with Prakas 986.
Further, on 18 March 2019, the GDT issued Circular 4909 on the required documents to support the interest charge of the related party loan (“Circular 4909”). Enterprises are required to maintain and provide the following documents to the tax administration to support the interest charged under a related party loan even if the interest charged is different from the market interest rate:
- Loan agreement stating the specific borrowing period;
- Business plan related to the borrowing;
- Documents explaining the basis of the interest determination;
- Board resolution passed in relation to the borrowing.
The requirements to maintain the documents outlined above for related party loans come into effect from the date of signing of Circular 4909.
– Booking Assets
It is important that any immovable property – be it land or buildings – is correctly recorded in the TOI return. Land would be typically be recorded at cost and for tax purposes is considered as a non-depreciable asset. Buildings are considered as a depreciable asset and are usually categorized as a Class 1 asset for tax purposes which would be depreciated at the rate of 5% on a straight line basis.
– Withholding Tax Credits
If during the year the real estate entity has leased real estate to a registered taxpayer who has withheld withholding tax on the lease payments then the real estate entity would be able to claim an equivalent withholding tax credit in its TOI declaration to offset against any taxable income it may have for that year.
It is advisable that the real estate entity request from the lessee formal confirmation that the withholding tax payments have been paid to the GDT in addition to ensuring that any lease payments referred to in the underlying lease agreement are stated as inclusive of WHT.
– Disposal of Assets
If during the tax year the real estate entity has disposed of land and building that it owns it will need to account for this in its TOI declaration. For a disposal of land any consideration received from the sale which is in excess of the initial booked cost price will be subject to 20% Tax on Income.
For buildings any consideration received from the sale which is in excess of the adjusted tax book value of the building i.e. Cost – depreciation, will be subject to 20% Tax on Income.
For completeness we note that the sale of a building by a real estate entity would be subject to 10% Value Added Tax (“VAT”). The output VAT received by the real estate entity from the sale of the building would be included in their monthly VAT return which covers the month is which the building as sold.
In the event that the real estate entity sells both land and building, it would require to separate the value of land and building for the VAT purposes as land is not considered a good or service for VAT purposes.
Any resulting Tax on Income from the disposal of land or buildings will need to be paid by the due date of 31 March 2019 which is the same date as the TOI declaration is due.
The DFDL tax and real estate team is always ready to answer any questions you may have on this and other tax or real estate issues.
Tax services required to be undertaken by a licensed tax agent in Cambodia are provided by Mekong Tax Services Co., Ltd, a member of DFDL and licensed as a Cambodian tax agent under license number – TA201701018.
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.
Head of Cambodia Tax Practice