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Rule of Law

I N the Cambodian Finance Law of 1994 the basis was set for the imposition of the

system of profit tax now in place. Article 8 of the Finance Law set out that profits

derived from industrial, craft, commercial and service activities, including forestry,

mining and fisheries, were to be subject to an annual tax for the benefit of the

national revenue. A comprehensive Prakas (notification) dealing with profit tax was

issued in March of this year by the Ministry of Economy and Finance. While the details

of this notification are too exhaustive to be considered in great detail in the space

of one column, the implications of its provisions are too great to be ignored. As

is commonly said: the two certainties in life are death and taxes; yet more energy

is expended in the avoidance of both than on almost any other pursuit. We would propose

therefore to devote this and a number of future columns to consideration of the profit

tax notification and its implications.

The first considerations that we will examine are the scope of the tax and who will

be subject to its provisions.

Scope of the profit Tax


The scope of the profit tax was defined in the 1994 Finance Law, as mentioned

above, and has been maintained in the 1995 notification. It will be applied to all

profits derived from industrial, craft, commercial, service and some agricultural

activities that are performed professionally.


"Industrial activities" are defined as being characterized by the importance

of the means of production. Essentially, industrial activities are said to be comprised

of activities by which goods are produced or minerals/natural resources are extracted.

"Craft activities" are those performed by artisans who are paid for their

skills. These include butchers, bakers, mechanics etc.

"Commercial activities" include the purchase of goods for resale. purchase

of goods for rental, provision of lodging, food and beverages, entertainment, and


"Service activities" are defined as those activities which do not involve

a transfer of property from one party to another and specifically include transportation,

construction, engineering, public works, insurance, brokerage and professional activities

(medicine, law, accounting, architecture ...).

The only agricultural activities specifically subject to profit tax are forestry,

fisheries and aquaculture. However, individuals and families (including cooperatives)

engaged in the sale of agricultural products and supplies or the performance of agricultural

services and trading are considered taxable. Similarly, all juristic persons engaged

in agricultural activities will be subject to profit tax as their businesses are

seen to be industrial or commercial in nature regardless of the sector or the economy

in which they are operating.

Professional Character

In order for profit realized from these activities to be taxable they must be performed

professionally. An individual or juristic person is said to be performing an activity

professionally when it is being done regularly, for the benefit of the party performing

the activity and for the purpose of making a profit.

If these conditions are met, only those entities benefiting from specific exemptions

(such as those available under the Investment Law) will be relieved of profit tax


Who is subject to profit tax

Profit tax arises exclusively from profits realized in Cambodia by natural or

juristic persons. Profits realized outside of Cambodia by natural or juristic persons

having their residence or head office in Cambodia are not subject to Cambodian profits


However, natural or juristic persons having their residence or head office abroad

will be subject to Cambodian profits tax for all profits realized by them from activities

within Cambodia.

In order for an individual or juristic person to be subject to Cambodian profit tax

they must be considered to be conducting regular business activities in Cambodia.

Regular business activity can be established in three ways: the existence of an independent

Cambodian establishment, the use of non-independent representatives within Cambodia

or the conduct of operations in Cambodia that are considered to amount to a "complete

cycle of commercial activity".

Independent Cambodian Establishment.

All production, trading or business ventures who aim to make profit in Cambodia will

be considered independent Cambodian establishments. In particular, the existence

of any of the following in Cambodia are indicative of a Cambodian establishment:

the head office of an enterprise; a factory, workshop, building site; a purchasing

or sales office; a branch, a store or an agency; a mine, a quarry or any other natural

resource extraction site; generally, all fixed presences where an enterprise conducts

all or part of its business.

Whether a service business has an Cambodian establishment for profit tax purposes

is said to be assessed on a case by case basis in application of international standards.

Cambodian Representatives

Two situations are considered by the profit tax notification:

  1. Where a local representative has an establishment of their own that is independent

    of that of the principal (e.g. forwarding agents or professional brokers) the principal

    will not be considered to be conducting a taxable business in Cambodia. They will

    be taxable in their home country.

  2. Where the principal uses a representative who does not conduct an independent

    business outside of that which they are employed to perform by the principal, the

    principal will be considered to be doing business in Cambodia directly and will be

    taxable for such commercial activities.

  3. Complete Cycle of Commercial Activity

This is defined generally as any series of commercial, industrial or artistic

transactions that are performed in Cambodia for a specific business objective. Caught

by this category will be businesses that conduct operations involving the purchase

and resale of merchandise, extraction, processing, finance or the performance of

services in Cambodia.

International Double Taxation Treaties

In order to avoid situations where individuals or businesses find themselves liable

for tax in more than one jurisdiction, nations will often enter into what are commonly

known as "double taxation treaties". The profit tax notification make it

clear that the above stated principles of the Cambodian profit tax regime are subject

to the provisions of any international treaties entered into between the Kingdom

of Cambodia and foreign nations. Such treaties once properly ratified and approved

are said to have the force of law and their provisions will prevail over any internal

fiscal laws that are in contradiction with such provisions. Unfortunately for many,

to date we are unaware of any such treaties being negotiated or in force.

- Michael Popkin is a lawyer in the Phnom Penh office of Dirksen Flipse Doran

& Le.



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