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.
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
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.
Two situations are considered by the profit tax notification:
- 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.
- 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.
- 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