Cambodia Tax & Banking Alert: Reduction of Withholding Tax on Interest for MFI’s

Summary

The Ministry of Economy and Finance has reduced the withholding tax (WHT) rate on interest payments to non-resident lenders made by Microfinance Institutions (MFIs) in Cambodia from 14% to 10%. This reduction applies for the 2017 and 2018 tax years. To qualify for the reduction in WHT, MFIs must maintain documentary evidence as outlined below. The reduction does not apply to interest payments made by MFIs to non-resident lenders in 2017 pre-dating the introduction of Prakas 1129.

Background

Our analysis points to this Prakas most likely being an attempt to offer some relief to MFIs following the sudden commencement of the Prakas that imposed Caps on Loan Interest Rates which affected all new MFI loans from 1 April 2017.

Documentary Requirements

To be eligible for the WHT rate reduction, MFIs must maintain:

Loan contracts certified by lawyers of both parties;
Money transfer documents that relate to the loan contracts; and
Proper accounting records.

As a general rule, all registered taxpayers in Cambodia should note that there is a legal requirement to formally notify the GDT of any loans that have been entered into within 30 days of being executed. Failure to do so could result in a tax audit officer re-assessing the loan principal as assessable income.

Withholding Tax

In Cambodia, the current position is that all registered taxpayers, excluding MFIs, that send interest payments to non-resident lenders must withhold 14% WHT. Cambodia has now signed Double Tax Agreements with Singapore, China, Brunei, and Thailand. In most cases, once these DTAs are ratified, interest payments from a Cambodian tax resident to a tax resident in those countries will also be reduced to 10%.

The DFDL team, as always, stands ready to answer any questions that you may have on this and other tax issues of concern.

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.