Cambodia Tax Alert: Double Tax Agreement Update

The Cambodia General Department of Taxation (GDT) has formally announced that the Double Tax Agreements (DTAs) which the Kingdom of Cambodia signed with Brunei Darussalam, The People’s Republic of China and the Socialist Republic of Vietnam officially come into effect on 1 January 2019 for Cambodian tax residents.

These developments represent major milestones in Cambodia’s ongoing tax evolution, and in practical terms, they signify that most of the substantive provisions contained in these DTAs, including the reduction of withholding taxes on certain cross border transactions, are applicable from 1 January 2019 for Cambodian taxpayers.

The total number of DTA’s signed by Cambodia with other countries now comes to six with five of those DTA’s now in effect as tabled below.  

Background

Simply put the primary objective of a DTA is to eliminate the double taxation of income arising in one territory and paid to tax residents of another – for the DTA’s that are in effect for Cambodian tax residents the relief of double taxation is provided by way of a tax credit for the tax that was paid in the other jurisdiction.

For example a Cambodian tax resident that receives income that was taxed in Singapore would typically be allowed a tax credit for the tax that was paid in Singapore, up to the amount of tax that would be payable in Cambodia on the same income.

DTA’s provide clarity as to the taxing rights of the respective countries that are signatories under the DTA and set out the types of income that is covered under the treaty. In addition the DTA’s contain specific rules on the creation of permanent establishments, the taxation of individuals, international transportation, disputes and information exchange. DTA’s also play a important role with respect to the growing concern from governments who are seeking to protect their respective tax bases from erosion through mechanisms such as profit shifting.

Cambodian taxes covered under the DTA’s may include tax on income; withholding tax on dividends, interest and royalties; minimum tax; additional tax on dividend distributions; and tax on salary.

One of the key features of the DTAs, from a Cambodian taxpayer perspective, is the ability to utilise a reduced withholding tax rate on payments relating to dividends, royalties, interest, or technical service fees to tax residents in the countries that have signed a DTA. The standard withholding rate on payments made by a Cambodian taxpayer to a non-resident is 14% whereas under the DTA’s that are in effect this may be reduced down to 10% in most cases.

Procedural Requirements

On the 26th of March 2018 the GDT issued instructions (Instruction 4084) on the rules and procedures for the implementation of tax treaties. Instruction 4084 provided that a Cambodian resident can apply for a residence certificate from the GDT, which is valid for one year and can be renewed annually. A Cambodia tax resident is defined as follows:

• An individual with a residence or principal place of abode in Cambodia, or who is present in Cambodia for more than 182 days in any 12-month period ending in the current tax year; or
• A legal person or partnership organized or managed in Cambodia, or that has its principal place of business in Cambodia.

If a resident taxpayer in Cambodia wants to apply for relief under the DTA they must apply and obtain for a pre-approval from the Department of Legal Affairs, Taxation Policy and International Tax Cooperation of the GDT in order to enjoy the tax benefit under the DTA.

The required documents for a physical person to apply for relief under the DTA include:

– Passport;

– Certificate of Residence issued by a competent authorities of the contracting state;

– Contract/document related to income payment; and

– Authorization Letter

The required documents for legal person to apply for relief under the DTA include:

– Certificate of Residence issued by a competent authorities of the contracting state;

– Certificate of Incorporation;

– Company Statute;

– Contract/document related to income payment; and

– Authorization Letter.

Final Observations

Determining the full range of implications of these DTAs on your current or contemplated business activities can be a complicated affair. Singapore for example, can now apply an economic substance test to determine tax residency. This means that certain registered companies in Treaty partner jurisdictions may not even pass the first hurdle of obtaining a tax residency certificate from the local tax authorities. This would hamper the ability of either party, involved in a qualifying cross-border transaction, from claiming tax treaty relief.

Additionally please note that the Articles of the DTA’s in effect may vary from country to country subject to the negotiations that took place between the respective governments. For example the rules relating to the creation of a Permanent Establishment, the reduction in withholding tax rates for cross-border transactions, the taxes that a treaty covers and the business profits articles may vary from Treaty to Treaty.

The DFDL tax team has a vast and varied depth of experience with regard to the application of tax treaties and applying for treaty relief, as always, we stand 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.

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.

DFDL Contact

Clint O’Connell
Partner
Head of Cambodia Tax Practice
clint.oconnell@dfdl.com

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