The Cambodian Private Sector
What does it take to do business in, or with, Cambodia?
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Overview
The private sector in Cambodia is mostly made up of small and very small informal and unregistered enterprises; these account for approximately 80% of the GDP and 95% of the nation’s employment.
Registered private sector enterprises are estimated at 10,000 the majority of which are funded by Foreign Direct Investment (FDI) they also comprise the majority of Cambodia’s exports, most specifically within the garment sector. Which until recently enjoyed the benefits of privileged access to US and European markets. In addition to the garment manufacturing sector, FDI has also invested into; telecommunications and tourism (especially into hotels and resorts)
The main sources of this FDI are other Asian countries; China, Malaysia, South Korea, Singapore and Taiwan.
Smaller amounts of FDI are to be found from American, British and European companies, mostly to be found in the services and construction sectors.
The Levels of Foreign Direct Investment
2006 US$ 3.97 billion
2005 US$ 1.05 billion
2004 US$ 131 million
2003 US$ 100 million
2002 US$ 53.8 million
2001 US$ 148.1 million
2006 figures include:
US$ 2.6 billion into tourism, mining, energy and construction
US$ 552 million into Industry; garment manufacturing, et cetera
US$ 481 million into Agro-Industry
Doing Business in Cambodia
Negative Aspects
While there have been considerable improvements in Cambodia over the last decade, there are still many constraints to doing business here. With the majority of FDI being concentrated into relatively few sectors it has left the majority of sectors with little or no investment, the advantaged sectors failing to integrate into the economy at large as most of the profit is transferred out of Cambodia.
Sectors with virtually no FDI include; spinning, weaving, dyeing and finishing, chemical and mechanical industries, food processing, electrical and electronic industries, to name but a few.
The more general constraints confronting the private sector are weak and corrupt; judicial, legal and administrative, oversight and governance. A poor national infrastructure and limited local banking and finance. Even when legislation is passed, often after long delays, there are further delays in enacting the required sub decrees and enforcement. Without a parallel process of improving and strengthening the judiciary many laws remain impotent.
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Positive Aspects
International donors are assisting many areas of Cambodia to improve its infrastructure, such as roads, electricity supply and telecommunications.
Many international agreements are in place to assist Cambodia’s economic development. It was granted Most Favoured Nation (MFN) status by the EU in 1993, it is a member of the Association of South-East Asian Nations (ASEAN) and is a member of the World Trade Organisation (WTO). Although at present it is not making full use of the potential of these memberships.
Physical Infrastructure
Roads and Highways are the only mode of transport, railways and river cargo is not possible in any speed, quantity or reliability. The national road network covers approximately 38,000 kilometres, of which around 12,000 is traversable by motor vehicles and of that around 3,000 is of a reasonably good asphalted condition.
Economic Overview
Cambodia’s economic reforms and policies are set out in a series of documents called Socio-Economic Development Plan, the main objectives of these plans are:
1. Economic growth to reduce poverty
2. The development of the private sector
3. Good governance
Objective 1, the strategy for poverty reduction, focuses on macroeconomic stability, aiming at an average annual growth rate of 6% to 7% while keeping inflation below 4%. The fiscal strategy focuses on improving the collection of taxes and reducing smuggling.
Objective 2 and 3, the development of the private sector and good governance, focus on ways to improve fiscal transparency and to reform public administration, including pay-rises for civil servants to help reduce corruption. It also recognises the national and international private sectors as engines for growth and economic development. It also recognises the constraint of expanding the private sector while good governance is an issue of concern.
Registering a Business in Cambodia
Requirements:
1. Name of the business
2. Address of the business
3. Name(s) of the Shareholder(s)
3a. How are the shares divided amongst the shareholders (x% y%)
4. Addresses of the shareholders in Cambodia
5. Objectives of the business
6. Statement of Capitol (Must have at least 2,000,000 riel = US$5,000 on deposit)
7. Photos of Shareholders (4x passport size per shareholder)
8. Photocopies of Shareholders Passports (foreigners) or Identity Cards (Khmers)
The fee for processing the above and issuing the business license should be approximately US$500 (including a $50 agent’s fee if you use a local for ease of facilitation, translation and legwork).
Notes on the above requirements:
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Point 5 examples:
- Information Technology Services
- Purchasing – Import / Export
- Real Estate
- Medical Clinic
- Institute of Education
- Et cetera
Point 6: if you do not wish to deposit this amount with the Ministry, the officer can issue a banking exemption guarantee. There is a US$200 fee for issuing this.
Furthermore, all of the documentation is issued in the Khmer language, if you wish the Ministry to provide an official (approved and stamped) translation into English as well there is a US$100 fee for doing so. Nota Bene: while many other businesses around the Country can off you a cheaper translation service, the translation will not have the official Ministry of Commerce stamp on it.
Employment of staff
The employment of staff is controlled by the Labour Law (1992 amd. 1997) which is administrated by the Ministry of Social Affairs, Labour and Veterans Affairs. Although it is worth noting that the 1992 law was drafted by the Ministry of Planning – Department of Labour Wages and responsibility for this area was only passed onto the Ministry of Social Affairs, Labour and Veterans Affairs with the 1997 Law.
The Law governs all relations between employers and employees within the Royal Kingdom of Cambodia, regardless of where the contract was made and what nationality and residences of the contracted parties are.
The Labour Law specifically states that “This Law applies to every enterprise or establishment of industry, mining, commerce, crafts, agriculture, services, land or water transportation, whether public, semi-public or private, non-religious or religious; whether they are of professional education or charitable characteristic as well as the liberal profession, associations or groups of any nature whatsoever.”
Although it lists certain specific exemptions to the Law, these being:
- Judges of the judiciary
- Persons appointed to a permanent post within public service
- Personnel of the Police, the Army, the Military Police, who are governed by a separate statute
- Personnel serving in the air and maritime transportation, who are governed by special legislation. However, these workers are entitled to apply the provisions on Freedom of Unison under this Law
- Domestics or household servants, unless otherwise expressly specified under this law. However, these workers are entitled to apply the provisions on Freedom of Unison under this Law
Non-Discrimination Article
Interestingly enough, and despite what is claimed by a few NGOs, the Labour Law contains explicit Articles on discrimination; specifically Section 2, Article 12 which states that “no employer shall consider on account of:
- Race
- Colour
- Sex
- Creed
- Religion
- Political Opinion
- Birth
- Social Origin
- Membership of workers union or the exercise of union activities
“To be the invocation in order to make a decision on; hiring, defining and assigning work, vocational training, advancement, promotion, remuneration, granting of social benefits, discipline or termination of employment contracts”. However, “Distinctions, rejections, or acceptances based on qualifications required for a specific job shall not be considered as discrimination.”
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Taxation
As controlled by The Taxation Law (1997) (amd.1999) (amd.2003) which is administrated by the Ministry of Economy and Finance’s Department of Taxation.
Corporate Tax
(Tax on Profit)
The current tax on profit is 20%
Although certain exemptions apply, such as some natural resources development projects, pre-existing Qualified Investment Projects (QIPs) and new QIPs that have been granted a limited term tax-exempt period.
Some of these QIPs are liable for a tax on dividends, although they are also eligible for inflated depreciation rates on Capital Equipment purchases of 40% during the year of purchase.
Salary Tax
Salaries paid to employees are subject to a sliding scale of taxation from 5% to 20%.
Distinctions are made between residents and non-residents
Residents are defined as:
- Persons who are domiciled in Cambodia
- Persons whose principle place of abode is Cambodia
- Persons who are physically present in Cambodia for 182 days or more during the tax year.
As residents, people are liable to Cambodia taxation on all of their worldwide earnings.
Non-residents are subject to taxation only on their Cambodia earnings at a flat rate of 20%
A Fringe Benefit Tax on benefits for employees is also payable at a rate of 20% of the market value of such benefits, inclusive of all taxes.
Withholding Tax - Local payments
15% on payments made to individuals for services (management, consulting, et cetera)
15% on payments of royalties for intangibles, oil, gas, minerals and interest (excluding interest paid to domestic banks)
10% on payments for the rental of movable and immovable property
6% on interest paid by a domestic bank or savings institution(fixed term deposit account)
4% on interest paid by a domestic bank (non fixed term deposit account)
Withholding Tax - Foreign payments
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A withholding tax of 14% applies to non residents on:
Interest payments
Royalties, rents and other income related to the use of property
Payment for management, consulting and technical services
Dividends
Indirect Taxes
Import and Export Duties
All goods imported to Cambodia are subject to duties as set by the Customs Department, the tariff ranges from 0% to 35%.
Presently the only goods subject to export charges are those on restricted products such as timber, rubber and seafood.
Excise Duties
A ‘tax on specific goods and services’ it is levied on a wide range of goods and services including, but not being limited to; vehicles, petroleum products, alcoholic beverages and tobacco.
Value Added Tax (VAT)
A Value Added Tax was introduced with the 1999 amendments to the Taxation Law; it is set at 10% and is chargeable on a wide number of goods and services. The Taxation Law sets out the general principles of ‘taxable supply’ as:
- The supply of goods or services by a taxable person in the Royal Kingdom of Cambodia
- Appropriations of goods for their own use by taxable persons
- The making of a gift or supply of a service at below cost of goods or services by the taxable person
- The import of goods into the Royal Kingdom of Cambodia
Exported goods and services are VAT exempt.
Lord Playboy
The information contained in this article are for demonstrative purposes only, legal or business decisions should not be based on them, if in doubt consult a suitably qualified lawyer or accountant within the Royal Kingdom of Cambodia.
Informal queries and questions can be addressed to playboy@khmer440.com remuneration is charged in the international currency of Beer Lao.
Alternatively, questions can be raised in our ‘Work and Business’ forum:
http://www.khmer440.com/chat_forum/viewforum.php?f=10
With special thanks and recognition to:
- The Ministry of Commerce, RGC
- The Ministry of Economy and Finance, RGC
- The Ministry of Agriculture, Forestry and Fisheries, RGC
- The World Bank (Labour Law project IBRD-IDF No. TF 27211)
- The Asian Investment Program
- The European Commission
- The Department for International Development, UK (DFiD)
- The Economic Institute of Cambodia
- Second Socio-Economic Development Plan 2001 to 2005
- Cambodia Investment, Trade and Infrastructure Conference 2005
With reference to:
- The Taxation Law (1997) (amd.1999) (amd.2003)
- Law on Banking and Financial Institutions (1999)
- The Law on Insurance (2000)
- The Law on Customs
- The Law on Factory Management
- The Law on Industrial Zones
- The Law on Commercial Enterprises
- The Law on Investment (2003)
© khmer440 Ltd. 2006, 2007, All Rights Reserved
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