Cambodian tax law provides a withholding tax ("WHT") system for many types of income including services, rent, interest, royalties and dividends. The applicable rate depends on whether the recipient of the income is a resident or not. In this article, the WHT regime of Cambodia is examined with particular attention for those situations which create the most practical difficulties.
There are widespread misunderstandings about WHT because many fail to recognize that WHT is just a collection system of tax due by the beneficiary of the service income, and not tax owed by the payer of the income. The payer ("withholding agent") remits the WHT directly to the Tax Department but it is in fact paid on behalf of the beneficiary of the income. The beneficiary of the income, the one that performed the service and is paid a fee, is the person that is taxable on that fee (the taxpayer). That tax is paid as a matter of responsibility of the payer of the income, which the payer remits to the Tax Department ("TD") on behalf of the taxpayer.
That is why the WHT must be grossed -up when the beneficiary charges a fee "net of withholding tax". That just means that the beneficiary expects the payer to bear the cost of the tax which is actually tax owed on the income by the beneficiary. So, the income of the beneficiary is actually the fee paid in cash plus the tax which is paid to the Tax Department and which the payer also took care of. The law provides that the WHT applies to the entire income, also to income paid in kind. Income paid in kind can consist of supplying goods or services, or by paying a debt to a third party.
The applicable WHT rates are represented in the following tables:
|Resident taxpayer carrying on a business||performance of services||resident physical person||15%||Exemption confirmed if beneficiary is a real regime taxpayer|
|Resident taxpayer carrying on a business||royalty for intangibles||resident taxpayer||15%||Exempt from WHT if this income is exempt income for a government institution and certain non -profit organizations|
|Resident taxpayer carrying on a business||royalty for mineral resources||resident taxpayer||15%||Exempt from WHT if this income is exempt income for a government institution and certain non -profit organizations|
|Resident taxpayer carrying on a business||rent of movables and immovable goods||resident taxpayer||10%||Exempt from WHT if this income is exempt income for a government institution and certain non -profit organizations|
|Resident taxpayer carrying on a business (except a domestic bank)||interest||resident taxpayer (except domestic bank)||15%|
|Resident taxpayer carrying on a business||interest||domestic bank||exempted|
|Domestic bank||interest on fixed term account||resident taxpayer||6%|
|Domestic bank||interest on non - fixed term account||resident taxpayer||4%|
|Resident taxpayer carrying on a business||performance of management or technical services||non -resident taxpayer||14%|
|Resident taxpayer carrying on a business||royalty for intangibles||non -resident taxpayer||14%|
|Resident taxpayer carrying on a business||royalty for mineral resources||non -resident taxpayer||14%|
|Resident taxpayer carrying on a business||rent of movables and immovable goods (including other income connected to use of property)||non -resident taxpayer||14%|
Who must apply the WHT?
Not everybody that pays service income is obliged to withhold tax in accordance with Cambodian tax law. In 2003 the tax law was amended to specify that only "resident taxpayers that carry on a business" can be withholding agents. "To carry on a business" means having an economic activity which is aimed at deriving income. This includes mostly companies that are real regime taxpayers, and also applies to non -profit organizations that carry on a business or derive income that is not exempt from taxes.
Non-resident companies that do not have a branch or another type of permanent establishment in Cambodia are not withholding agents for the Cambodian WHT. So when they pay for services, there is no Cambodian WHT even if the services take place in Cambodia.
Domestic or Non-resident?
Under Cambodian tax law, income will have a different WHT treatment depending on the residence of the beneficiary. It is thus important to identify the situation correctly. Under Cambodian tax law, a physical person is a resident for tax purposes when that person has his place of living or his principal place of abode in Cambodia or when he stays in Cambodia for over 182 days in any 12 month period. Companies are resident when they are organized or managed or have their principal business in Cambodia. A permanent establishment in Cambodia of a non-resident is treated as a resident for its Cambodia - sourced income.
So, residence of the beneficiary needs to be verified to apply the correct rate. Usually that does not present many practical problems, but questions may arise on the timing. When must the criteria of residence be verified: at the time of signing the service contract, at the time of invoicing the fee or at the time of the payment? The law and regulations are silent on this issue but it is likely that the moment of paying the fee counts in this regard. Thus, when a foreign expert who receives a monthly fee from a Cambodian company moves to live here, the domestic WHT shall apply to all payments that take place after his immigration.
The temptation may exist to have local persons act as nominees or pure intermediaries for payments that would otherwise be subject to WHT. That is notably the case with income which is exempt from WHT when paid to a local person, such as dividends and services fees (subject to conditions).
Take the following example:
A foreign company A supplies its Cambodian customer B with a service. The contract is signed by A and the services are performed by A. When the time to pay has come, A discovers that B must apply a 14% WHT because B is paying a service fee to nonresident company A. To avoid this, A assigns B to remit payment to C instead, which is a Cambodian company related to A. C issues the invoice and B does not apply the WHT. In this example, the TD is likely to argue that the exemption for Cambodian WHT should in fact not have been applied. A is and remains the taxpayer of the service fee because it is A who is entitled to the income. The interposition by C for collection purposes only (on A's behalf) does not change the fact that the taxpayer is a non -resident and thus that the domestic exemption does not apply.
Which service income is subject to tax?
The domestic WHT spells out that all "income from the performance of services" is subject to the tax. The Prakas TOP further provides that any income from economic activity besides sale of goods, rent and employment is in fact "income from the performance of services" and thus subject to WHT. This last definition is in any event incomplete. From the other articles of the LOT it is clear that interest, dividend and royalties are not treated as income from services for WHT purposes.
In the non-resident WHT, not all services are subject to the WHT. Only the income remunerated for "management or technical services". However, there is no definition of this category in the laws or regulations. It is safe to assume that the Tax Department normally gives a wide interpretation to what is a "management or technical service". Consequently, taking the position that the service you pay is not a "management or technical service" may easily trigger a challenge.
The place where services take place does not matter under the domestic or the nonresident WHT. When a Cambodian company pays for services that are carried out abroad, the non-resident WHT applies nevertheless.
When is the withholding tax due?
Under Cambodian tax law, WHT becomes due if and when the payer remits the payment to the beneficiary. At the latest at the 15th of the month following the month in which was paid, the tax return must be made and the tax paid.
If payment of the income does not take place, the duty to withhold the tax does not (yet) exist. However, there is one exception. Even if payment does not occur, the withholding agent must apply the tax if and when the income is included in the expenses of the company. So, an unpaid income that was deducted already by the company which is supposed to pay it will be subject to WHT anyway.
Exemption for domestic WT on service fees paid to real regime taxpayers
Under Cambodian tax law, the domestic WHT only applies on service fees paid to resident physical persons. This is confirmed in the Prakas TOP, where an exemption is provided for WHT on service fees (not on other income!) if the beneficiary is a resident real regime taxpayer and if the fee features in a VAT invoice which has all information as required by the relevant regulations. That is why, in most cases, Cambodian companies that pay service fees to each other do so without WHT, but with VAT.
Payment of rent and lease fees
A Cambodian company ("the lessee") must apply a 10% WHT when paying rent of movable or immovable goods to a resident company or physical person ("the lessor").
This applies for ex ample to office rent and leasing of land and buildings. If the lessor is a company that is subject to the real regime of taxation, the lessor may use the WHT which was paid by the lessee on his behalf to the Treasury as a credit for its own Tax on Profit liability. Rent, lease or finance lease allowances paid for the use or the right to use movable goods such as vehicles and equipment are also subject to a 10% WHT when paid to any Cambodian company, and to 14% when paid to a non-resident recipient.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.