Paying taxes, and the bookkeeping, filing and reporting needed to do so, can be a significant burden for new startups. Thankfully the Cambodian tax system is setup to gradually increase in complexity and costs as a business grows.

 

Types of Taxpayers in Cambodia

Within the Cambodian General Department of Taxation’s system, there are three classes of taxpayer 

 

Small taxpayers are sole proprietorships or partnerships that satisfy one of the four conditions:

  • Annual turnover of KHR 250 million to KHR 700 million (approximately USD 62,500 to USD 175,000)
  • Turnover of over KHR 60 million (approximately USD 15,000) over a three-month period
  • Expect turnover for the next three-months to be at least KHR 60 million (approximately USD 15,000)
  • Participate in a quotation or bidding for supply of goods or services

 

Medium taxpayers are any of the following three:

  • Businesses with annual turnover of KHR 700 million to KHR 2 billion (approximately USD 175,000 to USD 500,000)
  • Businesses that have incorporated as a legal entity
  • Associations, non-governmental organizations and subnational governmental organizations

 

Large taxpayers are any of the following:

  • Businesses with annual turnover over KHR 2 billion (approximately USD 500,000)
  • Subsidiaries of foreign companies
  • Businesses registered as Qualified Investment Projects
  • Government institutions, foreign diplomatic and consular missions, international organizations and agencies

 

Concretely, for a startup this means that until they either incorporate or have turnover of about USD 5,000 a month, they are not considered within the Cambodian tax regime.  If they choose to incorporate, even with no turnover at all, they become medium taxpayers. If they don’t incorporate, they can wait until they reach the turnover thresholds, at which point they are classified as a small taxpayer.

The classification determines the patent tax amount (see below), as well as record keeping requirements. Small taxpayers can use simplified accounting, whereas medium and large taxpayers must comply with the Cambodian Accounting Standards.

 

Cambodian Patent Tax

The patent tax is essentially an annual business registration tax, a fixed amount based on the taxpayer classification. It ranges from KHR 400,000 (approximately USD 100) for small taxpayers to a maximum of KHR 5 million for large taxpayers (USD 1,250). It is paid for each business activity and each provincial branch (if any), and due by the end of March of every year.

 

Corporate Income Tax / Tax on Profit /Minimum Tax in Cambodia

Under Cambodian tax law, a company’s profits and revenue are subject to taxation through either the corporate income tax (also sometimes referred to as tax on profit) or the minimum tax, whichever is greater.

On a monthly basis, a taxpayer must make a prepayment of 1% of its monthly revenue, also referred to as turnover. In practice, turnover means revenue plus other income. At year-end, the taxpayer must file its annual returns and calculate the tax on profit. If the tax on profit exceeds the prepayments that were made over the past year, an additional tax payment will be due. If on the other hand, the prepayments exceed the tax on profit, then the minimum tax (also equal to 1% of annual turnover) is applied, which generally means no additional payments need be made. The annual tax on profit must be submitted on or before March 31 of each year.

The tax on profit is set at a standard rate of 20% of profits for most companies, and applies to a resident taxpayer’s global income. Profits are calculated as a firm’s revenue minus deductible expenses. Revenue is essentially business income from a firm’s operations, plus certain other income like rent, royalties and interest. Generally speaking, expenses can be deducted if they are paid for or incurred in a tax year to carry on the business. Certain expenses, however, are non-deductible or subject to special rules on how much can be deducted. Non-deductible expenses include those for entertainment and amusement, personal expenses, donations to charitable institution not registered with the government, and non-related business expenses.

For certain asset classes, specific depreciation rates and methods apply to how much can be deducted when calculating taxable income:

ASSET DEPRECIATION RATE METHOD
Buildings and structures 5% Straight-line
Computers, IT systems, software and data-handling equipment 50% Declining balance
Automobiles, trucks and office furniture and equipment 25% Declining balance
Other tangible property 20% Declining balance
Intangible property with no specific useful life 10% Straight-line
Intangible property with specific useful life Based on useful life of property Straight-line

 

 

Withholding Tax

Withholding tax must be deducted from certain payments by Cambodian businesses at the time of payment. The tax thus reduces the invoiced amount received by the payee. Startups need to consider the withholding tax both from the perspective of the payor and payee. In other words, when must the startup withhold tax on invoices they are paying, and also when can they expect their invoices not to be settled in full because the customer is withholding tax themselves.

Whether withholding tax applies at all, and the rates, depend on the type of payment and whether the recipient is a Cambodian resident.

For payments made to a Cambodian tax resident, the rates are as follows:

PAYMENT TYPE TAX RATE
Services provided by Cambodian residents not registered for tax 15%
Royalties 15%
Interest payments, except those paid by domestic banks 15%
Interest paid by a domestic bank on fixed-term deposits 6%
Interest paid by a domestic bank on non-fixed term deposits 4%
Rental payments, except for subleases to a rental business 10%

 

A specific example can illustrate the tax in action. If a startup in Cambodia hires a Cambodia-based user-interface freelancer to work on their website, this will be considered a service provided by a Cambodian tax resident. As the individual is most not likely registered for tax, 15% of their invoiced amount will need to be withheld by the startup and paid to the tax authorities. If, however, the startup hires a Cambodian consulting company to do the work, no withholding tax is due because the company is registered for tax. While this difference might seem strange or unfair at first, it should be remembered that the services provided by the consulting company are taxed in other ways – principally VAT and corporate income tax.

A few other typical scenarios where a startup can expect to encounter withholding tax are when paying their office rent (10% in most cases), when paying back investor loans (15%), and licensing royalties on their intellectual property (15%). Further, if the startup has not yet registered for tax and is providing services to other Cambodian-resident taxpayers, they can expect theses customers to withhold 15% as tax.

For payments by Cambodian companies to non-residents, the following rates apply:

PAYMENT TYPE TAX RATE
Interest payments 14%
Royalties, rent and other property-related income 14%
Management and technical fees 14%
Dividends 14%

 

Tax on Cambodian Salary

Cambodian businesses, whether incorporated or not, must deduct the tax on salary from employee paychecks.

The tax is due on all salary, defined as “remunerations, wages, bonuses and overtime, compensation and fringe benefits paid to an employee, or which are paid for the direct or indirect advantage of the employee for the fulfillment of employment activities”. For startups, stock options or other forms of equity are often part of the compensation mix, and are taxable as salary.

The tax rates differ between resident, and non-resident employees. An employee is considered resident if they have their residence or principal place of abode in Cambodia, or are present in the country for over 182 days within the last 12 months. Otherwise they are non-residents.

For non-residents, salary is taxed at a flat rate of 20% on their Cambodian salary. For residents, the tax is scaled as follows:

BAND (KHR) BAND (approx.. USD) TAX RATE
0 – 1,200,000 0 – 300 0%
1,200,000 – 2,000,000 300 – 500 5%
2,000,001 – 8,500,000 500 – 2,125 10%
8,500,001 – 12,500,000 2,125 – 3,125 15%
12,500,001 + 3,125 + 20%

 

It is important to note that the tax rate only applies to the portion of the salary within that bracket. An employee with a salary of USD 2,000 is NOT taxed 10% on the entire amount (USD 200), but rather 0% on the first USD 300, 5% on the next USD 200 (USD 10), and 10% on the final USD 1,500 (USD 150) – for a total of USD 160 (assuming no deductions).

A deduction for each child in the employee’s household, as well as a non-working spouse, of KHR 150,000 (approximately USD 37.50) reduces the taxable salary base.

Fringe benefits, such as motor vehicles for private use, accommodation or flight tickets home, are taxed at 20% of their value.

Payment of the tax on salary is made by the employer on a monthly basis, no later than the 20th of the following month.

 

Value Added Tax in Cambodia

As the name implies, Cambodian value added tax (VAT for short), is paid on the additional value a business creates in the process of selling its products or services. This is done by requiring the business to add VAT of 10% (the standard rate in most cases) of the taxable sales to each invoice, which they then pass on to the tax authorities (referred to as output VAT). At the same time, they can deduct any VAT that had been paid on their supplies (input VAT).

A concrete example can help to see how this works. Consider a startup that sells wearable fitness trackers. They want to make USD 100 on each device, to which must be added 10% VAT for a final sticker price paid by the consumer of USD 110. Sales are strong, and they sold 10,000 units in their first year for a total of USD 1,000,000 in sales plus USD 100,000 in output VAT. Turning to the input side, they had bought goods and services (assuming all subject to VAT) worth USD 600,000, to which was added USD 60,000 in input VAT paid to their suppliers. Deducting USD 60,000 from USD 100,000, the business has paid VAT of USD 40,000 for the year. Another way to think of it is that the startup added USD 400,000 in value to the supplies it bought, and 10% of that is the VAT owed.

With that basic framework in mind, there are a number of finer points to consider to ensure that the correct amount of VAT is being collected and deducted. A rate of 0% applies to goods exported from Cambodia. Certain supplies are exempt, including medical services, insurance and primary financial services. Further, output VAT must be charged on certain products and services, but cannot be claimed as input VAT – including for example entertainment expenses and cell phone calls.

Cambodian taxpayers must register for VAT, when they will be issued a VAT number to be included on all invoices. The invoices must be numbered sequentially, beginning with number 1 for the first of each year. The invoices must contain the essential information in Khmer – English can also be used but must appear below the Khmer. Each invoice must include the name, address and VAT number of the supplier and customer, the date of issuance, description of goods or services, and separate the total price before VAT, and the amount of VAT charged. Copies of the invoices must be retained in case of audit. The tax must be declared and paid by the 20th of each month.

 

Even More Cambodian Taxes

Whereas the above-mentioned taxes apply to most all businesses generally, a number of other Cambodian taxes will apply depending on specific activities. A few of the most applicable to startups are:

Specific Tax on Certain Merchandise and Services applies on specific locally produced or imported goods and services, including flight tickets (tax rate of 10%), entertainment (10%), beer (30%), beverages (10-35%), and telecommunication services (3%).

Accommodation Tax applies to hotels and guesthouses at a rate of 2% of accommodation fee.

Stamp Duty, also sometimes referred to as registration or seal tax, applies to transfers of certain types of property. It is payable by the recipient of the property. The most common assessments are for real estate transfers (4% tax rate), cars and trucks (4%), and company shares (0.1%).

Property Tax is assessed at 0.1% of all real property valued at over KHR 100,000,000 (approximately USD 25,000). Unused land is taxed at 2% of market value, for properties with no structures or unused structures.

 

 

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