The Taxation Department (GDT) and Ministry of Economy and Finance (MEF) will enforce the pre-existing Capital Gains Tax (CGT) as of 1st January 2022.
CGT is paid on the difference between the cost of what you paid and the profit (gain) when resold. ‘Capital’ is real estate, leasing, investment capital, business reputation, intellectual property and foreign currencies.
The CGT rate will be fixed at 20% and taxpayers can choose from one of two calculation methods:
- Deductible: Allows 80% deduction of proceeds from an asset sale. An investor can deduct 80% of the acquisition cost and pay 20% of the gain, rather than a true gain
- Deduction based on actual expenses (if acquisition costs and expenses are higher than sale proceeds, no tax is due).
It will not apply to property used as a principal place of residence for 5+ years or on properties transferred between relatives.
The imposition of this tax sparked debate on how high it should be and whether it would stifle growth during the current pandemic. Opposers suggested a CGT will dampen an already slowed property market and requested a further delay. Supporters state a CGT exists in most countries and argue it should have been mandated years ago.
As with VAT, a CGT offers the government income that can support the national treasury for the nation’s benefit. CGT is applicable region-wide with some exceptions and many are much higher (e.g 42% in South Korea and 35% in Thailand) but the Cambodian rate of 20% sits fairly in the middle.
According to Clint O’Connell of DFDL
“… The taxation of capital gains is not a new feature to the Cambodian tax regime. Article 7 of the Law on Taxation has included capital gains under the umbrella of taxable income for some time. To date taxation of capital gains has only practically applied to those taxpayers registered under the self-assessment tax regime who have disposed of capital assets.
Historically as most individuals who brought and sold capital such as immovable property, shares and securities were not registered as taxpayers under the self-assessment regime of tax they had not been subject to tax on gains made from the disposal of those capital assets.
From 1 January 2021 that will change and Cambodian tax resident individuals and tax non-resident individuals and legal entities – will need to declare and pay capital gains tax on the transfer of capital (as defined above).
With respect to immovable property a Cambodian tax resident individual taxpayer will not only be assessed on capital gains derived from immovable property that they own in Cambodia but also on immovable property that they own that is located overseas which is sold or transferred – noting a tax credit is available for taxes paid on the disposal of the overseas immovable property if it was subject to tax in the jurisdiction that is located.
It should also be noted that when determining Cambodian tax residency for an individual if one or more of three listed criteria are met then an individual will be considered to be a tax resident of Cambodia. These criteria include place of residence i.e. whether the individual owns or rents property in Cambodia, whether the individual has a principal place of abode in Cambodia and whether they are physically present in Cambodia for more than 182 days within a period of 12 months. If the first two criteria are unclear then the physical presence criteria will be the deciding factor in determining tax residency.
The emphasis in the Prakas is very much on the basis of calculation of the transfer of immovable property but it should also be noted that the capital gains tax applies equally to shares, securities, bonds, goodwill and foreign currency.
The Prakas does not give any clear guidance as to the method by which shares may be subject to the capital gains tax apart from providing that when calculating the gain on a share sale or transfer that the actual expense method must be used. We hope that the GDT provides more guidance on this over the coming months and also whether they will follow the lead of their Vietnamese counterparts in recent months by looking to tax indirect sales of shares in a Cambodian entity i.e. the transfer of shares in an offshore holding company which has a Cambodian subsidiary.
In conclusion we understand the rationale behind the introduction of a capital gains tax regime particularly with respect to the Cambodian property market where property speculation and short-term trading has been prevalent in recent years. However it is critical that the extent and scope and subject matter of the capital gains tax regime is clearly set out so that investors have confidence and clarity when investing in Cambodia. Further clarifications on short-term verses long term capital gains, trading stock in listed entities, determining the share value for share transfers, direct verses indirect share transfers are just some of the issues that taxpayers and investors need certainty on in the coming months.”
Contact your lawyer or tax professional for more detail on the Capital Gains Tax and what to expect in 2022.