In B2B Cambodia's 'Legal Update' we delve into the latest legal changes and developments in Cambodia's laws and regulations with key experts in the field.
In Episode 2, we discuss the incentives under Cambodia's Law on Investment (2021) with Sok Vanseka, Managing Partner at Sethalay Law Office.
What Are The Incentives Under Cambodia's Law On Investment (2021)?
In 2021, a new Law on Investment came into force in Cambodia, replacing the previous investment law that had been in place since 1997. The new investment law was then implemented through Sub Decree 138 in 2023.
Vanseka shared that one of the main changes from the 1997 investment law is that the previous law only had incentives for qualified investment projects (QIPs), while the new law now offers new incentives, in addition to QIPs, such as for expanded QIPs and other investment guarantees and protections.
“Expanded QIP means you have a QIP already, but you want to expand your business operation or expand both the scope and the scale, while still related to your previous QIP, so you can ask for an expansion," she explained.
Basic Incentives Under Cambodia's Law On Investment
The basic incentives that fall under Cambodia's investment law include two options for investors:
Option 1: Income Tax Exemption
The duration of the income tax exemption period will differ based on the category of the investment being made – some categories of investment can receive this incentive for nine years, six years or three years.
Once the tax exemption period has lapsed, a scaled progressive tax rate will apply so investors are not expected to immediately start paying a 100 per cent full tax rate.
“So they might have 25 per cent for the first two years, 50 per cent for the next two years, and then 75 per cent for the last two years,” Vanseka described.
Additionally, under this option, QIPs can also seek exemption of prepayment tax, minimum tax and export tax.
Option 2: Special Depreciation
“Special depreciation means you can have 200 per cent deduction for specific expenses for up to nine years based on the investment categories," explained Vanseka.
Under this option, investors can also benefit from exemption of prepayment of income tax, exemption of minimum tax and exemption of export tax.
Additional Incentives Under Cambodia's Law On Investment
Additional incentives include:
- VAT exemptions for the purchase of locally produced inputs
- Deductible expense at the rate of 150 per cent – Vanseka explained that this applies to certain activities that the government wants to encourage because they contribute to the development of the country and human resources, and research and development
- Exemption of customs duty and specific tax and VAT for import of construction materials
Special Incentives Under Cambodia's Law On Investment
Vanseka added that there are also ‘special incentives’, which are different from basic and additional incentives.
“If your business or your investment has high potential of contributing to national economic development, you may receive a special incentive at the discretion of the Council for the Development of Cambodia (CDC)," she said.
How Does Cambodia's Investment Law Compare To Its Neighbours In The Region?
Vanseka explained that Cambodia's investment law by itself can be considered quite friendly to foreign investors, however, efforts beyond the law will need more work for Cambodia to be able to compete on the same level as other countries.
In terms of the law itself, it is friendly, but how the law talks to [business] operations is another issue. Right now, there are some countries that have started moving up on ESG (environmental, social, and governance) and towards a circular economy, so it means that there is a need for certain efforts beyond the law, it needs other sectoral laws to really support on this, like an environmental law… and on corporate governance and social contribution.
“Those kinds of things will really help place a minimum benchmark for the ecosystem to provide equivalent support on ESG requirements for the commitment to reach net zero in the future,” she added.
“[Cambodia] focuses more on production for export, so if the production inside [the country] cannot meet the requirements of the orderer regarding their commitment for exports to be free carbon [for example], the local manufacturer may face the risk of losing orders, so that's why these are the kinds of things that we need to upscale a bit.”
Watch the full episode for more details.
