Cambodia’s Law on Investment: What Foreign Investors Need to Know

In late 2021, Cambodia introduced a new investment law to increase the country’s competitiveness for foreign investors by modernizing local industries and protecting the rights of investors. The new law offers a variety of incentives, such as income tax exemption and customs duties incentives.

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On October 15, 2021, Cambodia promulgated a new Law on Investment, officially called the Law on Investment in the Kingdom of Cambodia (the “Law”). The Law governs both domestic and foreign investments in the country. The Cambodian government first enacted the predecessor to the Law in 1995 and amended it in 2003.

The Law aims to modernize and streamline Cambodia’s investment environment, bringing regulations closer in line with ASEAN best practices. It was spurred, in part, by the government’s need to stimulate Cambodia’s economic recovery from the effects of COVID-19.

Here, we look at the key features of the Law as they affect foreign investors.

General provisions

Article 1 of the Law sets out its overall objectives: to create an open, transparent, predictable, and favorable legal environment to attract and promote domestic and foreign investment in Cambodia. It lists the four ways the Law intends to do so:

1. Increasing Cambodia’s competitiveness to make its economic structure more diversified and resilient to crises;
2. Modernizing and increasing the productivity of local industries and strengthening connectivity with regional and global supply chains, including by promoting capital inflows and transfer of technology, knowledge, and know-how;
3. Establishing an investment incentive regime that is transparent, predictable, non-discriminatory, and competitive to support socio-economic development policies; and
4. Providing protection to investors’ rights and legitimate interests through the establishment of a comprehensive and equitable legal framework in line with national interests.

The Law advances these objectives by simplifying registration procedures, strengthening investor guarantees, and encouraging investments in strategic sectors, among other areas.

Registration procedures

Chapter 4 of the Law contains updated procedures for registering and implementing investment projects. Per Article 10, investments can be registered with the Council for the Development of Cambodia (CDC) or Municipal-Provincial Investment Sub-Committees under three categories:

• Qualified Investment Project (QIP): Eligible for investment incentives, as confirmed through a registration certificate.
• Expanded Qualified Investment Project (EQIP): An expansion of a QIP, such as through increasing production, implementing new technologies, or upgrading infrastructure.
• Guaranteed Investment Project (GIP): Not eligible for tax incentives.

The Law introduces the ability of investors to register projects online through a one-stop portal. As described in Article 12, relevant ministries will review and decide on investment applications submitted on the one-stop portal within 20 working days. According to Article 13, investment projects may be implemented upon receipt of the registration certificate, as long as other permits and requirements are met.

Investment guarantees and protections

The Law includes several new measures on investment guarantees and protections in Chapter 5. A key provision is Article 19, which states that investors are entitled to freely purchase foreign currencies and to repatriate those foreign currencies to settle financial obligations associated with their investment through authorized intermediary banks. Such transfers expressly include:

1. Capital contributions, including initial capital contributions;
2. Income, capital gains, dividends, royalties, license fees, management, and technical assistance fees, interest, and other income from investments;
3. Income from the total or partial sale or dissolution of the company implementing the investment project;
4. Payment of import and repatriation of both principal and interest of the loan;
5. Payment of compensation in case of civil disturbance, expropriation, or confiscation by the state;
6. Payment arising from the settlement of a dispute by any means including court decisions or arbitration awards; and
7. Other income and salary of employees.

The Law contains many other articles describing guarantees and protections, including Article 22, which describes the right to obtain and/or request stay permits in Cambodia for investors, foreign employees, and their families. To be noted, these provisions come with a number of caveats, such as permission to hire foreign employees based on circumstances and requirements to meet other visa application procedures.

Encouraged industries

Chapter 6 of the Law delineates incentives for encouraging industries and activities. The Law lists encouraged these encouraged industries and activities in Article 24. Many of these industries are in strategically important areas for the government to develop, such as high-tech and green technology, as opposed to areas wherein Cambodia is already strong, such as garment manufacturing.

Encouraged industries are as follows:

1. High-tech industries involving innovation or research and development;
2. Innovative or highly competitive new industries or manufacturing with high added value;
3. Industries supplying regional and global production chains;
4. Industries supporting agriculture, tourism, manufacturing, regional and global production chains, and supply chains;
5. Electrical and electronic industries;
6. Spare parts, assembly, and installation industries;
7. Mechanical and machinery industries;
8. Agriculture, agro-industry, agro-processing industry, and food processing industries serving the domestic market or export market;
9. Small and medium-sized enterprises in priority sectors and small and medium-sized enterprise cluster development, industrial parks, and science, technology, and innovation parks;
10. Tourism and tourism-related activities;
11. Special economic zones;
12. Digital industries;
13. Education, vocational training, and product promotion;
14. Health;
15. Physical infrastructure;
16. Logistics;
17. Environmental management and protection, biodiversity conservation, and the circular economy;
18. Green energy and technology contribute to climate change adaptation and mitigation;
19. Other sectors and investment activities deemed by the government of Cambodia have the potential for socio-economic development.

Investment incentives

According to Article 25, investments in encouraged industries are eligible for basic tax and/or customs duties incentives, unless they are included in the Negative List. Investors can claim the incentives after obtaining a registration certificate that certifies the investment’s Qualified Investment Project (QIP) status. QIP registration certificates can be issued by the Council for the Development of Cambodia and Municipal-Provincial Investment Sub-Committees.

Eligible investors have two options for claiming basic tax incentives, as laid out in Article 26:

• Option 1: Income tax exemption for three to nine years, depending on the nature of the investment. Afterward, investors pay 25 percent of the total tax due for two years, 50 percent for the following two years, and 75 percent for the next two years. Investors are also exempt from prepayment tax, minimum tax if an independent audit has been carried out, and export tax, unless otherwise required.
• Option 2: Deduction of capital expenditure through special depreciation as stated in tax regulations in force. Deduction of up to 200 percent of specific expenses incurred for up to nine years, depending on investment activities. As with Option 1, investors are exempt from prepayment tax, minimum tax if an independent audit has been carried out, and export tax, unless otherwise required.

In addition to these two options, customs duty, value-added tax (VAT), and special tax exemptions are available for imports and exports of construction materials and equipment, and production equipment and inputs.

Moreover, per Article 27, investments with a QIP registration certificate are eligible for additional incentives, namely:

• VAT exemption for the purchase of locally made production inputs for the implementation of the QIP.
• Deduction of 150 percent of the tax base for the following activities:
  • Research, development, and innovation;
  • Human resource development through the provision of vocational training and skills to Cambodian workers/employees;
  • Construction of accommodation, food courts, or canteens where reasonably priced foods are sold, nurseries, and other facilities for workers/employees;
  • Upgrade of machinery to serve the production line; and
  • Provision of welfare for Cambodian workers/employees, such as comfortable means of transportation to commute from their homes to factories, accommodation, food courts, or canteens where foods are sold at reasonable prices, nurseries, and other facilities.
• Income tax exemption for the expansion of a QIP.

Finally, Article 28 states that investments in areas that contribute to national economic development may receive special incentives set forth in the Law on Financial Management.

Further Reading

• The Cambodia-South Korea Free Trade Agreement: Increasing Potential for Downstream Sectors
• Cambodia’s First Law on Competition: What Investors Need to Know
• Cambodia Delays Capital Gains Tax to 2024: Impact for Businesses and Individuals

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