In particular, the Cambodian tax regime does not provide a specific income tax regime for non-resident shareholders that realise a gain on shares issued by a Cambodian company, even though capital gains on shares are, as a matter of principle, taxable income under Article 7 of the Law on Taxation:
"The taxable profit is the net profit from all the results of all types of business operations including capital gains realised during the business operation or at the close of the business."
The practical explanation as to why non-residents do not have to declare and pay tax on profit on gains derived from share transfers in a Cambodian entity is tied up with the specific operation of the Cambodian tax regime. Under the Law on Taxation, the primary way that a taxpayer can declare tax is via the submission of a tax declaration which can only be accomplished if the taxpayer is:
- Registered with the General Department of Taxation;
- Required to register by virtue of carrying out economic activity or by having a "permanent establishment" in Cambodia; or
- Via a third party registered taxpayer under the withholding tax regime in Cambodia.
On the face of it, a non-resident will not have a permanent establishment in Cambodia merely by holding shares in a Cambodian company. We note that at the time of writing, Cambodia has not entered into any double taxation agreements (DTA) and the concept of permanent establishment is to be found in the domestic tax regulations of Cambodia. The concept of permanent establishment as found in Cambodia's domestic tax regulations closely resembles the standard language that is to be found in most DTA's.
In addition, the withholding tax regime in Cambodia does not contemplate a withholding tax on gains that arise from the sale of shares by non-residents. As a result, no actual tax liability exists for non-residents that make a gain on selling shares in a Cambodian entity who do not have a permanent establishment in Cambodia.
Given the desire of the Cambodian tax department to increase tax revenue in the future and the additional information they will now have regarding potential lost revenue on non-resident share transfers, by virtue of the new registration tax, we believe it highly probable that this existing loophole may shortly be closed.
As per the existing withholding tax regime in Cambodia and the recently introduced 0.1% registration tax on share transfers – it would be a fairly simple process for the Cambodian tax officials to introduce a regulation that required Cambodian entities, whose shares are being transferred by a non-resident shareholder, to either withhold or be liable to pay, the resulting tax on profit that may arise on any gain that is derived in respect to the transfer.
The only questions that really remain are as to how long it will be before the tax officials in Cambodia enact this change, what will be the exact form of the change, and what, if any, notice will be given to those affected.