Capital gains tax

How should individuals treat tax on capital gains?

Most individuals living and working in Cambodia are familiar with their obligations in relation to tax on salary or, if they work as consultants, duties in relation to withholding tax.

Fewer individuals are familiar with their obligations in relation to capital gains, a type of income realized when an asset (such as a house) increases in value through renovation (‘improvements’) or sale (‘disposal’). This, too, is a type of income, but is not subject to tax on salary as it does not arise from employment nor from the provision of goods or services.

The Law on Taxation provides that such profit realized should be taxed at the following rates:

Annual taxable profit	USD	Tax rate
From 0 Riel to 6,000,000 Riels	$0 to $1,500	0%
From 6,000,001 Riels to 15,000,000 Riels	$1,501 to $3,750	5%
From 15,000,001 Riels to 102,000,000 Riels	$3751 to $25,500	10%
From 102,000,001 Riels to 150,000,000 Riels	$25,501 to $37,500	15%
Greater than 150,000,000 Riels	greater than $37,500	20%

 

For more information on taxation, please see our guide to business in Cambodia.

New moves on pirated movies

A recent Cambodia Daily article reports that the Ministry of Culture and Fine Arts has implemented anti-piracy measures for ten major Hollywood films currently licensed by Westec Media (owner of the newly opened Legend Cinemas movie theater).  These films (which include such blockbusters like “Harry Potter and the Deathly Hallows,” “Rise of the Planet of the Apes,” “Thor” and “Cowboys and Aliens”) will not be permitted to be sold at pirated DVD stores or shown on television.  Any store owner who sells the targeted titles will be fined and have those DVDs confiscated.

While only ten movies were the initial target of this new enforcement, more are expected to be added to the list as Westec Media acquires new film licenses.  The current movie roster at Legend Cinemas includes films such as Final Destination 5 and Johnny English Reborn and it would not be surprising if these and other currently featured films eventually disappear from bootleg DVD shelves.

With intellectual property enforcement still fairly new and copyright laws especially untested, entertainment in Cambodia is still dominated by the bootleg market.  While it is unclear how long these currently banned DVDs will stay off the shelves, it is at least one sign of anti-piracy measures being put into action in Cambodia.  To learn more about copyright law in Cambodia, please see our report here.

Buying land as a foreigner in Cambodia … someday?

Might foreigners one day be able to buy land outright in Cambodia? As we’ve blogged about before, foreigners can only buy units in co-owned buildings above the first floor. The land itself is off limits. Might that be about to change?

Prime Minister Hun Sen, as reported in today’s Cambodia Daily (print only), said the following in a public speech:

“We have a law allowing foreigners to buy apartments from the second story up, but we need a solution, because what they build on [Marakot Island, a new development near Sihanoukhville] are not multistory buildings but villas.”

The article also reports that the Council for the Development of Cambodia and the relevant ministries will take up the issue. It’s obviously too soon to say what will come of this proposal, though the Prime Minister’s statements are certainly a good sign.

Can expats adopt Cambodian children? Dispelling the myths

Adoption is a confusing process at the best of times. But in Cambodia, it’s even more so. Most people are aware of the current ban on inter-country adoption, and are surprised to discover that foreigners living in Cambodia are frequently able to adopt Cambodian children.

How?

In Cambodia, as in most countries, there are two different types of adoption. The first is national adoption, where a person or couple living in the country adopts a child from the same country. The second is inter-country adoption, where a person or couple from one country adopts a child from a foreign country.

National adoption in Cambodia is governed by the 1989 Law on Marriage and Family, which provides that adoptions can actually take place within Cambodia’s borders, regardless of nationality. This is subject to the court’s discretion.

Inter-country adoption in Cambodia is currently illegal, after being banned in 2009 following a series of child trafficking scandals, the US deciding not to recognize Cambodian adoptions , and objections to Cambodia’s ratification of the Hague Convention on Inter-country Adoption in 2007. Determined to bring adoptions into line with the convention, Cambodia itself banned adoptions between Cambodia and any other state until its laws were reformed.

The law was meant to be in place by April this year, but is still very much in the drafting phase. The lack of clarity can create a nightmare scenario for adopting parents who want to take their family back to their home country with them, be it permanently or for a temporary visit. It can be difficult for foreigners to adopt if there are indications that they have moved to Cambodia for the sole purpose of using the national adoption process, when in reality it should be an inter-country adoption.

For those who do succeed in securing a national adoption, many countries, such as the USA, France, Germany and the Netherlands currently refuse to recognize a Cambodian national adoption. Expats with no long-term plans to stay in Cambodia would be advised to hold off considering an adoption until the new law is finalized and international adoption agencies are established here.

As for those parents who have gone through with national adoptions, it is still uncertain as to whether or not they will be able to convert them into inter-country adoptions under the new system.

Do NGO employees have to pay tax on salary?

One of the most misunderstood fallacies amongst ex-pats living in Cambodia is the assumption that all Non-Government Organisation (NGO) employees are automatically granted a tax reprieve. Although there are some situations where NGO employees are exempt from Tax on Salary, this requires certain criteria to be met and an application to be processed and approved before NGO employees cease being liable for the tax.

Income Tax

One source of the misunderstanding stems from the fact that NGOs are usually exempt from income tax under Article 9 of the Law on Taxation, which deems organizations “organized and operated exclusively for religious, charitable, scientific, literary or educational purposes” exempt from income tax, provided that no part of the income is used for private benefits. If an NGO is granted income tax exemption under this heading, this exemption does not automatically flow on to employees. This was specifically confirmed in 1997 by Notice No 2672.

Diplomatic and Foreign Government Employees

Another basis for confusion arises from Article 43 of the Law on Taxation, which provides that “diplomatic and foreign officials” are exempt from paying tax on salary. The law goes on to detail that this is limited to those here representing their governments in official capacities or employees in Cambodia on behalf of official international organizations recognized under the Vienna Convention, such as the United Nations or the Red Cross.

The exemption

In 2001, the government considered the case for a salary exemption for NGO workers and issued Notice No 64 on Tax on Salary of NGO employees. The notice clarified the existing law and said that a salary tax exemption would be considered in relation to the following NGOs:

-          Those who implement projects on behalf of a foreign government (subject to agreement between both governments);

-          NGOs recognized by the United Nations;

-          NGOs that are self-sufficient, comply with Cambodian law and implement development and humanitarian projects in Cambodia;

-          NGOs that were granted a tax exemption in 1979;

-          NGOs with a small scope/budget of less than USD$50,000 a year; and

-          Employees who already pay salary tax in their own country.

Once these criteria are met, then the NGO in question must conclude a Memorandum of Understanding with the pertinent Ministry.

Such employees will not automatically receive an exemption, but must apply to the Ministry of Foreign Affairs and International Cooperation (MFAIC) or the Ministry of Economics and Finance (MEF), who will decide whether or not to grant the exemption.

Getting an exemption can be a complex and drawn out procedure. It is wise to assume nothing until the final stage, when a decision has been made by the MEF.

For more information, refer to our publication Labor Law Guide for NGOs

Slice of Paradise: Buying Real Estate as a Foreigner in Cambodia

A recent Wall Street Journal article showcases the newly-built home of Belgian photographer John Vink and also demonstrates how complicated property ownership and building construction can be in the Kingdom of Cambodia. In general, foreigners are not allowed to own land in Cambodia, but may hold a minority (49 percent) stake, with a Cambodian national holding the remaining majority stake, in a company that holds ownership rights to the land. Cf. Article 20 of the New Land Law (2001).  The article does not specifically mention whether Mr. Vink pursued this option to preserve some of his ownership rights, but it is a fairly common way for foreign landholders to do so.

Mr. Vink bought the land for his home near Kep from a local religious order that is moving to a new location. Usually, such as transfer would be prohibited by law, as monastery lands may not be sold and may only be rented for religious purposes according to Article 20 of the New Land Law (2001). Perhaps because the order is moving to a new location, the land has been reclassified and is therefore alienable. There are several categories of land and differing rights of ownership for each in Cambodia. Again, the article does not indicate why a variance was permitted in this case, but it’s always a good idea to check out which legal category the land you might be interested in falls under before beginning negotiations.

Also illustrated by this piece is the often confusing regulatory process for construction in the Kingdom, which can endanger projects at almost any stage of completion. From the article:

Building on a hilltop is unusual in Cambodia because of cultural customs and costs, says Mr. Vink, so he faced some challenges in ensuring that he had an experienced contractor and proper permits. At one point a month after construction began, he thought all the permits were in order, until an inspector from the local environmental protection office showed up and ordered a halt to the project. But $300 in “fees” later—a sizeable sum in Cambodia—the necessary permits were obtained and the project moved forward, Mr. Vink says.

Congratulations to Mr. Vink and his wife for their lovely new home, but let their experience be an illustration of the type of pitfalls that anyone can face navigating the legal and regulatory system here in the Kingdom of Wonder.

See here for related BNG reports.

The 8 Labor Rules You’re Most Likely Violating

Compliance with the Labor Law is not on many organizations’ radar screens, until something goes wrong. A worker is fired, a disgruntled employee sues, or a government labor inspector arrives to check your paperwork, and all of a sudden the Labor Law matters, A LOT.

If you think this law doesn’t apply to you – you’re probably wrong. It governs all employer-employee relations resulting from contracts to be performed in Cambodia, regardless of where they were signed, or the nationality or residence of the parties. That’s really broad – though there are a few narrow exceptions (household servants, civil servants…) which don’t apply to most organizations.

In no particular order, here’s my best guess at the eight most frequently violated rules:

1. Do you give your departing employees severance pay? According to Article 73, when a fixed duration contract ends, the employee gets an additional 5% of the TOTAL salary over the length of the ENTIRE contract, unless contracted otherwise.
2. Are you reporting every hiring and dismissal to the Labor Inspector? You need to, within fifteen days of the event, according to Article 21.
3. Have your human resource regulations been approved by the Labor Inspector? If you have more than seven workers, you need to have a comprehensive policy, approved by the Inspector (Article 24)
4. Do you give equal pay for equal work? Regardless of nationality, sex, or age? For work of equal conditions, professional skill and output, you must pay all workers the same, see Article 105.
5. Do you pay overtime for any work over eight hours a day? Overtime must be paid at 150% of normal wages, or 200% if done at night or during the weekend, according to Articles 137 and 139.
6. Do more senior employees get more annual leave? According to article 166, annual leave is increased one day per month for each three years of service. For a 10-year veteran, that works out to a four-day workweek.
7. Do you pay salary for paid-leave BEFORE the employee goes on vacation? That’s what Article 168 requires.
8. Are you reporting all vacancies and job postings to the Placement Office of the Ministry of Labor? You’re required to do so, according to article 258.

If you answered ‘no’ to any of those questions, you’re risking problems should trouble come to your door. A review of your employment contracts and HR policies is a pro-active way to get in front of the issue. You might not be able to avoid all problems, but at least you can control the damage.

Finding Cambodian Laws: Online Resources are Limited

Looking for a Cambodian law or regulation? Finding publicly available resources, particularly online or in English, can be tricky. To the best of our knowledge, there is no up-to-date and complete database freely accessible. Below is a short round-up of the resources we’ve been able to find – none are perfect.

If there is a specific law or regulation you know to exist, and just need a copy, you might be able to find it on one of the sites below (though there’s little guarantee as to the accuracy of the text).

However, if you are trying to answer a legal question on your own and don’t know the specific law you’re looking for,  we would strongly caution against relying on these online resources. You might find one or two laws on the topic, but as these resources are merely a selection of what is actually the law of the land, there’s a good chance that there are other texts you’re missing. That can create a false sense of security, and set you up for real trouble should a problem arise.

So except for very basic questions where you already know which law to rely on, the Do-It-Yourself route is ill-advised. Reputable Cambodian law firms should all have a complete database of laws, regularly updated as laws come into effect. Best to ask a professional.

• http://www.gocambodia.com/laws/ – Despite being the #1 Google hit when searching for “Cambodian Law”, this site has a small and seemingly random collection of laws. What’s worse, at least a  couple of laws (we just checked the Labor Law and Insurance Law) are missing a large portion of the provisions. It seems the texts were just cut off, leaving out all the articles after that point. Best to steer clear.

• http://cambodia.ohchr.org/klc_pages/klc_english.htm – Put out by the Office of the United Nations High Commissioner for Human Rights in Cambodia, this compilation is current through 2005. They’ve only collected “those laws and other legal instruments that are most relevant to day-to-day practice in the administration of justice and institutional development”. Khmer only.
• http://portail.droit.francophonie.org/df-web/collection.do?databaseId=282 – This French site has a small collection, all in French, but ends in 1998.
• http://daracambodia.blogspot.com – This is an interesting and well-intentioned effort by a Professor at Panassastra University to publish laws online. There are a fair number of laws and regulations, mostly in Khmer. Last updated in 2010.
• http://www.bakc.org.kh/ – The Bar Association of Cambodia’s website has a fairly complete set of khmer-only texts.
• http://www.bnglaw.net/index.php – This is one of the most complete online databases, though access is restricted. Most of the important laws and regulations are in English, the rest are in Khmer.

There are a few other sites out there, though they seem even less complete than these. Post us a comment if you come across any others you’d like to recommend.

Naming Your Company II: Trade Names and Trademarks

We blogged a few weeks ago about naming your company, and how the Ministry of Commerce will make sure that your proposed name is not already taken by another firm. It was all pretty straightforward, but left a glaring gap: trademarks! The list of registered trademarks and registered company names were totally separate.

Say you’re selling some kind of consumer good through a distributor in Cambodia. You’ve done the smart thing and properly registered all your trademarks. But the distributor gets sneaky, and registers YOUR trademark as his company name. As there was no cross-checking, the company name would probably accepted. Then it’s up to you to try and sue him for trademark infringement, not a fun proposition.

Well, the registrars of companies and trademarks (both within the Ministry of Commerce), are finally talking to each other. From now on, proposed company names will be checked against the list of trademarks. There are still some issues to iron out – like what happens when the company is in an entirely different field from the trademarked goods – but this is a really important step in Cambodian IP law.

You may find that it adds a couple of days to the company registration process but it may save you headache and expense in the longer term.

Inter-Country Adoption by April? Unlikely

UPDATE [May, 5, 2011]: As expected, the Government has postponed until April 2012 the acceptance of foreign adoption applications.

An article in today’s Daily reports on the unlikelihood of the 2009 inter-country adoption law being fully implemented next month as originally indicated. Although the government plans to start accepting inter-country adoption applications next month, the law requires that before this can take place, the Inter Country Adoption Administration in Cambodia must conclude agreements with its foreign counterparts.

To date, no such agreements have been concluded. Many foreign governments may be waiting to see how successful the implementation will be. At least one government has indicated it is reluctant to initiate such an agreement until the registration procedure for adoption agencies has been clarified.

The law currently calls for adoption agencies to “apply for authorization and approval by and recognition of” the Ministry of Foreign Affairs, but no further information is available on how to instigate this application process. Approval may be automatic if the agency has recognized NGO status from the Ministry, but NGO status requires an address (including lease agreement) within Cambodia, both for the NGO office and for foreign and local staff.

This would require an agency to commit to a presence for NGO purposes in Cambodia well in advance of any certainty as to their chances of successfully applying for registration as an adoption agency. Until this issue is ironed out, the situation remains in a catch-22.