Cambodia has officially postponed its planned implementation of capital gains tax to January 1, 2024, through Notification 4577 issued by the General Department of Taxation (GDT).
The decision supports the government’s new vision to foster post-pandemic economic growth through the “Policy Framework and Economic Recovery Programs in the Context of Living with COVID-19 in a New Normal 2021-2023”. The framework presents strategies and roadmaps for each sector of the economy focusing on three pillars: 1) economic recovery, 2) reforms and 3) building resilience.
Why was the tax deferred?
Capital gains tax has been deferred so that business sectors can continue to recover, especially those outside the textile and apparel and tourism sectors.
Cambodia’s economy shrank by 3.1% in 2020 and factory closures and disruptions in the country’s textile and garment sectors led to a drop in exports of 6.5% or 2.4 billion dollars year-on-year. These sectors are the backbone of the Cambodian economy, contributing 17% of total exports and employing nearly one million workers. It was also a tough year for the tourism sector, Cambodia’s second largest GDP contributor, as international arrivals fell 91% year-on-year.
The economy rebounded in 2021 and grew by 3% thanks to a host of government incentives aimed at protecting business and personal incomes, a successful national vaccination campaign and timely shutdowns. According to Development prospects in Asia (ADO) 2022, the Cambodian economy is expected to grow by 5.3% in 2022 and 6.5% in 2023, mainly due to strong merchandise exports.
The capital gains tax was originally to be implemented in July 2020 through the issuance of Prakas 346, under which capital gains received by residents and non-resident taxpayers would be taxed at a flat rate of 20%. This was postponed to January 2021, then postponed again to January 2022, before the government finally decided on a 2024 deadline. Prakas 346 defined “capital” as real estate, intellectual property, foreign currency , leases, goodwill and investment assets.
Although not a new tax, the government has expanded its tax base to include individuals who buy and sell properties.
According to the Prakas, the tax is levied on the difference between the sale price of the asset and the initial cost of the asset when it was first acquired. However, the GDT reserves the right to determine the sale price of the asset when it deems that the price quoted is lower than the market value.
In addition, fixed assets exempt from capital gains tax are as follows:
- Assets of state institutions, foreign embassies and international organizations;
- Real estate that has been sold or transferred in the public interest under expropriation law;
- The transfer of real estate between relatives in accordance with the regulations on stamp duty; and
- A taxpayer’s principal residence for at least five years prior to the sale or transfer.
How is capital gains tax calculated?
The Prakas defines two mechanisms for calculating capital gains tax and taxpayers are free to choose which method suits them best:
- Deduction based on determination; and
- The deduction based on actual expenses.
Under the determination-based deduction, the taxpayer takes 80% of the proceeds and subtracts it from the total value of sales. The difference will be taxed at the rate of 20%. This calculation is suitable for owners who have bought low in the market and are looking to sell high.
The deduction based on actual expenses takes the total sale proceeds and subtracts the expenses incurred by the seller. This includes registration tax, commissions, consultation fees, purchase fees and advertising, among others.
The difference will then be taxed at the rate of 20%.
Who benefits from the postponement?
Companies in the real estate sector will benefit the most from the deferral of capital gains tax. The construction and real estate sector in Cambodia has attracted strong interest from foreign investors and capital investment in construction has reached US$9 billion in 2019.
This trend continued in 2021 where nearly 4,000 projects were approved, amounting to 10.35 billion US dollars. Of the 4,000 projects, 90% were classified as residential projects, located mainly in Phnom Penh. According to CBRE Cambodia – a real estate services company – land values in Phnom Penh have seen an annual growth rate of around 10% in the central business district and inner suburbs, and 20% in the outskirts. Meanwhile, land prices in Sihanoukville increased by more than 100% for a five-year period before COVID-10 due to increased Chinese investment.
Another segment that stands to benefit from the deferral is individuals who profit from buying and selling properties that are not their primary residence. As mentioned earlier, capital gains tax is exempt for individuals who sell property that has been their principal residence for at least five years prior to the sale.
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