Doing Business in ASEAN: Legal Considerations – Cambodia Chapter

 
June, 2014

Cambodia Overview

 

The Kingdom of Cambodia is a vibrant and widely open free-market economy, which is moving rapidly towards integration into the ASEAN Economic Community (AEC) by the end of 2015 and into the broader regional integration with the economies of China, Japan and South Korea. Though the country is the last to join ASEAN in 1999, its records speed accession to the WTO in 2004 has unleashed a powerful market force, which stimulated a steady high growth unsurpassed in the East Asian region for the past decade. By global and regional standards it has a remarkable recent track record – despite the impact of the Global Financial Crisis and associated economic downturn in 2009, it has achieved average GDP growth of 8 percent over the past 15 years, with low average inflation over the same period. The International Monetary Fund projected an average of 7.4% growth over the next five years. As the country is moving steadfastly in the next few years towards becoming a Lower Middle-Income country, it is well placed to meet the requirements of AEC. In fact, the most recent assessment of ASEAN economies’ preparedness for AEC 2015, called the ‘ASEAN Scorecard’, ranked Cambodia third behind Singapore and Malaysia.

 

Foreign direct investment is anticipated to remain strong, particularly driven by the relocation of factory production from China, Thailand and Vietnam, and increasing foreign direct investment from China, Japan and South Korea. The Manufacturing industry, specifically garments and footwear, continue to retain its dominance in export earnings, with substantial increase to the EU, as a result of EU’s “Everything but Arms” trade initiative. Growth in the Tourism service sector was buoyed in 2013 with over 4.2m tourist arrivals and bringing more than USD 2bn into Cambodia’s economy. There are signs that tourism is diversifying to include beach and eco tourism, with the development of Cambodia’s islands opening up new opportunities in the sector and attracting more high-end tourists. Construction also continued its resurgence, with indications of a strong performance in 2014 and in the next few years to come, with mega multi-purpose commercial and retail construction projects and well planned residential communities development sprouting across the Capital and major cities.

 

There are ample opportunities arising from a diversified agriculture sector, from paddy production to rice export, cassava, peanuts, cashew nuts and corn. Small-scale rubber production and large-scale economic rubber plantation and latex processing will be a new source of growth for many provinces, previously disadvantaged due to its remoteness. We witness an increase capacity of hard Infrastructure development and improvement, such as seaports, inland ports, navigable waterways, bridges, rural feeder roads, trunk roads and railways. Cambodia’s banking sector, including microfinance, is becoming increasingly sophisticated, attracting more deposits as much as more credit lending. The nascent Stock Market established in 2011 is gradually strengthening its institution and potential IPOs are being prepared, and their listings anticipated in the upcoming years.

 

Sources Of Law: Cambodia is a constitutional monarchy led by a democratically elected government. The legal and judicial system has evolved from a multitude of origins combining the civil law French-influenced codes, and recently the Japanese influenced Civil Code, the Anglo-Saxon system, customary law, and other recent modern international business principles driven by the country’s accession to the WTO and ASEAN commitments.  

 

Cambodia’s commercial legal framework, both the substantive laws and the mechanisms for administering and enforcing those laws, though not sophisticated, is perceived to a large extent as adequate with a flurry of commercial laws enacted during and following its WTO accession process, including a commercial enterprises law, an insolvency law, a commercial arbitration law, a secured transactions law, a Civil Code and a Code of Civil Procedure, etc.

 

Court Precedents: Judicial power is exercised by independent courts, comprising of lower courts, including provincial, municipal and military courts, an Appellate Court and a Supreme Court. The Appellate Court reviews both questions of law and fact, while the Supreme Court only hears questions of law in most cases. Although Cambodian lawyers may refer to judicial precedent in court proceedings, courts are generally not bound by such precedents. The Supreme Court has just begun the compilation of Cambodian judicial opinions. So far only some courts decisions were compiled and their publications are extremely limited. The Cambodian court system is currently undergoing substantial reorganization, with retraining of judges and court personnel at all levels.

 

The Cambodian court does not recognize automatically a final judgment of a foreign court except when all of the following conditions are fulfilled: (a) jurisdiction is properly conferred on the foreign court by law or treaty; (b) the losing defendant received service of summons or any other order necessary to commence the action, or responded without receiving such summons or order; (c) the contents of the judgment and procedures followed in the action do not violate the public order or morals of Cambodia; and (d) there is a guarantee of reciprocity between Cambodia and the foreign country in which the court is based.

 

Dispute Resolution: Cambodia’s present judicial system did not provide for specialized courts, such as administrative or commercial courts. However for most of international transactions, parties to the contract usually refer their disputes resolutions to international arbitration. Cambodia had ratified the 1960 New York Convention on the Enforcement of Foreign Arbitral Awards and there have been cases precedent of the Cambodian courts recognizing and enforcing international commercial arbitral awards.

 

Private-Sector Perceptions On Investing In Cambodia

 

Many foreign firms noted that Cambodia offered a stable economic and political environment. Firms stressed in particular the pro-business attitude of the Government. There was a consensus that the Government was very open to dialogue with investors and is committed to helping investors, domestic as well as foreign, make their businesses work. As for the investment climate generally, investors were satisfied with its pro-business-friendly ecosystem. On the negative side, bureaucratic delays, corruption, and an unreliable judicial framework combined with poor enforcement of laws are items that needed most Government attention. Gaps in the current framework meant that many decisions were taken by public administrators on an ad hoc and subjective basis. Moreover, there is added impression of lack of transparency as new laws and regulations were often poorly communicated to the private sector.

 

II. Foreign Investment

 

Cambodia is one of the most open economy for foreign investment in the ASEAN region: 100% foreign owned investments are welcome in nearly every sector and type of business, with the main exclusion of land ownership. The Law on Investment (1994, as amended in 2003) and its implementing regulations set out a general legal regime to encourage investment in Cambodia.

 

What Is A Qualified Investment Project? a QIP is defined as an investment project which has received a Final Registration Certificate (FRC); in other word, an investment license or approval. QIP is issued to a project, not to an investor or investing enterprise. QIP is entitled to certain investment incentives, one of which is tax exemption.

 

How Can An Investor Obtain A QIP Status? Investors who are investing in activities or sectors, which do not benefit from investment incentives, are generally only required to register at the Ministry of Commerce (MoC) or obtain relevant operating permits. However, those who seek to invest in sectors which benefit from investment incentives are required to apply through the Council for the Development of Cambodia (CDC) or the Provincial-Municipal Investment Sub-Committee (PMIS) to obtain the QIP status.

 

Where Do Investment Companies Apply For QIP Status? The CDC is the highest decision-making level of the government for private sector investments. It is chaired by the Prime Minister himself and is operationally administered by the Cambodian Investment Board (CIB) and the Cambodian Special Economic Zone Board (CSEZB). The CIB administers investment projects outside Special Economic Zones (SEZs) while the CSEZB administers investment projects within SEZs. They review investment applications and grant QIP status and incentives for investment projects meeting the requirements laid out in the Law on Investment.

 

Are There Any Special Services For Expediting Applications? The CDC offers supposedly a “One-Stop-Service” for processing investment application, i.e. approval of QIP status through the issuance of the FRC, visa and work permit, custom duty, and company registration all in one package. However, the QIP investor is still required to apply and obtain other regulatory approvals from the appropriate ministries-entities:

 

a) Licenses and authorization to operate a business issued from the Ministry of Industry and Handicraft (MIH), and the Ministry of Mines and Energy (MME):

 

  • Operating license for small scale industry and handicraft (MIH);
  • Operating license for large scale industrial enterprise (establishing factory) (MIH); and
  • Operating license for mineral exploration, excavation gravel construction site (MME);

 

b) Licenses and authorization for business operations issued from the MoC and the General Directorate of Taxation (GDT):

 

  • Business license (Patente) (GDT); and
  • Certificate of origin (for exporting goods) (MoC).

 

What Are The Priority Sectors For FDI? The priority sectors for FDI for which incentives are granted are, including but not limited to, the followings:

 

  • Agriculture and agro-processing industries;
  • Tourism and related industries;
  • Production and exploitation activities to protect the environment;
  • Export-oriented processing and manufacturing;
  • Labor-intensive industries;
  • Exploitation of minerals, ores, coal, oil and natural gas;
  • Physical infrastructure and energy (hydropower, transport and telecommunications);
  • Investments in special promotion zones (SPZs);
  • Pioneer and/or high-technology industries; and
  • Provincial and rural development projects.

 

 

Is There A Negative List? Investment in certain highly sensitive sectors (the Negative List) is prohibited by both national and foreign investors for reasons of national security, social safety or economic necessity, i.e. Production/processing of psychotropic substances and narcotic substances. A takeover of an entity carrying on any activity listed under the Negative List is permitted, however the acquirer will not be entitled to any investment incentives.

 

Are There Any Taxes Levied On Profits? Upon the issuance of the FRC, a QIP is entitled to an exemption of tax on profit imposed under the Law on Taxation for a period of time. Such exemption is known as the Tax Holiday Period. This period may be varied depending on the size of the investment capital and available up to a maximum of 9 years. The formulation of such period consists of a Trigger Period (commencing from when the company first gain its income or profit, which is sooner) plus a Priority Period (varies on the size of investment capital) and 3 years automatic exemption.

 

What Are Any Tax Exemptions On Imported Capital Goods Of A QIP? Yes. For various 

 

  • Exemption for production equipment and construction material for Domestic QIPs; and
  • Customs duty exemption for production equipment, construction materials and productions inputs for Export QIPs and for supporting industry QIPs.

 

What Is A Special Economic Zone? To govern the SEZ scheme, the Government has issued a 2005 Sub-Decree on the Establishment and Management of the Special Economic Zone and has since issued licenses to 22 SEZs across the country. An SEZ refers to the geographically distinct area for the development of the economic sectors that bring together all industrial and other related activities. To be qualified for an SEZ the following requirements need to be met:

 

  • an area exceeding 50 hectares with precise location and geographic boundaries;
  • a surrounding fence;
  • a management office building, zone administrator offices, road networks, clean water, electricity, telecommunications networks, fire protection and security system;
  • a water sewage network, waste water treatment system, location for storage and management of solid waste, environmental protection measures and other related infrastructures as deemed necessary; and
  • compliance with all other technical construction and environment requirements.

 

What Are The Incentives Enjoyed By The Zone Developers? The CSEZB is the authority that examines and provides incentives to all SEZs. The incentives provided for an SEZ include:

 

  • Tax on profit or Tax Holiday for a maximum period of 9 years;
  • Import duties and other taxes on import of equipment and construction materials to be used for infrastructure construction in the zone;
  • Custom duty exemption on the import of machineries, equipment for construction of the road connecting the nearest town to the zone; and
  • Upon request of a temporary admission (AT), the import of means of transport and machineries used for the construction of the infrastructure in the zone.

 

What Are The Incentives Enjoyed By Zone Investors? Incentives for the Zone Investors are decided by the SEZ Administration through the “One-Stop Service” mechanism located within the zone and include the following:

 

  • The same incentives on custom duty and tax as other QIPs are entitled, namely tax on profit and import duties and other taxes; and
  • A Zero percent rate for Value Added Tax (VAT) to be recorded as the amount of tax exemption for its import provided the Production Outputs are re-exported. In the event that the Production Outputs are introduced into the domestic market, the Zone Investor shall refund the amount of VAT as recorded in comparison with the quantity of export.

 

Are There Any Other Incentives To The SEZ? Apart from the fiscal incentives, the Zone Developers and Zone Investors are entitled to:

 

  • Investment guarantees;
  • Rights to remit all their income derived from the investment and salary received in the zone to banks located in other countries after payment of tax;
  • Non-discriminatory treatment;
  • Non-nationalization; and
  • No price control.

 

Is There Any Restriction On Foreign Ownership Of Land? Only Cambodian nationals can own land in Cambodia. A Cambodian national for this purpose includes any person having Cambodian nationality, any Cambodian organisation recognised by law as a legal entity or any enterprise registered in Cambodia in respect of which 51% or more of the shares are held by Cambodian nationals or a Cambodian legal entity. A foreign investor cannot acquire or hold a majority interest in a Cambodian entity, which owns land in Cambodia. The takeover or acquisition of such an entity by a foreign investor would require the sale of any land held by that entity or the creation of a special purpose landholding entity (to be at least 51% owned by one or more Cambodian nationals) and transfer of ownership of the land to that entity. There are a variety of legal mechanisms that in practice are used to protect the interests of the foreign investor in such circumstances, including long-term leases, land concessions, mortgages or creation of security interests and other contractual arrangements. The acquisition by a foreign investor of a Cambodian entity holding such legal interests is therefore permitted by law. Long-term leases of 15 years or more are registrable property rights that may be the subject of an issuance of title deeds and which can be offered as collateral security for bank loan purposes.

 

III. Takeovers Regime

 

Cambodia does not have a specific regulatory regime nor does it have a particular regulatory principles applicable to takeovers or acquisitions of locally incorporated companies. There is no general competition or anti-trust regime, which prohibits agreements and conduct that limit or affect competition. However, there are general rules, which apply to the following:

 

Mergers Of Companies. The 2005 Law on Commercial Enterprises sets out a mandatory procedure to be followed for two or more companies to merge into one company or consolidate to form a new company. The merger must be authorized by a board resolution of each company and at least two thirds of the shareholders of each company. The effects of the merger will include that: 

 

  • the property of each constituent company will be the property of the surviving company;
  • the surviving company will continue to be liable for the obligations of each constituent company; and
  • all civil, criminal or administrative matters involving any constituent company will be inherited by the surviving company.

 

Takeovers Of QIPS: The rights and entitlements of a QIP may not be sold, transferred or assigned to any third party except in accordance with the acquisition or merger provisions of the Law on Investment. Those provisions apply if:

 

  • two or more persons who each carry on a QIP (each such person being an Investor), or an Investor and any other person, agree to merge to form a new entity, and the new entity wishes to carry on any or all of the QIPs and be entitled to the investment incentives and guarantees of such QIPs;
  • a person wishes to purchase the ownership of, and carry on, a QIP and be entitled to the investment incentives and guarantees of that QIP; or
  • a proposed transfer of shares in an Investor would result in at least 20% of the shares in the Investor being acquired by the transferee.

 

In order to be legally effective, any change of shareholders of a company incorporated in Cambodia must be registered with the CDC (for investment companies that are registered at the CDC) or otherwise the MoC by way of the filing of the amended Memorandum and Articles of Association with the CDC or the MoC.

 

Industry-Specific Regimes Such As The Banking And Insurance Industries:

 

Banking: The 1999 Banking and Financial Institutions Law regulates the licensing, supervision and control of commercial banks and microfinance institutions (Covered Entities). There are several specific provisions relating to the acquisition or sale of shares in or by a Covered Entity, including (i) notifying the National Bank of Cambodia (NBC) of any increase in, or transfer of, direct or indirect equity holdings in a Covered Entity which would enable the shareholder or group of shareholders to acquire or lose five percent of the Covered Entity’s capital or voting rights; (ii) obtaining the prior authorization of the NBC for acquiring or disposing of equity holdings that would directly or indirectly enable the shareholder or group of shareholders to acquire or lose either one half, one third, one fifth, or one tenth of the capital or voting rights of the Covered Entity; or the power of control over the management of the Covered Entity.

 

Insurance: The 2000 Insurance Law, which regulates the insurance sector, stipulates the following main provisions related to any takeover or acquisition of insurance companies in Cambodia: (i) any change in the shareholders who hold more than ten percent of the total shares of a licensed State-owned insurance company (that is, a licensed insurance company for which the State holds at least fifty one percent of the shares) must be approved by the Ministry of Economy and Finance (MEF); and (ii) if a licensed insurance company intends to change the Chairman of its Board of Directors, or any Director, the company must report the qualifications of the proposed new appointee to the MEF for its examination. The law does not require an acquirer to obtain the approval or consent of any Government agency, regulatory body or third party as a precondition to the sale or transfer of its shares in the company.

 

Zicolaw Logo-Pantone

 

For further information, please contact:

 

Sok Siphana, Partner, ZICOlaw

sok.siphana@zicolaw.com

 

Doing Business in ASEAN: Legal Considerations

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