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Brief Guide to M&A in Cambodia

1. The legal system

• Cambodia has a civil legal system, which has been strongly influenced by French law.

2. Are there any restrictions on foreign investment ownership?

• No, but certain regulated industries may require prior approval for a change in ownership.

• Foreign individuals/foreign-owned entities may readily incorporate a company in Cambodia.

3. What are the options available for an overseas investor in terms of the purchasing entity?

• Most acquisitions by foreign investors are made using a Cambodia private limited company. Such entities can be easily incorporated, although processing times generally take about four to six weeks and often longer for companies in regulated industries.

• The maximum number of shareholders of a private limited company is 30.

• The minimum share capital requirement is KHR4 million (approx. USD 1,000). However, if the business operates in a regulated sector, there may be additional capital requirements as determined by the relevant authority.

• The company must have a registered office in Cambodia, where the registers are kept. Registration must be made with the Ministry of Commerce (MoC). The company name must be approved by the MoC before incorporation.

4. Key corporate governance considerations for a local incorporated entity

• Upon registration, the company must appoint at least one director and one shareholder.

• There are no residency requirements for directors of Cambodian companies, but foreign directors must have work permits to conduct business in Cambodia.

• All directors must be individuals.

• Companies that have approved Qualified Investment Projects or meet two of the following criteria must submit yearly audit reports to the General Department of Taxation (GDT):

1. Annual turnover of KHR3 billion (approx. USD 750,000) or above;

2. Total assets of KHR2 billion (approx. USD 500,000) or above; or

3. 100 or more employees.

• Companies should submit monthly and annual tax filings to the GDT and an annual declaration to the MoC.

5. Brief overview of structure, documentation and execution

• Both share deals and asset deals are utilised, but share deals are more common.

• The contents of a sale and purchase agreement (SPA) in Cambodia are broadly similar to an SPA for acquiring a company in Singapore or Hong Kong. It is common for:

» Completion to be subject to condition precedents (see below); » A tax indemnity to be provided by the sellers; » Warranties to be qualified by disclosures in a disclosure letter;

» Liability to be capped, with a de minimis threshold; » No general material adverse change condition precedent; and » Data room to be set up for the purpose of buyer’s due diligence.

• For a share deal, the share transfer takes legal effect when the share transfer application is approved and the Memorandum and Articles of Association is updated by the MoC. For a company that has an approved Qualified Investment Project or is licensed in a regulated industry, additional regulatory approvals may be required prior to submission to the MoC.

6. What conditions precedent typically need to be satisfied before closing?

i. Antitrust approval

» No antitrust approval is required prior to signing or closing. There are currently no laws regarding competition that must be taken into account. However, a draft law on competition is currently pending. In its current version, no prior anti-trust approval will be required but business combinations with the effect of significantly restricting or distorting competition may be blocked or unwound.

ii. Employment

» While Cambodia does not impose any restrictions or regulations against foreign companies hiring in Cambodia, there are provisions in place regarding foreigners’ employment.

» Generally, foreign employees may not compose more than 10% of a company’s staff. An exemption for this quota may be requested from the Ministry of Labour and is often granted to foreign-invested enterprises.

» There is no need to consult the employees of the company in a share acquisition deal.

» In an asset acquisition deal, employment contracts may be automatically transferred to the buyer on the existing terms. However, this is subject to agreement by the buyer to honour all seniority and benefits of the transferred employment contracts.

» A foreigner must have a valid work permit issued by the Ministry of Labour in order to be legally employed in Cambodia.

iii. Material adverse change

» No material adverse change as an express condition precedent is not common, unless there is a long gap between signing and completion.

7. What are the options available to the foreign investor in terms of financing the transaction?

i. Onshore borrowing

– Banks may lend US dollars or Cambodia riel to non-residents (including foreign-owned companies) for any lawful purpose in Cambodia including investments in financial assets. Such loans are generally secured by land title or other hard asset security interests.

ii. Offshore borrowing

– Foreign financing is permitted for non-residents, subject to withholding tax on interest earned by foreign banks from the financing.

iii. Exchange control

– There are no formal restrictions nor limits on non-residents maintaining US dollars, Cambodian riel or other currency bank accounts in Cambodia. There are no restrictions on remitting currency overseas.

8. What are the key tax considerations for the foreign investor?

i. Profits tax

» There is currently no separate capital gains tax in Cambodia; rather, Cambodia imposes an analogous “tax on profit” (TOP). All earned income from capital gains from the sale of various asset and immovable property by a company is taxed the same as regular TOP at the rate of 20%, with a notable exception for insurance activities which is taxed at a rate of 5% (on gross premium income only; income derived from other business activities is subject to the standard TOP rate of 20%). Capital gains tax is currently slated to be implemented as of 1 January 2022. Once in force, capital gains tax will be imposed on individuals and companies at a flat rate of 20% on gains from the sale or transfer of assets (such as land), subject to deductions of allowable expenses.

» Resident taxpayers are subject to tax on worldwide income/profits while non residents are taxed on Cambodian-sourced income/profits only.

ii. Share transfer tax

» Stamp duty is payable on any written document that relates to a transfer of shares of a Cambodia-incorporated company, such as an SPA and transfer document for shares. The rate is 0.1% of the consideration paid per share, payable within three months of execution of the transaction.

» A flat rate of KHR1 million (approx. USD 250) is payable on the registration of any legal document with the GDT.

iii. Property transfer tax

» Tax on immovable property is payable on any transaction that relates to any immovable property such as land, buildings and construction or infrastructure on the land.

» Tax on immovable property is imposed at the rate of 0.1% of the value of the immovable property exceeding the threshold of KHR100 million (approx. USD 25,000). The immovable property’s value is determined by the Immovable Property Assessment Committee. The property tax return must be filed and taxes must be paid by 30 September each year.

» Stamp duty is applied at a rate of 4% to the transfer of ownership or possession of the following:

– all immovable property including buildings and other structures;

– land; and

– all means of transportation.

iv. Withholding tax

» Cambodia levies withholding tax (WHT) on specified domestic transactions as well as specified payments to non-resident parties.

» Payments of certain Cambodian-sourced income by a resident taxpayer carrying on a business in Cambodia to a Cambodian resident are subject to the following WHT:

– performance of services (15%), except payment to a tax-registered taxpayer and supported by a valid VAT invoice;

– royalties (15%);

– interest payments (15%); and

– rental payments (10%).

» WHT on payments to resident entities may be offset against the TOP of those resident entities.

» Payments by a resident taxpayer to a non-resident are subject to the following WHT unless reduced by a favourable tax treaty (e.g., Cambodia’s tax treaty with Singapore):

– interest (14%);

– royalties, rental and other income connected to the use of property (14%);

– management and technical fees (14%)

– while these fees are not currently defined in the Law on Taxation and tax regulations, the GDT has, in practice, adopted a very broad definition of management fees and technical services; and

– dividends (14%).

» WHT does not apply to payments for goods.

» WHT generally applies to the expenses or payments listed above that are accrued in a resident taxpayer’s accounting books.

However, please note that if the Cambodian entity pays these expenses in advance, it must also subject these advance payments to the appropriate WHT rate. The WHT is due to be remitted to the tax authorities by the 20th day of the month following the accrual or the payment of the expense.

v. Dividend income » Distributions of dividends are subject to Advanced Tax on Dividend Distribution (ATDD) as follows:

Distribution of profits which

are subject to a TOP rate of ATDD

20% or 30% ___________________Nil

0% __________________________20%

» Dividends received from resident companies are not subject to income tax, while dividends received from non-resident companies are subject to income tax in Cambodia. However, a credit for tax paid overseas on foreign source income is generally allowed.

9. Is arbitration a common option for dispute resolution?

• Yes. Cambodia is a signatory to the New York Convention and international arbitration in Singapore or Hong Kong is commonly used and local arbitration is also available.

10. Is there a requirement that the agreement be executed in the local language?

• No, there are no language requirements for the SPA, but some documentation, including share transfer applications with the MoC, is required to be in the Khmer language.

Author, Joseph Lovell Senior Partner IAO ASIA. Extract from Brief Guide to M&A in Southeast Asia published by Mayer Brown in 2021. Image right reserved from Brief Guide to M&A in Southeast Asia published by Mayer Brown in 2021

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