Will Cambodia's New Draft Law On Investment Attract More Foreign Investors?

Compass Cambodia - Recently, the Council of Ministers of Cambodia approved the new version of Draft Law on Investment of the Kingdom of Cambodia. Prime Minister Hun Sen said that the New Draft Law on Investment aims to further optimize the business environment, attracts foreign investors and facilitates their investment in Cambodia.

In recent years, Cambodia's economic development has made remarkable achievements. Since 2010, the annual GDP growth rate has almost exceeded 7%. The open investment environment is an important factor to promote the growth of domestic and foreign investment. Even during the epidemic period in 2021, Cambodia attracted nearly US $3 billion in investment in the first half of the year, which is enough to prove that Cambodia's investment value is still quite attractive.

In the post epidemic era, what changes will the adoption of the New Draft Law on Investment bring to Cambodia's investment environment? Will Cambodia's investment attraction increase?

1. Review of Law on Investment of The Kingdom of Cambodia

1.1. The First Law on Investment In 1994

According to the unofficial translation of Law on Investment of the Kingdom of Cambodia by Council for the Development of Cambodia (CDC), the first investment law was promulgated and signed by His Majesty King Norodom Sihanouk on August 8th 1994. This law consists of 9 chapters and 26 articles. It governs all investments projects made by investors who are Cambodian citizens and/or foreigners within the Kingdom of Cambodia, and has the following important provisions on the investment behavior:

▲ The Royal Government shall not impose price control on the products or services of investors who have received prior approval from the government;

▲ Investors with investments in Cambodia are permitted to purchase foreign currencies through the banking systems and to remit abroad these currencies for the discharge of financial obligations incurred in connection with their investments;

▲ Investments in important fields in 9 categories are able to receive incentives to encourage investments: 1) Pioneer and/or high technology industries, 2) Job creation, 3) Export-oriented, 4) Tourism industry, 5) Agro-industry and processing industry, 6) Physical infrastructure and energy, 7) Provincial and rural development, 8) Environmental protection, and 9) Investments in Special Promotion Zone (SPZ) as shall be crated by law;

▲ Land ownership for any purpose of investment activities shall be vested only in natural persons holding Cambodian citizenship or in legal entities in which more than 51% of the equity capital are directly owned by natural persons or legal entities holding Cambodian citizenship. Investors are permitted for the use of land, including long-term leases of up to a period of 70 years, renewable upon request.

1.2. Amendment Law on Investment In 2003

In order to make a better progress in investment in Cambodia, the government decided to have an amendment to the investment law in 2003. Law on the Amendment of the Law on Investment of the Kingdom of Cambodia has been adopted by the National Assembly on February 3rd 2003. This law consists of 10 chapters and 27 articles. The Law governs all Qualified Investment Projects and defines procedures by which any person establishes a Qualified Investment Project, and again, increases the incentives of encouraging investment:

▲ A Qualified Investment Project (QIP) shall be entitled to exemption from the tax on profit imposed under the Law on Taxation by obtaining a profit tax exemption period. The tax exemption period is composed of a Trigger Period + 3 years + Priority Period. Priority Period shall be determined in the Financial Management Law;

▲ A domestically oriented QIP shall be entitled to import production equipment and production input construction materials, exempt of duty which shall be specified by the Sub-Decree;

▲ A "Supporting Industry" QIP shall be entitled to import production equipment, construction materials, raw materials, intermediate goods and production input accessories, exempt of duty which shall be specified by the Sub-Decree;

▲ A QIP shall be entitled to 100% exemption of export tax, except for activities as stipulated in laws in effective;

▲ Ownership of land by investors for the purpose of carrying on a QIP shall be vested in natural persons holding Cambodian citizenship or in Cambodian Entities. Use of land shall be permitted to investor, including concessions, unlimited long-term leases and limited short-term leases which are renewable, in compliance with the provisions of the Land Law.

2. Changes And Impact of The New Draft Law on Investment

2.1. Adoption of The New Draft Law on Investment

On July 9th 2021, the Council of Ministers of Cambodia approved the new draft law on investment. This draft law is expected to be promulgated in the near future. After that, the New Law on Investment will reclassify Cambodian industries. Industries that are aligned with the national development goals and those that it plans to attract in the next 5 to 10 years will be categorized into special categories and receive investment incentives.

The tax incentives in the draft law are divided into three categories: - Basic incentives - Additional incentives and - Special incentives.

As for the basic incentives, it is further divided into two different options depending on the choice of the direct investor, with the first option focusing on income tax exemption for a period of 3 to 9 years based on the sector and the investment activity from the time of first income and other incentives. And the second option is focused on the right to deduct capital expenditure through special depreciation and deduction, which is up to 200% on other significant expenses for up to 9 years and other incentives. In addition, Qualified Investment Project (QIP) also receives other additional incentives, such as tariff exemptions, excise duties and value-added tax (VAT) on construction materials, construction equipment, production equipment, and its inputs, depending on the type of investment project.

As for special incentives that the draft law is also intended to be flexible, which are for specific industries and investment activities that have the potential to contribute significantly to national development in accordance with government priorities. The Financial Law for Management will specify this specific incentive.

2.2. Impacts of The New Draft Law on Investment

After the New Draft Law on Investment passed smoothly, its impact will be multifaceted. It is expected to enhances the stability and predictability of investment and adds preferential measures on the basis of existing laws, which will undoubtedly increase the confidence of investors.

In addition to reassure investors, the draft law incorporates some of Cambodia's international commitments, demonstrating the Royal Government of Cambodia's willingness to protect investments and give guarantees in compliance with international law to all investors. Nondiscrimination as well as financial management services are also available.

In the long run, the New Draft Law is more strategically important for Cambodia's development.

The global economy has changed dramatically since the outbreak in 2020. Under the background that the Cambodia-China Free Trade Agreement, the Cambodia-Korea Free Trade Agreement, and the Regional Comprehensive Economic Partnership Agreement (RCEP) are about to enter into force, and under the framework of the Generalized System of Preferences (GSP) of the United States and the United Kingdom and the EBA with the European Union, the new investment law is at the right time to attract more investors to invest in Cambodia, and bring new opportunities for Cambodia's economic development.

3. Cambodia's Investment Advantages Have Become Increasingly Prominent

Investment law has brought a relaxed investment environment to Cambodia. In recent years, with the economic development of Cambodia and Southeast Asia, Cambodia's investment advantages have been increasingly valued by the world:

▲ Strategic Advantage: Cambodia is located in an important area of "The Belt and Road Initiative", the eastern line of "Trans-Asian Railway", and also the core position of ASEAN. The future economic and trade exchanges between Cambodia will be more convenient. This will undoubtedly greatly enhance the economic development momentum of Cambodia and drive Cambodia's position in ASEAN.

▲ Huge Demographic Dividend: the average age of Cambodian population is 27 years old, and young people under 34 years old account for 70% of the total population, with a population growth rate of 1.5% and women account for 51%. The whole Cambodian population presents a perfect "Symmetrical Pyramid". The younger the country, the greater the possibility of increase in market value. In terms of purchasing power, consumption power, productivity and so on, Cambodia has shown a strong driving force. The next 10 years will be the golden 10 years of Cambodia;

▲ Accelerated Rural-Urban Migration: in recent years, 16.2% of Cambodian people leave rural areas to find jobs in cities every year. A large number of rural young people, and students who return from abroad, come to Phnom Penh to look for opportunities and settlement in the big city. These populations also bring a lot of living demand. With the development of Cambodian economy, the local purchasing power is gradually increasing;

▲ US Dollar Assets: Cambodia, as the only US dollar asset country in Asia and the third largest in the world, from buying a house and a car to buying vegetables and goods, whatever consumption is, it is traded in US dollar, which virtually resists the asset evaporation caused by currency devaluation, because the US dollar is still the most stable currency in the international circulation;

▲ No Foreign Exchange Control: capital flows in and out freely, and taxes are low. There is no personal income tax, and how much you earn is all owned by you;

▲ Large Number of Foreign Investment: many countries and regions, including China, have entered Cambodia, and the world's famous brands have set up sites or factories in Cambodia. This has brought abundant foreign capital and a large number of population inflows to Cambodia, as well as strong demand.

Cambodia will attract additional investment opportunities for locals and foreigners especially with the New Law on Investment and several investment incentives.

Currently, Cambodia's real estate market is at a low point due to the epidemic. Thus, it is a wonderful investment opportunity for investors with sufficient funds to acquire at a low price. If the inflow of investment proceeds as planned, Cambodia's real estate market will continue to thrive, with a major portion of the housing stock available for various types of investment.

Source: Compass Cambodia Original

Editor: Malinda         Chief Editor: Sunnie         General in Chief/Executive Producer: Nicole

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