Key Highlights of Cambodia-China Double Taxation Treaty
By Dezan Shira & Associates
Editor: Vasundhara Rastogi
Recently, China’s State Administration of Taxation (the SAT) released an announcement, setting out the effectiveness of the new China-Cambodian Double Taxation Treaty (DTT) and the associated protocol. The new DTT – signed on October 13, 2016 – entered into force on January 26, 2018, and will be applicable to income received on or after January 1, 2019.
The treaty aims to create a clear legal framework built on increased fiscal transparency that will improve the tax collection mechanism between the two countries and increase cross-border trade and investment.
It is important to note that the DTT does not apply to Hong Kong or Macau, as these regions have a separate tax system and do not fall under the taxation laws of the People’s Republic of China.
Some of the key highlights of the DTT include the following.
- Permanent establishment
The DTT specifies that a Chinese company is deemed to have a permanent establishment (PE) in Cambodia or, in other words, have a taxable presence in Cambodia if it has a place of management, office, branch, construction, assembly, or an installation project, or provides associated supervisory activities that last for at least nine months. A Chinese company may also be deemed to be a PE if it conducts activities for the exploration or exploitation of natural resources for more than 90 days in any 12-month period.
It must be noted that Cambodia imposes a 20 percent income tax on the income earned from the carrying on of a business through a PE.
- Reduced withholding tax rate.
Previously, Cambodia levied a 14 percent withholding tax on payments of dividends, interest, and royalties paid to Chinese residents. Under the signed DTT, these rates have been slashed to 10 percent.
Only, the interest payments made by a Cambodian company to a Chinese financial institution that has the government of China as the majority shareholding partner enjoy full exemption from withholding tax. This provision allows Cambodian companies, involved in large-scale infrastructure projects in the country, to benefit tremendously from tax-free interest payments on loans granted by Chinese state banks.
- Fees for technical services
The reduced withholding tax rate also applies to fees for technical services unless the services are rendered through a PE in Cambodia. In case of latter, the income, net of allowable expenses, is taxed at 20 percent.
DTT defines technical services to include any managerial, technical or consultancy services, including the provision of services of technical or other personnel. The definition does not include independent personal services.
Difference between Cambodia’s DTAs with Singapore and China
One of the key differences between Cambodia’s double taxation agreements with Singapore and China is that the DTT with China does not include a provision for the creation of a service PE. Cambodia’s DTT with Singapore, on the other hand, provides for the creation of service PE if a Singaporean company’s employees are physically present or engaged in Cambodia for a period exceeding 183 days in any 12-month period.
Further, there is a difference in the time period required for the Chinese and Singapore companies to establish a PE in Cambodia.
Where the tax treaty with China provides a nine-month threshold for determining a PE, the threshold for Singapore based companies is six months.
Significance of the DTT with China
In the last five years, from 2013 to 2017, China has been the leading source of foreign investment in Cambodia. According to the Cambodia Investment Board, the total investment capital from China reached US$5.3 billion in the five year period, which is about US$1 billion annually.
This agreement will encourage Chinese investors to inject more capital into Cambodia by eliminating the risk of double taxation. As the agreement comes into effect, the investors will enjoy tax credits on both inbound and outbound capital, and will no longer need to worry about an excessive tax burden derived on income earned in either Cambodia or China.