Cambodia Delays Capital Gains Tax to 2024: Impact for Businesses and Individuals
Cambodia has officially delayed its planned implementation of capital gains tax to January 1, 2024, through Notification 4577 issued by the General Department of Taxation (GDT).
The decision is in support of the government’s new vision to foster post-pandemic economic growth through the ‘Strategic Framework and Programs for Economic Recovery in the Context of Living with the COVID-19 in a New Normal 2021-2023’. The framework lays out the strategies and roadmaps for each sector of the economy by focusing on three pillars: 1) economic recovery, 2) reforms, and 3) building resilience.
Why was the tax postponed?
The capital gains tax was postponed so business sectors can continue to recover, especially those outside of textile and garments, and tourism sectors.Cambodia’s economy shrank 3.1 percent in 2020 and factory closures and disruptions in the country’s textile and garment sectors resulted in exports decreasing by 6.5 percent or US$2.4 billion year-on-year. These sectors are the backbone of Cambodia’s economy, contributing to 17 percent of total exports as well as employing close to 1 million workers. It was a harsh year for the tourism sector too, Cambodia’s second-largest contributor to GDP, as international arrivals plunged by 91 percent year on year.
The economy did rebound in 2021 and saw growth of three percent due to a slew of government incentives aimed at protecting businesses and people’s incomes, a successful national vaccination campaign, and timely lockdowns. According to the Asian Development Outlook (ADO) 2022 report, Cambodia’s economy is forecasted to grow 5.3 percent in 2022 and 6.5 percent in 2023, mainly due to strong merchandise exports.
The capital gains tax was originally planned to be implemented in July 2020 through the issuance of Prakas 346, whereby capital gains received by residents and non-resident taxpayers would be taxed at a fixed rate of 20 percent. This was delayed until January 2021 and then delayed again to January 2022, before the government finally decided on a 2024 deadline. Prakas 346 defined ‘capital’ as immovable property, intellectual property, foreign currencies, leases, goodwill, and investment assets.
Although this is not a new tax, the government has expanded its tax base to include individuals buying and selling properties.
Under the Prakas, the tax is levied based 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 selling price of the asset where it deems the indicated price is lower than the market value.
Further, capital assets that are exempted from capital gains tax are as follows:
- Assets of state institutions, foreign embassies, and international organizations;
- Immovable properties that were sold or transferred for the public interest under the Law on Expropriation;
- The transfer of immovable properties between relatives as stated in the regulation on stamp duty tax; and
- The primary residence for a taxpayer for at least five years prior to the sale or transfer.
How is capital gains tax calculated?
The Prakas sets out two mechanisms for calculating capital gains tax and taxpayers are free to choose which method suits them best:
- The determination-based deduction; and
- The actual expense-based deduction.
Under the determination-based deduction, the taxpayer takes 80 percent of the proceeds and subtracts it from the entire sales value. The difference will be taxed at the 20 percent rate. This calculation is suited for property owners who have bought cheap in the market and are looking to sell high.The actual expense-based deduction takes total sales proceeds and subtracts expenses the seller has incurred. This includes registration tax, commissions, consulting fees, purchasing costs, and advertising, among others.
The difference will then be taxed at the 20 percent rate.
Who stands to benefit from the postponement?
Businesses in the real estate sector will stand to benefit the most from the postponement in the capital gains tax. Cambodia’s construction and real estate sector saw high interest from foreign investors and capital investments in construction reached US$9 billion in 2019.
This trend continued in 2021 when almost 4,000 projects were approved, amounting to US$10.35 billion. Of the 4,000 projects, 90 percent were classified as residential projects, located primarily in Phnom Penh. According to CBRE Cambodia — a real estate services firm — land values in Phnom Penh have seen an annual growth rate of around 10 percent in the central business district and inner suburbs, and 20 percent in the outer suburbs. Meanwhile, land prices in Sihanoukville rose over 100 percent for a period of five years before COVID-10 due to increasing Chinese investments.
Another segment set to benefit from the postponement is individuals who make a profit from buying and selling properties that do not constitute their main place of residence. As was previously mentioned, capital gains tax is exempted for individuals who sell a property that has been their primary residence for at least five years before the sale.
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