Cambodia Eases Financing for Businesses Impacted by COVID-19
- Cambodia’s government has issued a variety of measures to assist businesses impacted by the coronavirus outbreak.
- The government has reduced the withholding tax rate to between 5-10 percent on interest applied to new and existing loans starting from April 2020.
- The Ministry of Economy and Finance has injected an additional US$200 million to help businesses secure working capital loans or investment loans.
The Cambodian government has issued new measures to assist more businesses impacted by the coronavirus pandemic. The Ministry of Economy and Finance (MEF) issued Prakas (regulation) no. 525 in late June 2020 on the new reduced withholding tax (WHT) rates to be applied on interest paid by banks and other financial institutions on domestic and foreign loans.
Furthermore, the MEF has provided more financing for small and medium-sized (SMEs) in the country through the Credit Guarantee Fund, which guarantees loans provided by financial institutions, thus improving access for SMEs to obtain working capital.
This initiative is part of the government’s efforts to increase cashflow into the banking system and reduce the tax burden for businesses.
The government has provided a variety of COVID-19 stimulus packages, mainly targeting the country’s two major business sectors – apparel manufacturing and tourism.
Apparel manufacturing, which constitutes some 80 percent of Cambodia’s total exports and is the largest contributor to national economic growth, has suffered from dwindling imports of raw materials from China because of virus-caused supply chains problems and cancellation orders from apparel brands in Europe and the US. This resulted in more than 200 apparel factories in Cambodia suspending operations and adversely affecting 150,000 workers.
Investors should seek the assistance of dependable advisors to help them understand how they can benefit from these incentives.
What are the new withholding tax rates?
The standard WHT rate that applies to interest payments for resident lenders is 15 percent whereas the rate for non-resident lenders is 14 percent.
Under Prakas 525, for banks and financial intuitions that have an existing loan with a resident and non-resident lenders, the WHT rate has been reduced to 10 percent – effective between April 1, 2020 to December 31, 2020. The standard 14 0r 15 percent will be applicable as of January 1, 2021.For banks and financial institutions that have entered into new loan agreements with resident and non-resident taxpayers, the WHT rate is five percent – effective between April 1, 2020 to December 31, 2020. This is then increased to 10 percent for the 2021 tax year (January 1-December 31, 2020) with respect to new loans before the standard WHT rate of 14 or 15 percent is reapplied from January 1, 2022.
To obtain the aforementioned WHT rates, banks and financial institutions must provide the following supporting documents:
- The loan agreement, certified by the lawyers of both parties;
- The cash transfer documents related to the loan agreement; and
- The accounting records of the loan and interest payments in the records of the bank/financial institution.
Increased access to business financing
The MEF has provided US$200 million for the Credit Guarantee Fund so that businesses in all sectors can have improved access to financing.
The government has already provided low-interest loans through the Agriculture Rural Development Bank (ARDB). Interest rates for working capital loans were lowered from six to five percent and from 6.5 to 5.5 percent on loans for investment capital.
The loan tenure for working capital loans has been capped at two years whereas the tenure for investment loans has been shortened to five years from seven years previously.
Businesses can use the government’s recently launched online registration platform to apply for these incentives.