Cambodia

There is no specific provision for group taxation in Cambodia.

Transfer pricing

On 10 October 2017, the MEF issued Prakas No. 986 to provide ‘rules and procedures on income and expense allocation among related parties’ (known as the ‘Local Transfer Pricing Rules’), which is effective immediately.

The Prakas defines the transfer price as ‘the price of goods, services, or property charged between related parties’. Transfer pricing refers to setting the value of transactions (e.g. the sale or purchase of goods or services, royalties, or interest) between related parties using the most appropriate transfer pricing methodology. If the transactions aren’t at arm’s length, the tax authority may adjust the value and impose taxes accordingly.

The purpose of transfer pricing rules is typically to make sure related entities compensate each other appropriately in an amount that is commensurate with the value of property transferred or services provided and to prevent entities from manipulating profits between related parties to minimise tax exposure.

We’ve summarised key information from the Prakas, including the definition of related party, acceptable transfer pricing methodologies, and the required documentation, below.

Related party definition

The Prakas defines ‘related party’ as a relative of the taxpayer or an enterprise that controls, is controlled by, or is under common control with the taxpayer. The term ‘control’ means ownership of 20% or more of the equity interest in the enterprise or voting power of the board of directors.

Transfer pricing methodologies

The acceptable methodologies for determining arm’s-length pricing under the Prakas are those endorsed by the Organisation for Economic Co-operation and Development (OECD) in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The five methodologies are described below:

Transfer pricing documentation

Entities that transact with related parties must prepare and maintain transfer pricing documentation setting out related-party transactions and the transfer pricing methodologies used to justify an arm’s-length value. Documents related to the transactions, such as invoices, must also be kept for ten years from the tax year end.

Entities must also disclose related-party transactions when filing their annual CIT return and provide relevant transfer pricing documents if required by the tax authority.

Updated rules and procedures on income and expense allocation among related parties

The Ministry of Economy and Finance (MEF) has issued Prakas 574, 19 September 2024 to replace (update) Prakas 986, 10 October 2017 on the rules and procedures for income and expense allocation among related parties. The key changes from the previous Prakas are summarised below.

Definitions

1. The term ‘related party’ refers to:

         - any relative of the taxpayer

         - any enterprise which directly or indirectly controls, is controlled by, or is under common control with the taxpayer, including         relationships between a permanent establishment (PE) and a non-resident taxpayer. The term ‘control’ means ownership of 20% or more of the value or voting rights to the equity interests in the enterprise. To determine the degree of control of any taxpayer (physical person), the ownership of all equity interests by that individual and the direct or indirect ownership of equity interests of a taxpayer’s spouse will be considered. Regardless of the above conditions, the tax administration can make a judgement on the direct or indirect control based on each actual case to determine whether the control exists.

2. The term ‘primary adjustment’ refers to the tax administration’s initial adjustment to taxable income after applying the arm's length principle to transactions between taxpayers and related parties.
3. The term ‘secondary adjustment’ refers to the adjustments that arise from tax reassessment on transactions resulting from the primary adjustment. In this case, the transactions resulting from the primary adjustment include dividends, capital contribution or loans.
4. The term ‘median’ refers to the middle value in a set of data organised and ordered from smallest to largest. If the number of data points in the set is odd, the median will be the middle number. Conversely, if the number of data points in the set is even, the median will be the average of the two middle numbers.
5. The term ‘transfer pricing’ refers to the setting of prices for transactions among related parties.

Arm's length range

1. The arm’s length range is a range of relevant financial indicators (e.g. price, or profit margin) of the uncontrolled transactions derived from the implementation of the transfer pricing methods stated in this Prakas. They are comparable to the controlled transaction based on a comparability analysis as stated in Article 6 of this Prakas.
2. The controlled transaction won’t be adjusted if the financial indicator derived from the controlled transaction, tested in line with the appropriate transfer pricing method, falls within the arm’s length range. In contrast, a financial indicator of the controlled transaction that falls outside the arm’s length range will be adjusted to the median of the arm’s length range.But this only applies where it doesn’t result in a reduction or loss of tax revenue.

Documentation

1. Taxpayers who prepared a transfer pricing report for the previous tax year can reuse the report for the current tax year if there are no changes to the controlled transactions and comparability factors affecting the transfer pricing method used. However, they must update comparable financial indicator data annually.
2. Loan transactions with related parties are exempt from the arm’s length principle if the taxpayer maintains interest documents as determined by the GDT’s Instruction.
3. Resident taxpayers, who aren’t banks or microfinance institutions (MFIs), are exempt from the arm’s length principle for loans from related parties and aren’t required to prepare interest documents with related parties. However, the taxpayer must meet at least one of the following conditions:

         - the enterprise was incorporated less than three tax years ago, starting from the date of tax registration

         - it’s a single member private limited company with loan transactions from shareholders that have a balance of less than KHR 3 billion (approx. USD 750,000) at any period, or

         - it’s a sole proprietorship with loan transactions from the owner, spouse or dependent children.

4. Taxpayers are exempt from preparing transfer pricing documents for any tax year if they meet all the following conditions:

          - their annual turnover is less than KHR 8 billion (approx. USD 2 million) and total assets are less than KHR 4 billion (approx. USD 1 million), and

          - their related party transactions have a total value of less than KHR 1 billion (approx. USD 250,000) for goods, services, royalties              and other transactions, excluding loan transactions.

Attributions of profits to the permanent establishment (PE)

1. If a non-resident taxpayer has a PE in the Kingdom of Cambodia, the taxpayer must allocate gross income, deductions or other benefits to clearly reflect the income between the PE and non-resident taxpayer.
2. This taxable income derived from the PE and non-resident taxpayer will be determined as the taxable income of independent and separate enterprises that have the same or similar business activities under the same or similar conditions. This will also include the income from the supply of goods or services similar to or the same as the PE’s business activities that the non-resident taxpayer has supplied within the Kingdom of Cambodia.

Penalties

Regardless of other criminal offences, failure to comply with the obligations laid out in this Prakas will result in the revocation or reassessment of the taxpayer's tax compliance certificate. The taxpayer will also be subject to penalties as stated in the tax law. Where necessary, the tax administration may investigate and build a case for a criminal tax offence, as stated in the tax law.

Implementation

This new Prakas came into effect on 1 January 2025.

Thin capitalisation

There is no provision for thin capitalisation in Cambodia. However, there are various rules and restrictiosn for tax deductions of interest expenses (see the Deductions section).

Controlled foreign companies (CFCs)

There is no provision for CFCs in Cambodia.