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Jan 31, 2014

Notice and Registration Requirements for Loan Documents

By Tim Holzer

Cambodia’s General Department of Taxation (the “GDT”), on 22 January 2014, issued new Instruction No. 151 which, by its terms, may require loans to enterprises to be registered within 30 days of the loan transaction. Failure to register a loan may result in the lent amount being treated as taxable profit at a 20% taxation rate. 
Instruction No. 151 on Tax Assessment on Interest Expense of the Enterprise (22 January 2014) (herein, “Instruction 151”) deals with tax issues related to interest on loans received by an enterprise in Cambodia and – more importantly – with loan proceeds themselves. Instruction 151 replaces earlier Instruction 1707 which inter alia required certification of the loan agreement by lawyers for each party.
Different interpretations of Instruction 151 are possible.  We are studying the Khmer version and its (draft) English translation now.  We are also discussing the intention and interpretation of Instruction 151 with the GDT.  Accordingly, the content of this newsletter will almost certainly require updating.
As our study of Instruction 151 continues, other issues may be identified.   Presently identified performances and issues include the following:
(i) Must the loan agreement, itself, be registered?
May a Pro-Forma loan agreement be used?  Instruction 151 requires the borrowing enterprise to “notify [the] tax administration within 30 days after the loan transaction incurred [and have attached] the loan contract or agreement or supporting documents”  (Article 5, Instruction 15).  Noting that, at times, either the lender or the borrower may wish to keep terms of the loan (e.g., conditions precedent) confidential, we (Sciaroni & Associates) are working to develop a notice and pro-forma loan agreement that may be used;
(ii) Does the loan agreement or pro-forma agreement need to be certified before a lawyer?
Although the language in Instruction 151 does not, by its terms, require certification by a lawyer for each party, some caution is recommended.  This is because Instruction 151 replaces Instruction 1707.  Instruction 1707 clearly required certification by a lawyer for each party.  It may be that the GDT will continue to require certification by a lawyer for each party;  
(iii) Does Instruction 151 Apply Retroactively?
By its terms Instruction 151 should not apply retroactively.  Instruction 151 states: “All of the units of taxation and all enterprises which are self-declaration regime taxpayers shall comply with the contents of this Instruction in effect from the date of this signature”.  Still it is prudent to remember that the GDT will be looking for documentary evidence that a loan exist.  So the question is what documentary evidence is sufficient?  It may be that tax officials may require the documentation specified in Instruction 151, even retroactively.  Recent experience has shown that the GDT was applying (the now replaced) Instruction 1707 retroactively; 
(iv) What borrower and lenders are covered by Instruction 151?
Instruction 151, by its terms, applies to “any enterprises which have recorded in balance sheet of loan from the bank or savings institution or from other enterprise . . .”  This general scope may, arguably, only apply in the following circumstances: (a) where the balance sheet does not record interest expense; (b ) where interest is below market interest rate; or (c) where the balance sheet has recorded interest expense above market interest rate;  and
(v) Is it necessary to register amendments to covered loans?
Instruction 151 does not provide any guidance on this question.  Still, it may be not be unreasonable to provide notice (within 30 days of the event) to the GDT of changes in the “principal amount”, the “up to amount”, the interest rate, and the identity of the borrows and/or lenders.  The potential effect of failure to comply with Instruction 151 is brutal: namely, the lent amount may be treated as taxable profit at 20%.
"Sciaroni & Associates has extensive experience in advising clients on the application of Cambodian tax law and on implementing a suitable tax strategy to reduce tax risk to an acceptable level" 

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Sciaroni & Associates is a leading professional and investment advisory firm doing business in Southeast Asia since 1993. Based in Cambodia with legal offices in Laos and Myanmar, we provide experienced advice and business insights to many of the world’s leading companies, governments, economic think tanks, global development funds, international NGOs and the Royal Government of Cambodia in accordance with strict international standards.
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