On 14 February 2023, the General Department of Taxation (“GDT”) issued Notification 5367 (“Notification 5367”), which provided the 2022 market interest rates for Employee Loans and loans between related parties in accordance with Article 15 of Prakas 543 on Tax on Salary and Instruction No. 7015 GDT dated 13 March 2020 and Instruction No. 10979 GDT dated 25 May 2022.

The GDT market interest rates for 2022, based on the average of eleven (11) commercial Cambodian banks, are as follows:

• USD – 8.35% per annum
• Khmer Riel – 8.78% per annum

Commentary

The GDT makes it clear in Notification 5367 that the 2022 market interest rates are to be used to determine the tax base for the application of fringe benefit tax on loans that are provided by an Employer to an Employee and to cap the interest rate, from a tax deductibility perspective, for loans between related parties.

Employee Loans

When an Employer in Cambodia provides a loan to an Employee with an interest rate that is lower than the market rate the difference will be considered a fringe benefit that has been provided to the Employee. The Employer will need to withhold and deduct Tax on Fringe Benefit at the flat rate of 20% on the difference.

Instruction No. 7015 issued by the GDT in early 2020 provides two options for an Employer to determine the market interest rate for loans that they have provided by to an Employee;

1. The minimum interest rate charged by the Employer on loans to third parties or to debtors;
2. The market interest rate issued by the GDT from the previous tax year i.e., year N-1 with N being the current tax year.

To the extent that the market interest rate, as determined above, is higher than the actual interest rate used for an employee loan the 20% Tax on Fringe Benefit will apply on the difference.

Loans between Related Parties

Based on Instruction 10979, a Cambodian enterprise entering into a loan with a related party may determine the interest based on an interest rate that is mutually agreed upon. The enterprise does not need to comply with the Arm’s Length Principle (contained in Prakas 986), provided that the enterprise has the following documents to support the loan:

1. A loan agreement that specifies the terms of loan and repayment obligations.
2. A business plan or current/forecasted financial statements at the time of borrowing that provides evidence of the purpose of the borrowing, as well as explanations.
3. Approval of the Board of Directors (for those enterprises that are not single-member private limited companies)

Instruction 1097 provides that the interest rate to be used for related party loans shall not exceed the prevailing annual market interest rate determined by the GDT.

This means that the annual market interest rates issued by the GDT are used as a cap to determine interest expense deductibility for Tax on Income purposes (in addition to the standard interest deductibility rules that already exist). Any amount of interest from a related party loan that exceeds the GDT market interest rate will be non-deductible from a tax perspective.

The DFDL tax team is always ready to answer any questions you may have on this and other tax issues.

Tax services required to be undertaken by a licensed tax agent in Cambodia are provided by Mekong Tax Services Co., Ltd, a member of DFDL and licensed as a Cambodian tax agent under license number – TA201701018.

The information provided here is for information purposes only and is not intended to constitute legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations.

Contacts

Clint O’Connell
Partner, Cambodia Deputy Managing Director & Head of Cambodia Tax Practice
clint.oconnell@dfdl.com