DFDL Cambodia

Prakas 574 “On the Rules and Procedures for Income and Expense Allocation among Related Parties” (Transfer Pricing) was issued by the Ministry of Economy and Finance on the 19 September 2024 and comes into effect on 1 January 2025.

Key Takeaways:

  • Prakas 574 dated 19 September 2024 relaxes the previous transfer pricing documentation (TPD) requirements under Prakas 986 in addition to providing new definitions and procedures.
  • Prakas 574 takes effect from 1 January 2025 and as such, the new TPD thresholds would apply from the financial year 2025 onwards.
  • The new TPD threshold requirements are based on the annual turnover and asset value of a taxpayer in addition to the total value of related party transactions (RPTs), excluding loans.
  • The current exemptions for TPD with respect to related party loans remain and are extended to include a grace period for newly incorporated enterprises, loans of less than USD 750k, and loans between a sole proprietorship and its owner, spouse and/or dependent children.
  • TPD for the preceding tax year, may be recycled for the current tax year provided there have been no significant changes in the RPT’s and comparability factors that would affect the TP methodology used, with the exception for current year financial indicators for the comparables.
  • Key new definitions include primary and secondary adjustment, control and median.
  • Prakas 574 includes Permanent Establishments within the definition and expands further on the attribution of Profits to a Permanent Establishment (PE).

The Detail:

Prakas 574 “On the Rules and Procedures for Income and Expense Allocation among Related Parties” was issued by the Ministry of Economy and Finance (MEF) on the 19 September 2024 (“Prakas 574”) and comes into effect on 1 January 2025. Practically what that means is that for most taxpayers the first financial year that will be impacted by Prakas 574 will be the financial year ending 31 December 2025.

Notably Prakas 574 abrogates existing regulations in the event of a conflict, including Prakas 986, that was formerly the founding transfer pricing document in Cambodia.

Documentation Requirements

One of the salient updates to arise from Prakas 574 involves the concessions provided to some taxpayers with respect to the requirement to maintain annual TPD. Article 17 of Prakas 574 sets out the annual documentary requirements for taxpayers in Cambodia who enter into controlled transactions i.e. transactions entered into with related parties, as follows:

(i) Ability to recycle previous year TPD

Taxpayers who have prepared TPD for the preceding tax year, may utilize the same TPD for the current tax year, provided that there have been no significant changes in the controlled transaction(s) and comparability factors that would affect the methodology used, with the exception of financial indicators for comparables which still needs to be current.

(ii) Exemption on TPD for loans – existing regulations

Loan transactions with related parties shall be exempt from the annual TPD requirement if taxpayers can provide supporting documentation as outlined by Notification No. 10979 GDT on the “Required Documents to Support the Interest Charge on Related Party Loans” the required supporting documentation includes:

  1. A loan agreement that specifies the terms of loan and repayment obligations.
  1. 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.
  2. Approval of the Board of Directors (for those enterprises that are not single-member private limited companies).

In addition it should be noted that under Notification No. 10979 cash advances received from a related party that are repaid within one (1) year of receipt shall not be considered to be a related party loan for the purpose of the Arms Length Principle.

(iii) Exemption on TPD for Loans – new update

Cambodian resident taxpayers, excluding financial institutions, shall be exempt from the TPD compliance obligation for related party loans if the taxpayer meets any of the following criteria:

  1. For newly incorporated entities – three (3) years from the date of tax registration, or
  1. A single member private limited company that enters into a loan transaction with a shareholder, with a loan balance for any period of less than KHR3 billion (approx. US$750k).
  2. A sole proprietorship with loan transactions with the owner, spouse, or dependent children.

(iv) General Exemption on TPD

Cambodian resident taxpayers are exempted from the obligation to prepare TPD for any tax year if the taxpayer has met both criteria in that tax year as follows:

  1. Has annual turnover of less than KHR8 billion (approx. USD2 million) and total assets of less than KHR4 billion (approx. USD1 million); and
  2. There are transactions among related parties with a total value of less than KHR1 billion (approx. USD250k) for goods, assets, services and/or royalties, excluding loan transactions.

Please refer to our DFDL update here which looks at a regional comparison of the TPD requirements.

Remaining Key Points

Arm’s length range and TP adjustment (Article 7): Prakas 574 provides for TP adjustments based on the median of the arm’s length range.  Cambodia’s focus on the median aligns with the approach in Thailand but contrasts with Singapore, where adjustments may be made to any point within the range, offering more flexibility to taxpayers. 

Intangible assets and DEMPE functions (Article 14 and 15): Cambodia’s approach to intangible assets, particularly emphasizing the development, enhancement, maintenance, protection, and exploitation (DEMPE) framework, is fully aligned with the OECD BEPS Action 8 to 10 guidelines.  Cambodia’s focus on the legal ownership as well as the economic ownership of the intangible asset is a welcome step towards reducing potential tax disputes. 

Services (Article 16) focuses on services supplied between related parties has made the methodology to be used by Cambodian resident taxpayers in determining the “cost base” allowable for charge/deduction clearer. Article 16 focuses on the importance of being able to authenticate the service was actually supplied, that the service has economic and commercial value to the recipient, that the service supplied is not already being performed by the service recipient itself, and that the service provided has a direct benefit to the service recipient, rather than a secondary benefit. 

Primary and Secondary adjustment definitions (Article 3): The introduction of primary and secondary adjustment in Cambodia’s New Prakas 574 is a significant development that aligns with the OECD Transfer Pricing Guidelines. 

Primary Adjustment: Refers to an adjustment that a tax administration in a first jurisdiction makes to a company’s taxable profits as a result of applying the arm’s length principle to transactions involving an associated enterprise in a second jurisdiction.[1] This is a standard procedure in many jurisdictions when the declared transfer price between related parties deviates from what would have been set between independent parties. 

The inclusion of primary adjustments ensures that Cambodia’s General Department of Taxation (GDT) can directly address transfer pricing discrepancies, which is the essential for combating base erosion and profit shifting (BEPS).  This adjustment on the taxable income is a common practice adopted by the tax authorities in the region. 

Secondary Adjustment: Refers to a constructive transaction that some jurisdictions will assert under their domestic legislation after having proposed a primary adjustment in order to make the actual allocation of profits consistent with the primary adjustment.[2]  A secondary adjustment is a correction that arises as a result of a primary adjustment. The basic idea is that the related party in the first jurisdiction with the increase in income from the primary adjustment is deemed to have given this amount to the related party in the second jurisdiction.  However, the manner of effecting this depends on the relationship between the parties.

Secondary transactions may take the form of constructive dividends, constructive equity contributions, or constructive loans, triggering additional tax liabilities like withholding tax.  The tax consequences of secondary adjustments tend to be complex in nature and require consideration of an issue from several angles. 

Moreover, secondary transfer-pricing adjustment rules vary among tax jurisdictions.  For instance, Indonesia is quite aggressive with secondary adjustments, particularly when tax adjustments lead to deemed dividends, triggering withholding taxes and other penalties.  Singapore, on the other hand, is generally more lenient when it comes to secondary adjustments.  

There is a potential for double taxation in case of secondary adjustments, particularly in cases where there is no corresponding credit or relief provided by the second jurisdiction for the additional tax liabilities that may arise. Taxpayers may resort to dispute resolution mechanisms including Mutual Agreement Procedures (MAP) in such cases. 

Cambodia’s introduction of secondary adjustments is a shift towards stronger enforcement and greater alignment with the OECD Transfer Pricing Guidelines.  Companies operating in Cambodia should be particularly vigilant, as this move by the GDT signals that companies not only must ensure that their RPTs are priced at arm’s length but also that they are prepared for any recharacterization of the RPTs by the tax authorities.  Secondary adjustments can results in significant additional tax cists and thus, taxpayers must ensure that their RPTs are well documented and defensible in case of a review. 

Attribution of profits to Permanent Establishments (Article 18): The definition of Related Party in Prakas 574 now provides a reference to Permanent Establishment (PE) The guidance on profit attribution to permanent establishments (PEs) aligns with the OECD Transfer pricing Guidelines, ensuring income is allocated to the PE as if it were a separate entity. 

Article 18 provides that non-resident taxpayers must allocate income, deductions, and benefits in a way that clearly reflects the income attributable to the Cambodian PE.  The income attribution must be determined by considering the income from the supply of goods or services that are similar to the PE’s activities.  The allocation must be made in a manner as if the PE were an independent entity operating in similar circumstances. 

Given the importance of PEs in the overall international tax landscape, Cambodia’s attribution of profits to PE rules are a positive step towards ensuring a robust transfer pricing regime that is consistent with the OECD Transfer Pricing Guidelines.  The PE rules often tend to be highly technical where the determination of income/ profits is often critical.  By aligning with the international norms, Cambodia ensures that the treatment of PEs in the country is transparent and comparable to that of more mature transfer pricing regimes like Singapore. 

For any questions regarding this update or for any transfer pricing queries please contact your usual DFDL advisor.

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.


[1]               Glossary, the OECD Transfer Pricing Guidelines, 2022. 

[2]               Glossary, the OECD Transfer Pricing Guidelines, 2022. 

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DFDL Cambodia

DFDL established its headquarters in Cambodia in 1995. DFDL is licensed as an investment company by the Council for the Development of Cambodia and the Cambodian Investment Board. We are also registered as a private limited company with the Ministry of Commerce. Under these licenses and registrations, we are permitted to provide business consulting, tax and investment advisory service of an international nature.

On 1 March 2016, DFDL and Sarin & Associates joined forces and established a commercial association and cooperation in order to form a new business transactions platform to serve clients with interests in Cambodia and across the expanding ASEAN marketplace.

DFDL and Sarin & Associates have worked together for over 10 years in Cambodia. Sarin & Associates has long been recognized for providing advice to companies in Cambodia in several sectors, such as telecommunication, energy, retail, real estate, financial services, banking, etc.

Our clients are major international and Asian foreign investors in Cambodia, including large foreign and Asian financial institutions. We have been involved in major projects in Cambodia including electricity projects, aviation, telecommunications, infrastructure projects and large real estate projects.

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