VINAYA LAW FIRM

Taxation: Sub-Decree on the encouragement of taxes for small and medium-sized enterprises (SMEs) in priority sectors of the Royal Government of Cambodia

Date of publication: 06-10-2018


Category: Legal updates


Audience: All


Sub-Decree on the encouragement of taxes for small and medium-sized enterprises (SMEs) in priority sectors of the Royal Government of Cambodia

    On 2 October 2018, Prime Minister Hun Sen issued a sub-decree on the Encouragement of taxes for SMEs in priority sectors to be implemented upon signature.

    The key objective of the Law is to strengthen the development of SMEs, by setting forth conditions for the encouragement of taxes, in order to create employment as well as to increase the capacity of the local production. In that matter, the sub-decree defines the scope of application, including the determination of the beneficiaries and the priority, and the measures of encouragement and the beneficiaries of said measures.


    1. Scope of application

    As provided by Article 4 of the sub-decree, the distinction between small size enterprise and medium size enterprise namely relies on the amount of annual turnover and the number of personnel in the enterprise.

    Indeed, as defined by the sub-decree, a small size enterprise refers to any type of business enterprise with an annual turnover between 250 million Riels to 700 million Riels, or any enterprise subject to the small-taxpayer regime, or any enterprise employing 10 to 50 employees whereas, a medium size enterprise refers to any type of business enterprise with an annual turnover between 700 million Riels to 4 billion Riels, or any enterprise subject to the medium-taxpayer regime, or any enterprise employing 51 to 100 employees.

    In addition, the sub-decree provides that enterprises falling under the qualification of SMEs will benefit from the encouragement measures if their activities are conducted in the following priority sectors:

  • - Agricultural or agro-industrial products;
  • Food production and processing;
  • Manufacturing of domestic products, recycling, and products for the tourism sector;
  • Manufacturing of finished products, parts or assembled products to supply other manufacturing;
  • Research and development of Information Technology (IT) including innovative IT service supply;
  • Enterprises situated in the area of SMEs as well as enterprises which developed the said area.

        2. Measures of encouragement

    Should all conditions are met, any SME will receive the measures of encouragement which are a tax exemption and the permission to deduct certain additional expenses.

    Indeed, the sub-decree provides that any SME meeting the conditions set forth in the sub-decree will be entitled to an exemption to pay the tax on income for 3 years counting from the date of tax registration or registration renewal as well as from the date of implementation of the sub-decree.

    Moreover, the duration of said tax on income exemption will be extended to 5 five years if the SME has used domestic material for at least 60% of its production,  or if the SME has increased its amount of employee by at least 20%, or if the SME is situated in an SME Cluster Zone, an industrial park for SMEs.

    In addition to the tax exemption, any SME meeting the conditions mentioned above will be entitled to an exemption of prepayment of income tax and minimum tax for the same duration as provided for the tax on income exemption.

    Furthermore, the said SME will be allowed to deduct the following expenses, ordinarily not susceptible to be deducted:

  • - Deduction of 200% of expenses related to the use of accounting book trough IT system;

    - Deduction of 200% of expenses related to the training of the accounting bookkeeper or technical skill training for employees;

    - Deduction of 150% of expenses related to the investment of innovative machines or technology equipment to serve and increase the productivity.

    With regards to the above incentives, it is worth mentioning that SMEs must keep an accounting book and submit an annual income tax return for the year ending in the determined time to taxation authority even if they are exempt from income tax.

    Likewise, SMEs must submit a return for the value-added tax and other taxes they undergo according to the specifics of their business activities.

    Any failure to comply with taxation obligations or with the conditions as stated in the sub-decree will result in the revocation of the tax encouragement measures.