On 13 October 2016 representatives of the governments of the People’s Republic of China and Cambodia signed Cambodia’s second Double Taxation Agreement (DTA) during the visit of Chinese President Xi Jinping. Cambodia’s first DTA was signed with Singapore in May of this year. The new DTA is important as China is already a significant investor in Cambodia, and further major investment is expected, with several large Chinese-funded investment projects being discussed during the President’s visit.
Existing and future Chinese investors in Cambodia should find this Client Alert of interest, as the issuance of this DTA offers opportunities to make investment into Cambodia more tax-efficient. VDB Loi will be delighted to assist investors to ensure their investments are structured to take advantage of these opportunities, and we are also pleased to announce that our professional team now includes native Chinese-speaking capabilities.
Why is this DTA special, and what does it mean for my business?
The DTA does not apply to Hong Kong or Macau, as each of these territories have their own tax systems, and are not covered by the taxation laws of the People’s Republic of China.
Reduction in withholding tax on Dividends, Interest and Royalties paid to Chinese residents. Now 10%, previously 14%
Reduction in withholding tax on fees for Technical Services from 14% to 10%, however the DTA defines such services to include “any managerial, technical, or consultancy services”
Salaries paid by a China-resident employer to a China-resident employee working in Cambodia will only be taxed in Cambodia if the employee is present in Cambodia for more than 183 days in any 12 month period, or the remuneration is borne by a Cambodian company or branch
China-based international airlines will not be taxed in Cambodia, however China-based international shipping companies will be taxed in Cambodia, but will receive a 50% reduction in the tax that would otherwise be due
A Chinese company will only create a Permanent Establishment (taxable presence) in Cambodia if they have a place of management, office, branch, building site, mine, farm, or a construction project, or undertake related supervisory activities lasting for more than 9 months. A Permanent Establishment may also be created if a Chinese company operates substantial mining equipment in Cambodia for more than 90 days in any 12 month period
A comparison of the key items in the DTA compared with Cambodia’s DTA with Singapore is below:
There are 2 significant differences between the DTA with China and the DTA with Singapore. Firstly Article 3 of the Singapore DTA contains the usual definitions of territory, person, competent authority etc. however in paragraph 2 it states that “For the purposes of Articles 10, 11 and 12, a trustee liable to tax in a Contracting State in respect of dividends, interest or royalties shall be deemed to be the beneficial owner of that interest or those dividends or royalties.” This is quite an unusual provision, in that normally reduced rates of withholding tax under a DTA are available only to a beneficial owner eligible for treaty relief (i.e. resident in the other Contracting State), to avoid “Treaty shopping”. This provision is absent from the DTA with China.
Secondly under Article 5 of the Singapore DTA, a PE is created by the furnishing of services by a company resident in one state through employees or others present in the other state for periods exceeding 183 days in any 12 month period. This provision is also absent from the DTA with China.
So what are the main details of the China-Cambodia treaty?
Under Article 2 of the DTA, the existing Cambodian taxes to which the treaty applies include: Tax on Profit including Withholding Tax, Minimum Tax, Additional Profit Tax on Dividend Distribution, Capital Gains Tax and Tax on Salary. In China the DTA applies to Individual Income Tax, and Enterprise Income Tax.
Definition of Resident
Article 4 of the DTA defines a “resident of a contracting state” as any legal person who is subject to tax in that state “by reason of his domicile, residence, place of incorporation, place of effective management, principal place of business or any other criterion of a similar nature”.
Under Article 5 of the DTA the term ”Permanent Establishment” is defined as a “fixed place of business through which the business of an enterprise is wholly or partly carried on”. This may include a place of management, a branch, an office, a factory, a workshop, a warehouse, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, and a farm or plantation.
A Permanent Establishment is also defined as “a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than nine months; and the carrying on of activities (including the operation of substantial equipment) in the other Contracting State for the exploration or for exploitation of natural resources for a period or periods aggregating more than 90 days in any twelve-month period.”
Article 5 also makes clear that the maintenance of a fixed place of business solely for the purposes of storing or displaying or delivering goods, purchasing goods, or gathering information, and other activities of a preparatory or auxiliary nature (similar to existing Representative Offices) will not constitute a Permanent Establishment (“PE”). Interestingly, and unlike in many DTAs, the furnishing of services by a Chinese company through employees or others in Cambodia will not create a PE, provided the activities do not take place in a “fixed base” operated by the Chinese company. Put simply, as an example a Chinese consulting company could send employees to work at a client’s office in Phnom Penh for unlimited periods of time, and this would not create a PE. (Although the fees received from the client would be subject to 10% WHT, and the individual employees may, depending on their circumstances, be subject to tax on their earnings.
Income from immoveable property
Under Article 6 of the DTA, the right to tax income from immoveable property is given to the State in which the property is located. In addition to land, immoveable property is defined to include livestock and equipment used in agriculture and forestry, and rights over natural resources.
The profits, under Article 7 of the new DTA, derived by an enterprise of one of the States are only taxable in that State, unless the enterprise carries on business through a Permanent Establishment in the other State. In this case the profits attributable to the Permanent Establishment may be taxed in the other State.
Consistent with the UN Model, Article 8 of the Singapore-Cambodia DTA states that the profits derived from the operation of aircraft in international traffic will be taxable only in the State where the operator is based. In a departure from the standard model however, profits derived from the operation of ships in international traffic or inland waterways by an enterprise of one state may be taxed in the other state. Such tax will be reduced by 50%.
The signing of this DTA will be a welcome development for International Airlines based in China flying to Cambodia, as it is now clear that the income derived is only taxable in China. Clarity has also been achieved for China-based shipping companies, who will be taxed in Cambodia, but will receive a 50% reduction in the tax otherwise due.
Article 9 of the new DTA addresses transactions between related parties, or parties under common control, and allows the authorities in each state to adjust for transactions between the parties that have been recorded at values other than market value.
Dividends, Interest and Royalties
Under Articles 10, 11, and 12, dividends, interest, and royalties arising in a Contracting State, and paid to a resident of the other State may be taxed in the other State, but also in the State in which they arise, at a rate not to exceed 10%.
Interest paid to the Government of either State, or certain State institutions is exempt from tax.
Royalties are defined to include payments for the use of copyrighted literary, artistic, or scientific works, patents, trademarks, plans, formulas, and scientific, commercial, or industrial information.
Technical Service Fees
Payments for technical services to a resident of a Contracting State may be taxed in that State, but also, under Article 13, may be taxed in the State from which payment is being made, at a rate not to exceed 10% of the gross amount.
Fees for technical services are defined as consideration of any kind “for the rendering of any managerial, technical, or consultancy services”, including the services of technical or other personnel.
The 10% rate does not apply if the enterprise has, or during the provision of the services, creates a Permanent Establishment, in which case the fees form part of the income of the Permanent Establishment.
Under Article 14 capital gains derived by a resident of one of the Contracting States are taxable only in the State of residence, except for gains from the sale of immoveable property located in the other State, gains from the sale of moveable property forming part of the business assets of a Permanent Establishment, and gains from the sale of shares deriving more than 50% of their value from immoveable property in the other State.
Personal Services and Directors Fees
Articles 15, 16, and 17 address the taxation of an individual’s income from services. A self-employed resident of a Contracting State, such as a doctor, lawyer, architect etc. is taxable in the other State on income derived in the other State if he or she is present in that other State for more than 183 days in any 12 month period, or has a fixed base available to him or her.
In the case of employees, income from employment is taxable only in the State of residence, unless such employment is exercised in the other State, and the employee is present in the other State for a period, or periods exceeding 183 days in any 12 month period, the remuneration is borne by a Permanent Establishment the employer has in the other State.
Directors’ fees and other similar payments received by a resident of a Contracting State in his or her capacity as a Director of a company which is a resident of the other Contracting State may be taxed in that other State. In addition remuneration received by a resident of one state in his capacity as an “official in a top-level managerial position” of a company in the other state may be taxed in that other state.
Artistes and Sportspersons
Under Article 18 the income of performers, entertainers, or sportsmen resident in one of the Contracting States may be taxed in the other State to the extent the activities were exercised in that other State. This applies even if the income is paid to a third party, such as an agent or promoter. An exemption is available for activities performed under cultural or other arrangements between the two Governments.
Pensions, Social Security Payments and Government Service
Pensions and similar remuneration paid by a resident of one Contracting State in respect of past employment are taxable under Article 19 only in that State unless, under Article 20, such payments may be taxed in the other State if paid to a resident national of the other State.
Elimination of Double Taxation
Under Article 23 the DTA describes how double taxation, if it occurs, will be eliminated in each of the signatory countries. In the case of a Cambodian resident deriving income which may be taxed in China, Cambodia will allow a tax credit for the tax paid in China; however the amount credited cannot exceed the Cambodian tax due on the same income.
In the case of a resident of China deriving income from Cambodia which may be taxed in Cambodia, China will allow a credit for the tax paid in Cambodia, however the amount credited cannot exceed the Chinese tax due on the same income.
Entry into Force and Termination
Although the DTA between China and Cambodia has been signed it will only come into effect once the provisions of Article 28 have been implemented. These require that the two countries notify each other when any procedures required under their laws or legislation to bring the DTA into effect have been completed. The Agreement will enter into force 30 days after the date of receipt of the later of these notifications, and will apply to income derived from the following 1 January.
Under Article 29 the Agreement will terminate on the giving of notice not later than 30 June of any calendar year after 5 years from the date of entry into force.
If you have any questions, or would like to discuss the potential impact of this DTA on your business, please contact Mr. Robert Porter (firstname.lastname@example.org), or your regular VDB Loi adviser.
VDB Loi is a network of leading law and advisory member firms and affiliated companies that comprises eight partners and over 100 lawyers and advisors, with offices in Cambodia, Indonesia, Laos, Myanmar and Vietnam, and representatives in Singapore and Tokyo. We provide the highest quality solutions for transactions and taxation.
You can find more information on our Cambodia office here.