Phnom Penh (FN), Sept. 6 – On July 29, the Cambodian People’s Party (CPP) declared victory in the general election and by the time this article is published is expected to form a new government imminently. With the elections out of the way, Phnom Penh, once known as the ‘Pearl of Asia’ can again be viewed as a hub of opportunity especially given Cambodia’s robust average gross domestic product (GDP) growth of 8% over the past decade.
There are also various other factors which could propel Cambodia as the investment destination. The CPP is known for its pro-business policies and a CPP victory is likely to see continued implementation of policies that are conducive for business. This victory should also continue Cambodia’s political stability, which can only be a boon for investors.
As Singapore businesses seek to expand in the ASEAN region, there are multiple reasons why Cambodia should be the investment destination of choice. The Agreement for the Avoidance of Double Taxation (DTA) between Singapore and Cambodia, which came into force beginning of this year, has reduced the cost of investing in Cambodia while ASEAN membership has meant that Singapore companies investing in Cambodia can benefit from various tariff reliefs and rely on the ASEAN Comprehensive Investment Agreement for protection of their investments.
Additionally, the Cambodian government has implemented a multitude of policies aimed at attracting foreign direct investments (FDI). Relatively cheap labour coupled with the high percentage of people who are of working age are also key plus points for investors.
Political stability
2018 marked the thirty-third year of Samdech Hun Sen’s uninterrupted tenure as prime minister of Cambodia. While there have been a number of concerns about Hun Sen’s and the CPP’s alleged curtailment of civil and political liberties in the run-up to the election, businesses have generally breathed a sigh of relief over the result as the CPP’s pro-business policies are expected to continue.
Socioeconomic ‘pull factors’
The cost of labour remains relatively low. Although the minimum wage increased to US$ 170/month in 2018, the cost of labour remains competitive relative to other Southeast Asian countries such as Thailand (US$ 300/month) and Indonesia (US$ 243/month). Cambodia has a sizeable working age population and this is expected to grow in the near future. Out of a population of 16 million, 70% of its citizens are under the age of 34.
The burgeoning middle-class consumer market is another reason why Cambodia is an attractive market for investors. As a result of its recent economic growth, Cambodia has a growing middle-class consumer market — the expansion of which will continue to drive GDP growth.
Cambodia’s location also encourages productive opportunities, as its regional neighbours continue to outsource low and mid-level skilled manufacturing operations to the kingdom.
Pro-business policies
The government’s pro-business policies have been a major boost for investors. For instance, companies can enjoy corporate tax holidays of up to nine years with a tax rate of only 20% thereafter. Capital goods can also be imported duty-free, and there are no restrictions on capital repatriation. The government has also established several special economic zones which provide preferential incentives to investors and offer government import-export administrative support to facilitate trade. Singapore companies such as food and beverage conglomerate, Yeo Hiap Seng Limited and publicly listed independent power player, Asiatic Group (Holdings) Limited are investors in these zones.
There is also a framework of additional incentives for Qualified Investment Projects (QIP). QIP status is especially sought after as it provides companies with attractive tax incentives including profit tax and export tax exemptions, and an expedited one-stop-shop registration process.
A significant benefit to note is that Cambodian companies can be wholly foreign owned which is uncommon in Southeast Asia. In Thailand for example, foreign ownership is generally limited to 49%. In fact, article 8 of the Cambodian Law on Investments provides that “a foreign investor shall not be treated in any discriminatory way by reason of the investor being a foreign investor, except in respect of land as set forth in the Land Law.”
There are various corporate structures available to an investor setting up a business in Cambodia. These include a limited liability company (LLC), a public limited company (PLC), a representative office and a branch. Each structure has its pros and cons and depends on the commercial requirements of the investor. The set up cost of these corporate structures are minimal compared to similar structures in other countries in the region. For example, the minimum issued share capital for a PLC or a LLC in Cambodia is US$ 1,000 and there is no minimum capital requirement to set up a branch or a representative office. In contrast, to set up a LLC in Vietnam requires a minimum share capital of US$ 250,000. Broadly, it takes about eight weeks to set up an LLC or a PLC in Cambodia, although with local knowledge of the systems and procedures, this time can be significantly reduced.
Notable treaties and conventions
Between 2016 and 2017, the level of FDI into Cambodia nearly doubled from US$ 3.6 billion in 2016 to US$ 6.3 billion. Singapore is one of the largest foreign investors into Cambodia. Singapore companies should take note of the key treaties and conventions mentioned below which Cambodia has ratified.
The ASEAN advantage
As both Singapore and Cambodia are part of ASEAN, Singapore businesses are effectively able to access a market of about 19 million people with no or minimal tariffs. Cambodia’s proximity to other economies in Southeast Asia and low labour costs make it a viable manufacturing hub for Singapore businesses; the products manufactured in Cambodia can be sold locally and exported to other ASEAN members tariff-free.
Singapore-Cambodia Avoidance of Double Taxation Agreement
One particular agreement that benefits Singapore investors is the DTA which was signed in May 2016 and entered into force on 1 January 2018. The DTA essentially eliminates double taxation, a key deterrent to cross border trade. It also clarifies the taxing rights of each country and provides avenues through which the settlement of tax disputes is possible.
Dispute resolution
With increased economic activity, it is inevitable that disputes will also increase. Businesses are generally dissatisfied with the court system in Cambodia and often refer their disputes to arbitration as an alternative. Cambodia is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This should provide some assurance to investors as arbitral awards obtained in other member states, such as Singapore and Malaysia, can be enforced in Cambodia..
Cambodia is also a party to the ICSID (International Centre for Settlement of Investment Disputes) Convention. The ICSID Convention provides for an institutional framework and arbitration rules to resolve disputes between foreign investors and states by allowing foreign investors to launch arbitration proceedings directly against the host state in which they made their investments. Knowing that one can have recourse against the state (if necessary) is comforting to an investor.
Kohe Hasan, Partner, Reed Smith and Director, Resource Law LLC
Sin Soputhi, Managing Partner, SIN & Partners
Billie Slott, Consultant, SIN & Partners
