Instruction Circular no. 1707 (2 October 2013) provides:
- When an enterprise records an interest-free loan from a bank, financial institution or other enterprise, the tax authority will neither deem an interest expense for withholding tax purposes nor deem the presence of an interest subsidy on the loan for profit tax purposes.
- When an enterprise records a lower-than-market rate of interest on such loans, the tax authority will not deem interest based on the market rate for withholding tax or profit tax purposes.
- When an enterprise records an interest expense, (1) the tax authority will review and verify that the rate of the interest comports to market rate and if higher than market rate, will adjust the interest rate downward to the market rate, and any excess over market rate will not be deductible; and (2) after this adjustment, the interest expense is still subject to the limitation on interest expense deductions under Article 12 of Cambodia’s tax law.
All loans (described above) must have certain supporting documentation, including the loan contract / agreement as certified by both parties’ lawyers, remittance advice related to the loan contract / agreement, and “proper and precise records” in the taxpayer’s book of accounts.
Loans made by taxpayers without such supporting documentation will be considered as “non-supporting loans,” and will be treated as an increase in net asset and included as taxable income.
The tax authority’s guidance is not specifically limited to related-party transactions, and it is understood that there is to be no difference in respect of loans between related parties and non-related parties.
The guidance, however, does not address certain issues—such as, why is the “market rate” determined by reference to the SIBOR* + 6% and if the interest rate on a loan between non-related parties is higher than the indicated “market rate,” why is the interest expense limited to the market rate of interest?
*SIBOR = Singapore Interbank Offered Rate
Taxpayers entering into loan transactions need to review the guidance carefully, and pay particular attention to the requirement for supporting documentation.
Read an October 2013 report [PDF 376 KB] prepared by the KPMG member firm in Cambodia:
Instruction Circular on interest-free loans and lower/higher interest than market rate
Contact a tax professional with KPMG's Global Transfer Pricing Services.