Capitalist Exploits - Frontier Markets Investing, Private Equity and IPO's

One of the highlights of our recent Meet Up in Cambodia was the presentation from Matthew Rendall, Managing Partner of Sciaroni & Associates. It was a very enlightening hour, which we wish could have continued for far longer than that!

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The topic of doing business in any country can take up volumes, and it’s no different for Cambodia. However, we will say that in comparison to some of its neighbors, Cambodia is doing an excellent job as far as making it easy and attractive to do business in the country. To help our readers who couldn’t join us at the Meet Up, I sat down with Matt and went over a few of the finer points.

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Mark: Matt, thanks for the excellent presentation at our Meet Up a couple weeks ago. I think our guys got a lot out of it, but clearly there is much more to discuss.

Matt: Happy to have a more in-depth chat Mark.

Mark: Great! So, first let’s discuss the firm a bit. Give us a brief overview of Sciaroni & Associates.

Matt: Sure. Bretton Sciaroni, the Senior Partner founded the firm in 1993. At the time it was actually a local office for the largest independent law firm in Thailand, Tilleke & Gibbins R.O.P. In 2004 Bretton had to go independent due to requirements mandated by the Cambodian Bar Association, and thus Sciaroni & Associates was born.

Bretton has been in Cambodia for a long time, in fact since 1993. He actually negotiated the first foreign investment in Cambodia under the 1994 foreign investment law, and advised the Royal Cambodian Government on negotiations to release some assets frozen in the US since 1975 after the Lon Nol regime fell. As a result and in recognition of his long-standing work with the government here he is actually a named legal adviser to the Royal Cambodian Government, which is a ministerial position.

Mark: So he’s a minister?

Matt: Yes, which is of course not very common for a foreigner. Bretton and I are actually both Cambodian citizen/passport holders as well. He also works with the Minister of Finance, and since 2000 he has served as the Co-Chairman of the Working Group on Law, Tax and Good Governance. I should also mention that since 1998 he has served as Chairman of the American Cambodian Business Council and was named vice chairman representing the ASEAN region for the Asia-Pacific Council of American Chambers of Commerce (APCAC) in 2012. He also served as Chairman of the International Business Club, which includes most of the multinationals in Cambodia.

Before relocating to Cambodia he worked in private practice in Washington, D.C., and is still in fact a member of the bar there, as well as the American Bar Association. In D.C. he worked in the White House and at the U.S. Department of Commerce.

Mark: What about yourself?

Matt:  I’m from Australia originally, but I’ve also been here for quite some time, 1994 in fact. Back in Australia I was admitted to the roll of the Supreme Court of NSW in 1991 and I’m also still a member of the Law Society of NSW.

I’ve written or co-written quite a few legal training texts on Cambodia Constitutional Law, Cambodia Property law, Cambodian Labor Law, Cambodian and International Human Rights law, Contract law, Sales of Goods law, etc. I’ve also taught and lectured at prestigious local universities on the subjects just mentioned.

I’m also the only foreign arbitrator on the Cambodian Labor Arbitration Council. Overall I am quite well-versed in real estate law and transactions here.

Regarding the firm itself, we now have over 35 advisors, paralegals and support staff. In 2011 we expanded into Laos and Myanmar, which we feel are promising markets, and as neighbors to Cambodia are interesting to many of our clients.

Mark: Thanks for that overview Matt. Let’s talk about how you’d go about starting a company in Cambodia, briefly.

Matt: Sure. In Cambodia we rely on the 2005 Law on Commercial Enterprises, which details the structures one can utilize. These include limited liability companies to partnerships. Overall the most common structure is the LLC, which of course exists in many, many jurisdictions and is probably familiar to most.

Basically you would file an application with the Ministry of Commerce and then make the required capital investment of four million Riel, which is around US $1,000, at the current exchange rate. Your liability is limited to the value of the capital contribution. Foreigners can own 100%, except where land ownership is involved. In that case you need majority Cambodian ownership.

Mark: How long a process is it to get up and running?

Matt: It takes up to 4 weeks to get all the approvals. You’ll also need a VAT number which can take a couple of months. But overall it’s a straight forward process.

Mark: How about “Free Zones”, or duty-free areas? Do those exist in Cambodia?

Matt: Yes. The CDC is the government office that approves and regulates what are called “Special Economic Zones” or SEZs. At this point the CDC has approved 19 licenses but there are only a few operating. The Manhattan SEZ in Svay Reing Province near the Vietnamese border, and the Phnom Penh SEZ, which is a JV between a Cambodian company and a Japanese company. Sihanoukville, Poipet and Koh Kong also have SEZs.

There are tax advantages obviously, as well as import duty advantages in some instances. SEZs also offer permitting and other benefits to help investors get started.

Mark: Foreign direct investment, or FDI is picking up from what we can tell. Cambodia has a fairly liberal FDI policy, which is unique, really for most Frontier Markets. Tell us a bit more about how it works there.

Matt: You’re right, Cambodia’s FDI policy is very liberal and lacks the biases and discrimination you normally see in these developing markets. Cambodia has a lot of natural resources, inexpensive labor and a warm climate. Industries like agriculture and agri-business, value-added food processing, tourism, mining, manufacturing and service industries are all ripe with opportunity. There’s also a lot of opportunity on the coast in our opinion. The country also offers guarantees, incentives and is very investor-friendly.

Mark: What kinds of incentives are you talking about?

Matt: Well, for example an investment project approved by the Council for the Development of Cambodia (CDC) as a Qualified Investment
Project (QIP) is eligible for a variety of investment incentives. These include a profit tax exemption or special depreciation and customs duty exemptions up to 100% of export tax. For QIPs located inside SEZs there is also an exemption for VAT on imports!

The government makes some guarantees to investors as well, including a promise of non-discrimination except in regard to the ownership of land, which the
Constitution limits to Cambodians. In addition, the government will not undertake a nationalization policy that would adversely affect investors’ properties, and will not fix the price or fees on the products or services of a QIP.

The government also permits investors to purchase foreign currencies through the banking system and to send the currencies out of the country to pay for imports, royalties and management fees; to repay principal and interest on international loans; to remit profits; and to repatriate invested capital.

Mark: So where would one start?

Matt: For most investors, the place to start is the CDC, which was established by the 1994 Law on Investment. It’s a one-stop decision-making body for private and public sector investment that is chaired by the Prime Minister and composed of senior ministers from various government agencies.

The Cambodian Investment Board (CIB) is the CDC’s operational arm for private sector investment. The CIB reviews investment applications and grants concessions to investors and investment projects meeting the requirements laid out in the Investment Law.

Mark: What about foreign exchange restrictions? Are investors free to take profits out of the country?

Matt: Like I just mentioned, there are no restrictions on the transfer of funds into or out of Cambodia through banks. Companies are subject only to a withholding tax on profits, but investors can freely repatriate the proceeds from their investments. In the event of a trade sale or a liquidation, an investor is free to transfer the proceeds.

Mark: Yeah, this is pretty progressive for such a small place!

Matt: It really is.

Mark: Matt you’re a real estate expert in a sense. Talk to us about owning property in Cambodia.

Matt: Cambodia enacted its current Land Law in 2001, establishing a national registration system. Under this system, registration of title on the
national register is conclusive evidence of ownership, and all transfers of land must be registered in order for ownership to pass. The system is
similar in nature to the Torrens Title system used in Australia, being a Title by Registration system rather than a Recordation system, such as in the US and Japan. There is no need to trace title in order to prove valid ownership.

Mark: Similar to Fiji, another place we find intriguing.

Matt: Yes, very similar and very reliable. It’s important to understand however that much of the land is still currently under “possession” status, a holdover
from the former socialist system of land holding. For those with possession status, proving 5 years continuous possession is sufficient to convert this status to “ownership” status. This is achieved by undertaking “first time registration.” Once registered for the first time, title can be passed by having the Cadastral office amend the Register to replace the transferor’s name with the incoming transferee.

Mark: That sounds like “squatter’s rights”?

Matt: It can be a problem. Out in the countryside you’ll see elaborate walled lots, sometimes with a guy sitting there to keep out squatters.

Mark: So what are the categories of land rights? Are there any laws restricting foreign ownership?

Matt: There are 5 categories: freehold; leasehold (15 years or greater creates a right “in rem” in favor of the Lessee); concessions; monastery title
(applicable to Buddhist temples etc); and indigenous title (applicable only to traditional communities such as hill tribes etc).

There is a general prohibition on foreign ownership of land. This prohibition is in the Constitution and the Land Law. There are no exceptions. There are ways for a foreign company to purchase land, but that’s a much more involved conversation.

Mark: How about the short version?

Matt: In a nutshell, foreigners who want an interest in land set up a Cambodian company to hold title. The company is one in which 51% or more of the shares are in the name of a Cambodian national. Accordingly foreigners can own up to 49% of the shares in a Cambodian land holding company. The prohibition only applies to land. There are no restrictions on foreigners owning other forms of immoveable property such as leases, concessions, and mortgages. But, with regard to buildings there is now a law in place that allows foreign ownership of apartments above the ground floor. However, only 70% of the surface space of any one apartment block may be foreign-owned. In order for apartments to be foreign-owned the entire apartment block must be firstly registered as “co-owned” property with the Cadastre.

Mark: So where there is a will there is probably a way…

Matt: Exactly. It’s not as cut and dry as some places, but compared to some of our neighbors it’s a bit more navigable.

Mark: What about property taxes?

Matt: There is a property tax of 0.1% of 80% of the “Immovable Property Value”, to be determined by the “Immovable Property Assessment Committee”. The taxable amount shall be the Immovable Property Value times 80% minus 100,000,000 Riels, or about US$ 25,000. There is also an expectation that a 20% capital gains tax will be introduced at some point. At this time the only taxes which become an encumbrance on a title are unused land taxes, which are only applicable on undeveloped properties, and the above mentioned property tax.

Mark: Cambodia is a member of ASEAN. What does this mean for free-trade?

Matt: Right, Cambodia became a member of Association of Southeast Asian Nations, or ASEAN in 1999. ASEAN membership allows access to the ASEAN Free Trade Area with importation and exportation of goods and services at lower duties and taxes. In 2004, Cambodia was admitted to the WTO, which expanded trading opportunities between Cambodia and the rest of the world, particularly the US and EU. A consequence is that Cambodia will need to liberalize its services and
tariffs.

Cambodia also has bilateral agreements with China, Japan, Malaysia, the U.S., Thailand and others to promote and protect trade and investment.

Mark: Cambodia is a young country, demographically. The reasons for this are more tragic than anything else, and we won’t rehash the past here. Talk to us about the labor force and hiring in Cambodia.

Matt: More Cambodians, particularly the young, are studying English and other foreign languages, and many are learning to use computers in order to
improve their chances of getting employed. There is no compulsory employee training obligation, but because of improving but still problematic education, foreign companies often find that formal and on-the-job training of local staff is necessary.

Mark: Yes, we heard this as well from some of our other local contacts. What about hiring non-locals then?

Matt: Well, the 1997 Labor Law limits the proportion of foreign employees on a payroll, but for the most part Cambodian and foreign employees are covered equally. Foreign employees however require visas and work permits. The law requires employers to give priority to hiring Cambodians. In general, 90% of a staff must be national. But this is not absolute, and an employer who demonstrates that they need employees with special skills or training not readily available can apply to the Ministry to increase the number of foreigners on staff.

Overall though, Cambodia has a sizable young labor sector consisting of skilled and unskilled workers. The labor force was reported to be 4.65 million in 2007 with 32.3% of the 14.4 million population between 25 and 54 years of age. That population of young workers is projected to grow by about 200,000 per year.

Mark: We definitely believe that Cambodia is being under-utilized for manufacturing, especially in the value-added agricultural sector. It’s something we are looking at.

Matt: That’s not a bad idea.

Mark: Let’s discuss taxation a bit. Give us the rundown.

Matt: Foreign investors in Cambodia must pay taxes on income earned in the country, including profits. Cambodian residents including foreigners present in the country 183 days or more a year and companies organized, managed or having their principal place of business in-country must pay taxes on income and profits earned worldwide. Residents earning foreign-sourced income are entitled to receive credit for foreign taxes paid. There is at the moment no capital gains tax.

Investors generally come under the real regime taxation system. Real regime taxpayers include most large, incorporated taxpayers and all commercial enterprises, except sole proprietorships.

Mark: So as a foreign investor, what taxes will I have to pay on my business?

Matt: Most foreign investments and foreign investors will be affected by the Tax on Profit, the Minimum Tax, the Value Added Tax, various withholding taxes, Customs duties and the Salary Tax on Cambodian and foreign employees. Other taxes that can affect foreign investors include a Specific Tax on certain Merchandise and Service and other minor taxes.

According to the Law on Taxation, companies must register with the Tax Department of the Ministry of Economy and Finance within 14 days of company creation.
Every month four separate tax return forms must be filed. Due on the 15th of each month are forms for the Salary Tax, a Return for Withholding Tax, a Return for Prepayment of Tax on Profit, Specific Tax on Certain Merchandise and Services, Tax on Accommodation, Tax for Public Lighting, and other taxes. On the 20th of each month a Return for VAT is due.

Mark: OK, so it’s not insignificant, the requirements one must comply with?

Matt: No it’s not. You really need the services of a competent accountant here.

Mark: Agreed. We heard from the folks at PWC at the Meet Up and they said the same.

Matt: Right. Tax forms must be filed even if returns are nil, and there are hefty fines for non-compliance.

Mark: You touched on investment taxes and profits earlier, but again, what taxes will I owe on profits from my investments?

Matt: The general rate of the Tax on Profit is 20%, but the Law on Taxation has exceptions and exemptions. An investment company with a tax holiday enjoys a 0% rate. Insurance activities are taxed at a rate of 5% of gross premium income. Profits of a company investing in oil and gas are taxed at 30%. Most commercial enterprises are subject to a monthly Prepayment of Tax on Profit at the rate of 1 % of monthly turnover inclusive of all taxes except VAT. The Prepayment can be offset against the annual Tax on Profit liability and the Minimum Tax. The Minimum Tax is a separate tax calculated at 1% of annual turnover
inclusive of all taxes, except VAT. It is payable at the time of the annual liquidation of the Tax on Profit.

Mark: So no capital gains tax?

Matt: No, there is no separate capital gains tax in Cambodia. All earned income from capital gains is taxed the same as regular income. Under a new law passed in 2007, capital gains from sales of immovable property by individuals will now be taxable at the rate of 20%. As of the start of 2013, however, like I mentioned earlier, this has not yet been implemented.

Mark: Thanks Matt, I think we’ll leave it there, as this has been a lot of information!

Matt: Absolutely. If any of your readers are interested in discussing doing business in Cambodia they can contact me at the firm directly.

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If you’re considering SE Asia for business, Cambodia really should be on your radar. When you look at demographics, income levels, resources and a myriad of other factors, Cambodia stands out. We really enjoy the place and intend to keep digging for opportunities.

Meanwhile, to get ahold of Matt or Bretton you can go to the Sciaroni & Associates website, where you can also download a handy, free little booklet on doing business in Cambodia.

- Mark

Regarding FDI inflows to Cambodia: “People are not looking for exit strategies from China, they’re looking to set up parallel operations to hedge their bets,” – Bretton Sciaroni