Corporate Tax News Issue 64 - November 2022

Guidance issued on related party loans

Guidance issued by the Cambodian General Department of Taxation on 25 May 2022 (Notification 10979) sets out the documentation needed to substantiate an arm’s length interest rate on related party loans, as well as the rates to be used in such transactions.

According to the guidance, a loan between a Cambodian enterprise and its related party may have an interest rate that has been mutually agreed between the two parties. The loan agreement does not have to comply with the arm’s length principle as long as the Cambodian enterprise has the following supporting documents:

  • A loan agreement specifying the terms of the loan and the repayment obligations;
  • A business plan or current/forecasted financial statements at the time of borrowing that provide evidence of the purpose of the loan; and
  • Approval of the Board of Directors (for enterprises other than single-member private limited companies).

Notification 10979 clarifies that the interest rate used by an enterprise when borrowing funds from a related party may not exceed the prevailing annual market interest rate during the term of the loan. The prevailing market rate is determined based on the average of the lending interest rates of five large Cambodian banks and is announced annually by the tax authorities.

Finally, Notification 10979 provides that an enterprise that receives cash advances from a related party which are repaid within one year from the date of receipt will not be considered to be a related party loan, and thus will be exempt from the requirement to comply with the arm’s length principle.

Lim Seng Siew