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Cambodia's Manufacturing Potential: Guide for Investors

9 Mins Read
Cambodia's Manufacturing Potential: Guide for Investors

Cambodia has emerged as a prime destination for foreign manufacturing investments, with its regulatory environment and business-friendly policies increasingly drawing international attention. In fact, in the first nine months of 2023 alone, according to The Phnom Penh Post, Cambodia attracted fixed-asset investments totalling over three billion – a notable 8.6% rise from the previous year – signalling robust confidence among foreign investors. This influx is supported by a liberal investment framework that stands out in Southeast Asia for allowing foreign entities to maintain full ownership of their investments, a significant draw compared to other regions that often require local partnerships.

So, which sectors are most attractive to foreign investors eyeing Cambodia's potential?

The garment industry, a cornerstone of Cambodia's economic structure, is one sector dominated by foreign ownership. 

According to Research and Markets' study posted on Yahoo! Finance, about 90% of factories are Chinese-owned and there are notable investments from European entities like the Netherlands. This highlights Cambodia's appeal for Foreign Direct Investment (FDI) in the manufacturing industry.

However, while Cambodia's new investment laws, like the Law on Investment in the Kingdom of Cambodia, aim to attract investors, navigating this landscape to leverage the various opportunities requires a clear grasp of the regulatory requirements, licensing procedures, and the available government incentives designed to bolster manufacturing ventures. 

So, what are the labour laws and regulations that foreign businesses need to be aware of if trying to set up manufacturing operations in Cambodia?

Understanding Cambodia's regulatory landscape

For businesses considering establishing manufacturing operations in Cambodia, understanding the country's regulatory framework is essential, even if Cambodia offers a favourable environment for foreign investment with relatively open policies. 

For example, when setting up manufacturing operations, be it in the car sector or electronic manufacturing services, foreign businesses need to navigate through the regulations set forth by multiple government bodies like the Council for Development of Cambodia (CDC). 

Consider the following:

What are the main laws and regulations governing foreign investment in Cambodia’s manufacturing sector

Here are the key aspects that foreign investors should consider:

  1. Company registration and investment approvals: All foreign investments in Cambodia must undergo registration with the Ministry of Commerce. This includes obtaining necessary approvals from the General Tax Department for tax compliance and the Ministry of Labour and Vocational Training for employment practices.
  2. Regulated activities: Foreign businesses are restricted from engaging in certain activities, such as land ownership, which is limited to 49% foreign ownership when structured through a local land-holding company. Other restricted sectors include the production and processing of psychotropic and narcotic substances, certain chemical productions, and industries utilising waste imported from abroad.
  3. Business structure options: Foreign investors have the option to establish their presence in Cambodia in several forms:
    • Representative office (RO): Limited to non-commercial operations, it is ideal for market research and promoting the parent company without engaging in profit-making activities.
    • Branch office: Can perform all activities of an RO and engage in commercial operations open to foreign investments, except for restricted activities like land ownership.
    • Subsidiary: Can engage in all commercial activities allowed to local companies. A subsidiary must be registered with the Ministry of Commerce, and at least 51% of its shares must be owned by the foreign parent company.
  4. Labour laws: Under Cambodian labour law, wages for workers in the manufacturing sector must meet or exceed the guaranteed minimum wage standards. The minimum wage is uniformly applied across all professions and job types within the sector and is regularly reviewed and set through a Ministerial Order from the Ministry of Labour.

What permits and licenses are required to start a manufacturing business in Cambodia?

<p>Now, what are the various licensing procedures and types of permits required?</p> <ul> <li>Certificate of Incorporation from the MoC:&nbsp;As mentioned, any business intending to operate in Cambodia needs to be registered with the MoC. Upon registration, companies receive a Certificate of Incorporation and other necessary documents.</li> <li>Tax Registration from the General Department of Taxation (GDT):&nbsp;Additionally, companies must register with the Tax Department within 15 days of MoC registration to obtain a Tax Identification Number (TIN) and relevant tax certificates.</li> </ul> <ul> <li>Investment company with qualified investment project (QIP) status: Companies looking for QIP status must register both with the MoC and the CDC. The CDC operates through a &quot;One-Stop Shop&quot; at the Cambodian Investment Board (CIB), which reviews and approves investment proposals.</li> <li>Special Economic Zone&nbsp;(SEZ) permits: For investments in SEZs, companies must apply to the Cambodian Special Economic Zones Board for approval to be registered as a Qualified Investment Project. The Zone Developer is required to submit an application fee of 7 million Riels to the Cambodian Special Economic Zones Board for establishing a Special Economic Zone. Once approved, the Zone Developer will have to conduct detailed feasibility studies and submit required documents and certified letters from the Cambodian Special Economic Zones Board to be granted the developer rights to establish and operate within an SEZ.</li> </ul> <p>Overview of all the other permits that manufacturing enterprises may need to have include the following:</p> <ul> <li>Permit for Small and Medium Factory &amp; Handicraft from the Ministry of Industry, Science, Technology, and Innovation (MISTI)</li> <li>Certificate of Operation for Small and Medium Factory &amp; Handicraft: Ministry of Industry and Handicraft</li> <li>Product Registration Mark License from the Institute Of Standards Of Cambodia</li> <li>Product Certification Mark CS License from the Institute of Standards of Cambodia</li> <li>Location Approval License from the local municipality/Sangkat</li> <li>Enterprise Registration, Establishment Ledger, Payroll, and Internal Work Rules Registration from the Ministry of Labour and Vocational Training (MLVT)</li> <li>Trademark Registration (optional): Ministry of Commerce</li> <li>Tax Permit for Sign Board</li> <li>Sign Board Permit</li> </ul> <h2>Government incentives and support for manufacturing ventures</h2> <p>Cambodia's manufacturing sector benefits significantly from various government incentives aimed at attracting foreign investment and enhancing industrial development.&nbsp;</p> <p>Some of these incentives and support mechanisms available to investors include:</p> <ol> <li>Tax incentives: Investors in Cambodia's manufacturing sector can benefit from substantial tax incentives, which can be claimed after they have been registered with a QIP status.<ul> <li>Option 1: Following the tax exemption of three to nine years, businesses pay a scaled tax amount starting at 25% of the total due, gradually increasing over subsequent years.</li> <li>Option 2: Investors may choose to deduct capital expenses at an accelerated rate, up to 200%, for specific costs related to investment activities.</li> </ul> </li> <li>Customs duty and value-added tax (VAT) exemptions: Manufacturing ventures benefit from exemptions on customs duties and VAT for essential imports and exports like construction materials and production equipment.</li> <li>Additional incentives for QIPs: Businesses with QIP status enjoy further privileges, such as VAT exemptions on local purchases for production and additional deductions for costs related to innovation, vocational training, and worker welfare.</li> <li>Investment protection: Cambodia has also established protections for foreign investments, including the right to repatriate profits and handle foreign currency transactions freely.</li> <li>SEZs: Businesses operating in SEZs benefit from&nbsp;<a href="https://www.dhl.com/discover/en-kh/logistics-advice/import-export-advice/exporting-importing-customs-clearance-cambodia">streamlined customs and administrative processes</a>. Some of these incentives include VAT exemptions.</li> </ol> <h2>Tax structures and financial considerations</h2> <p>Beyond tax benefits for manufacturing in Cambodia, permits for legal compliance and regulations and&nbsp;<a href="https://www.dhl.com/discover/en-kh/logistics-advice/essential-guides/cambodia-export-tax-vat-system">understanding Cambodia's tax regime</a>&nbsp;are just as crucial for foreign businesses considering setting up manufacturing operations there.&nbsp;</p> <p>For one, the tax system includes several types of taxes that directly affect businesses:</p> <ul> <li>Corporate income tax (CIT)</li> <li>Minimum tax</li> <li>VAT</li> <li>Withholding tax</li> <li>Personal income tax</li> </ul> <p>Cambodia operates under a self-declaration tax regime, categorising taxpayers into large, medium, and small based on turnover, legal structure, and other factors. The classification is based on the following:</p>

Now, what are the various licensing procedures and types of permits required?

  • Certificate of Incorporation from the MoC: As mentioned, any business intending to operate in Cambodia needs to be registered with the MoC. Upon registration, companies receive a Certificate of Incorporation and other necessary documents.
  • Tax Registration from the General Department of Taxation (GDT): Additionally, companies must register with the Tax Department within 15 days of MoC registration to obtain a Tax Identification Number (TIN) and relevant tax certificates.
  • Investment company with qualified investment project (QIP) status: Companies looking for QIP status must register both with the MoC and the CDC. The CDC operates through a "One-Stop Shop" at the Cambodian Investment Board (CIB), which reviews and approves investment proposals.
  • Special Economic Zone (SEZ) permits: For investments in SEZs, companies must apply to the Cambodian Special Economic Zones Board for approval to be registered as a Qualified Investment Project. The Zone Developer is required to submit an application fee of 7 million Riels to the Cambodian Special Economic Zones Board for establishing a Special Economic Zone. Once approved, the Zone Developer will have to conduct detailed feasibility studies and submit required documents and certified letters from the Cambodian Special Economic Zones Board to be granted the developer rights to establish and operate within an SEZ.

Overview of all the other permits that manufacturing enterprises may need to have include the following:

  • Permit for Small and Medium Factory & Handicraft from the Ministry of Industry, Science, Technology, and Innovation (MISTI)
  • Certificate of Operation for Small and Medium Factory & Handicraft: Ministry of Industry and Handicraft
  • Product Registration Mark License from the Institute Of Standards Of Cambodia
  • Product Certification Mark CS License from the Institute of Standards of Cambodia
  • Location Approval License from the local municipality/Sangkat
  • Enterprise Registration, Establishment Ledger, Payroll, and Internal Work Rules Registration from the Ministry of Labour and Vocational Training (MLVT)
  • Trademark Registration (optional): Ministry of Commerce
  • Tax Permit for Sign Board
  • Sign Board Permit

Government incentives and support for manufacturing ventures

Cambodia's manufacturing sector benefits significantly from various government incentives aimed at attracting foreign investment and enhancing industrial development. 

Some of these incentives and support mechanisms available to investors include:

  1. Tax incentives: Investors in Cambodia's manufacturing sector can benefit from substantial tax incentives, which can be claimed after they have been registered with a QIP status.
    • Option 1: Following the tax exemption of three to nine years, businesses pay a scaled tax amount starting at 25% of the total due, gradually increasing over subsequent years.
    • Option 2: Investors may choose to deduct capital expenses at an accelerated rate, up to 200%, for specific costs related to investment activities.
  2. Customs duty and value-added tax (VAT) exemptions: Manufacturing ventures benefit from exemptions on customs duties and VAT for essential imports and exports like construction materials and production equipment.
  3. Additional incentives for QIPs: Businesses with QIP status enjoy further privileges, such as VAT exemptions on local purchases for production and additional deductions for costs related to innovation, vocational training, and worker welfare.
  4. Investment protection: Cambodia has also established protections for foreign investments, including the right to repatriate profits and handle foreign currency transactions freely.
  5. SEZs: Businesses operating in SEZs benefit from streamlined customs and administrative processes. Some of these incentives include VAT exemptions.

Tax structures and financial considerations

Beyond tax benefits for manufacturing in Cambodia, permits for legal compliance and regulations and understanding Cambodia's tax regime are just as crucial for foreign businesses considering setting up manufacturing operations there. 

For one, the tax system includes several types of taxes that directly affect businesses:

  • Corporate income tax (CIT)
  • Minimum tax
  • VAT
  • Withholding tax
  • Personal income tax

Cambodia operates under a self-declaration tax regime, categorising taxpayers into large, medium, and small based on turnover, legal structure, and other factors. The classification is based on the following:

Type of taxpayer

Criteria

Corporate tax rates

Small

  • Annual turnover from 250 million riels to 1 billion riels for agricultural, service, and commercial sectors
  • 250 million riels to 1.6 billion riels for the industrial sector
  • Participates in bidding or expects three consecutive months' turnover from 60 million riels
  • Progressive tax rates from 0% to 20% based on income levels

Medium

  • Annual turnover from 1 billion riels to KHR 4 billion riels for the agricultural sector
  • 1 billion riels to 6 billion riels for service and commercial sectors
  • 1.6 billion riels to 8 billion riels for the industrial sector
  • Includes legal persons and representative offices
  • Standard corporate income tax rate is 20%

Large

  • Annual turnover above 4 billion riels for the agricultural sector
  • Above 6 billion riels for service and commercial sectors 
  • Above 8 billion riels for the industrial sector
  • Includes subsidiaries of multinational companies and branches of foreign companies
  • Standard corporate income tax rate is 20%

There is also a separate tax, the Minimum Tax (MT), which is due annually at 1% of total turnover, applicable unless the business maintains proper accounting records, exempting them from this tax from January 1, 2017, onwards.

Strategic financial planning for manufacturing ventures in Cambodia

Given the above, when establishing a manufacturing business in Cambodia, foreign investors must consider various financial factors to ensure a profitable operation. This includes initial capital investment requirements, which can vary depending on the scale and scope of the project. Operational expenses such as labour, materials, and local services also play a critical role in the budgeting process.

To aid in these financial undertakings, Cambodia offers several financing options, including the aforementioned government incentives.

Beyond that, strategic tax planning and utilisation of available incentives can further enhance cost efficiency and improve overall financial performance.

Optimising tax efficiency and compliance in Cambodia

Navigating the tax landscape in Cambodia requires careful planning and compliance to optimise financial outcomes for manufacturing ventures. Effective tax management involves understanding the local tax regime, including the above-mentioned corporate income tax, value-added tax, and customs duties.

By adhering to compliance requirements and employing strategic accounting practices, businesses can significantly reduce tax liabilities and enhance profitability. Moreover, leveraging Cambodia's tax incentives can lead to substantial financial benefits, supporting long-term business growth and stability in the manufacturing sector.

Legal compliance and risk management in Cambodia’s manufacturing sector

And finally, ensuring legal compliance and effectively managing risk is also pivotal for the success of manufacturing operations in Cambodia. 

Strategic risk management involves a thorough understanding and application of intellectual property laws, robust contract management systems, and effective dispute resolution mechanisms. For example, labour contracts in Cambodia, whether written or verbal, must adhere to the stipulations outlined in the Labour Law, ensuring contracts for specific durations do not exceed two years and are properly renewed within legal limits.

Additionally, it is also important to stay abreast of labour laws that regulate working hours, which are capped at eight hours per day or 48 hours per week, ensuring worker rights are protected. Employers must also implement stringent occupational health and safety standards to safeguard employee welfare in the workplace.

Manufacturers must also focus on mitigation strategies that address potential regulatory risks and compliance challenges. This includes conducting regular compliance audits and fostering a corporate culture that emphasises ethical practices and compliance. 

Such measures not only reduce legal uncertainties but also enhance the overall stability and reputation of the business within Cambodia’s growing manufacturing landscape.

Leveraging Cambodia's Manufacturing Opportunities with DHL Express

By understanding the essential permits, environmental regulations, export-oriented policies and supportive incentives provided by the Cambodian government, businesses can confidently plan their entry into this promising market. 

We encourage international firms to not only explore the myriad opportunities that Cambodia offers, particularly in sectors like CNC machining and export-oriented manufacturing, but also to utilise the specialised services of DHL Express. 

With our expert knowledge in international shipping, DHL Express is ideally positioned to support your overseas venture's logistics needs, ensuring operational excellence and efficiency in entering and thriving within the Cambodian manufacturing landscape.

Broaden your business horizons globally and discover new pathways to expansion by opening a DHL Express business account, offering unparalleled services tailored to your needs.

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