Update on the Transfer Pricing Regulations 2025

October 17, 2024

Effective 1 January 2025, the Ministry of Economy and Finance (“MEF”) of Cambodia issued Prakas No. 574 (“Prakas No. 574”) on 19 September 2024, which provides additional rules and procedures for income and expense allocation among related parties and requirement for transfer pricing (“TP”) documentation. This is the second TP regulations published by the MEF, which will abrogate the initial Prakas No. 986 and any other regulations that are contrary to Prakas No. 574.

Let’s delve into the key updates and provisions brought forth by Prakas 574:

1. Updates of existing provisions

Update	Details
Chapter 1 – General Provision Article 3 – Definition	“Related party” is expanded to cover an enterprise which direct or indirect controls or is controlled by, or is under common control with the taxpayer, or the connection between permanent establishment and non-resident taxpayer. “Control” – means ownership of 20% or more in the value of the direct equity interest in the enterprise or voting power on the board of directors of the company. Notwithstanding this condition, the tax administration may evaluate direct or indirect control based on the specific facts of each case to determine whether control exists. Additional new term: “Transfer pricing” refers to the determining of prices for transactions performed among related parties. “Primary adjustment” refers to an initial adjustment made by the tax administration on the taxpayer’s taxable income as a result of applying the arm’s length principle to transactions between the taxpayer and related parties. “Secondary adjustment” refers to an adjustment that arises from imposing tax as result of a primary adjustment. Secondary transactions may take the form of constructive dividends, equity contributions, or loans. “Median” is the middle value when all numbers are sorted in ascending order. If the number of values is odd, the median is the middle value. If the number of values is even, the median is the average of the two middle values.
Article 7 – Arm’s length range	The controlled transaction will not be adjusted if the relevant financial indicator derived from the controlled transaction are tested by an appropriate TP method within the arm’s length range. In contrast, the financial indicator of the controlled transaction that fall outside the arm’s length range will be adjusted to the median of the arm’s length range only in the case of non-reduction or loss of tax.

2. Newly added provisions

Article	Details
Article 17 (4) – Documentation	For taxpayers who have prepared TP documentation for the preceding tax year, the most recently prepared TP document may be utilized for the current tax year, contingent upon the taxpayers’ identification that there have been no significant changes in the controlled transaction and comparability factors that would affect the TP method used, except for the annual preparation of financial indicators for the comparables.
Article 17 (5) – Documentation	Loan transaction from a related party shall be exempt from compliance with the arm’s length principle if the taxpayers can provide supporting loan documents as outlined by the Instruction of the GDT.
Article 17 (6) – Documentation	A resident taxpayer that is not bank and financial institutions shall be exempt from the compliance with the arm’s length principle for loan transactions from related parties and is not required to prepare supporting loan documentation, as outlined in Paragraph 5 of Article 17, if the taxpayer has the following criteria: An enterprise incorporated for less than three taxable years from the date of tax registration, or A single member private limited company that enters into a loan transaction with a shareholder, with a loan balance for any period of less than KHR3 billion (approximately US$750,000). A sole proprietorship with loan transaction from the owner, spouse, or dependent children.
Article 17 (7) – Documentation	The taxpayer is not required to prepare TP documentation for any taxable year, as stated in Paragraph 2 of Article 17, if the taxpayer meets both of the following criteria for that taxable year: An annual turnover of less than KHR8 billion (approximately US$2 million) and total assets valued at less than KHR4 billion (approximately US$1 million); and A total value of controlled transactions less than KHR1 billion (approximately US$250,000) for goods, assets, services, royalties, and other controlled transaction, excluding loan transactions.
Article 18 – Attribution of Profits to Permeant Establishment (“PE”)	In the case that a non-resident taxpayer has a PE in Cambodia, the taxpayer must allocate gross income, deductible amount, or other benefits in a manner that properly reflects the income between the PE and the non-resident taxpayer. For the purposes of the Paragraph 1 of Article 18, taxable income arising from PE and non-resident taxpayer is defined as the taxable income of a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions. It also includes income from the supply of goods or services of the same or similar business activities of PE, supplied by the non-resident taxpayer in the Cambodia.