Cambodia’s Law on Taxation[1] featured a definition of “permanent establishment” (the Cambodian PE) from its first draft in 1997. The Cambodian PE functions much like in other countries as a source nexus for the Cambodian income taxation of business income derived from Cambodia by non-residents. Income from business activities by a non-resident taxpayer are only taxable in Cambodia if they are realized through a Cambodian PE[2].

Since 1997, the Cambodian PE has only expanded, both in terms of definition and in terms of the income that is allocable to and taxable for the PE.

This contribution examines these expansions, particularly the most recent ones in the 2023 amendments to the LOT, and looks at the changes from the perspective of various industries and business models.

How did the Cambodian permanent establishment evolve over time?

In 1997 at the time of the introduction of the LOT, the Cambodian PE was first defined as

“a fixed place of business in the Kingdom of Cambodia, the branch of a foreign company or an agent resident in Cambodia, through which the non-resident person carries on their business. “a PE includes any other association or connection through which a non-resident person engages in economic activity in Cambodia”. [3]. 

Taking into account the definition provided in the key income tax regulation implementing the LOT at that time, more normative content for the Cambodian PE appears[4]. The regulation set out, in addition, a number of examples of a PE such as a place of management, a branch, an office, a factory and an agency, as well as a building site or furnishing services through employees exceeding six months in any 12 month period[5]. For an agency, the Prakas deemed these a PE based on authority to conclude contracts, maintaining a stock of goods or collecting insurance premiums.  

In 2020, the PE definition in the LOT was amended by replacing the word “association” with “network” (“ban danch”)[6]. The text now became:

“[PE] includes any network or connection through which a non-resident person engages in economic activity in Cambodia”.  (“the network or connection PE”)

Also in 2020, the Prakas on Income Tax was amended to provide a new concept of PE for e-commerce activities:

“For e-commerce activities, a non-resident taxpayer is considered to have a PE in Cambodia if the goods or services are supplied or used in Cambodia”[7].

In 2023, finally, the LOT’s definition of PE added:

“Any person may be considered as a PE of a non-resident person in Cambodia in case the person regularly has and uses the right to enter into a contract on behalf of the non-resident or fulfill a primary role in facilitating reaching the contract”[8].  (“the facilitation PE”).

The reference to the authority to conclude contracts we had already seen in the Prakas on Income Tax since 2000, so that is hardly considered new. But the reference to “a primary role in reaching the contract” is indeed new since 2023. 

Presently, therefore, the definition of PE in the LOT presently reads as follows:

The term “permanent establishment” means a fixed place of business in the Kingdom of Cambodia, the branch of a foreign company or an agent resident in the Kingdom of Cambodia, through which the non-resident person carries on their business. The term “permanent establishment” also includes any network or connection through which a non-resident person engages in economic activity in the Kingdom of Cambodia. Any person in Cambodia may be considered as a PE of a non-resident if the person has and regularly uses the right to enter into a contract on behalf of the non-resident person or to play a primary role in facilitating reaching the contract. A PE is considered as a resident legal person only for the income from Cambodian sources”[9]. 

Some notable differences in the definition of PE in Cambodian domestic law and the OECD and UN Model DTA

From the outset, the Cambodia PE was meant to be much wider in source taxation potential than its counterpart in the OECD or even the UN Model Double Taxation Agreement (DTAs). In the nineties, Cambodia’s modest economy hardly exported any capital, and drafters of the LOT were mostly concerned with preserving and expanding the very narrow domestic tax base[10].

The tension between the PE concept in its domestic laws and that in international DTA practice did not manifest itself until much later as for much of its recent history, Cambodia had concluded no DTAs, with its first DTAs only being signed in 2016[11].

The basic concept and functionality of the Cambodia PE is the same as in international tax practice; a fixed place of business through which part or whole of the activity is carried out. The important concepts that exist in the OECD and UN Model, but which do not exist in the Cambodian LOT, are (1) there are no so-called “negative PE’s” and (2) there is no concept of independent agent.

The OECD and UN Model DTAs both provide in a number of cases where, despite there being a fixed place of business, a PE is deemed not to exist. These are the various applications of the rule that a fixed place of business used for preparatory or auxiliary activities, does not trigger a PE[12].  These applications include facilities for storage, display or delivery of the goods of the non-resident, a stock of goods itself for delivery or processing, and a purchasing office[13]. Simply put, when a non-resident maintains a fixed place of business for any of these purposes or other preparatory or auxiliary activity, that fixed base is not deemed a PE.

Cambodian domestic tax law knows no such carve outs. This has a number of important potential consequences. There is no explicit confirmation in the LOT for stating that a representative office (“RO”), which in Cambodia typically does not report any income itself, cannot be the PE of its head office if it is e.g. merely engaged in storage display or delivery of goods belonging to the enterprise[14]. Indeed, tax authorities have in practice regularly challenged the lack of reported income by Cambodian RO’s while the group derives income from customers in Cambodia.

Turning to “independent agents”, the OECD and UN Model DTAs provide that a “broker, commissionaire or any other agent of an independent status” is not deemed a PE of the non-resident enterprises that do business through such independent agent, provided the agent acts in the ordinary course of business, is not operating exclusively for one principal and applies arm’s length conditions. This basic concept means that a person, even one with authority to conclude contracts, should not be deemed an agency PE of a non-resident if it is this person’s normal business to be an agent for various non-resident suppliers. Hence the reference to “independent”.  The Cambodian LOT has no carve out for an independent agent in the way the OECD and UN Model do. This raises the question if a person who would be deemed an independent agent under the OECD or UN Model DTA would nevertheless trigger a Cambodian PE under the LOT, in non-treaty situations, if that person satisfies the LOT definition of a PE. In other words, would an OECD/UN Model independent agent who has and uses the authority to conclude contracts for the non-resident, or who is the “primary facilitator in reaching the contract” nevertheless trigger a PE under the LOT? Not having a reference to independent agency is certainly a possible factor in increased source taxation, but we should keep in mind that even the LOT PE also requires activity by the agent on behalf of the enterprise, and not just activity for the (independent agent’s) own business. Although, as merely any other tax law provision, this is untested by Cambodian court decisions, one could make the argument that an independent intermediary with an arm’s length commission might be performing his sales activity just to earn his own commission.     

Cambodia’s E-commerce PE

In 2020, the LOT’s PE definition was radically expanded at least in the regulation (and not in the LOT) just for one particular type of trading, the trading over the Internet. As was mentioned above, for e-commerce activities, a non-resident taxpayer is considered to have a PE in Cambodia if the goods or services are supplied or used in Cambodia”[15].The special attention e-commerce has received in Cambodia comes in the wake of a surge in mostly B2C, untaxed import of goods online, organized by unregistered taxpayers. Other tax laws and regulations have been issued as well to somehow include this new and massive informal economy in the country’s tax base[16].

Despite this wording being introduced in 2020, to date, in actual practice, nonresident e-commerce vendors have generally not been deemed to have a PE by the Cambodian tax authorities merely because their goods are used in Cambodia. The General Department of Taxation (the GDT) seems hesitant to deploy this weapon in its quest for more source taxation for a variety of reasons. 

Cambodia’s network or connection PE

The reference to PE by means of a connection has been in the LOT since 1997, but never really been defined properly. Surprisingly, the Prakas Tax on Income, which has pages full with explanatory paragraphs about the LOT’s PE definition, remains completely silent on a PE “by connection”.

The term “network” was added in 2020, also without a definition. The Cambodian language term used (“ban danch”) does not exclusively mean a network in the sense of a computer or communications network, although it could mean that, but wider, such as any type of connection, means or link. It can be a person or a thing[17].

The reference to “connection” is in the official Cambodian language “Tum nak tum nong”, which is a noun with a wide sense of “involvement” or “relationship”[18]. The Cambodian term is used for various types of business relationships such as customers, suppliers, and the like. It does not cover a mechanical or telecommunication connection such as an internet or telephone connection.

The refence to “to facilitate” is in the official Cambodian language “Som rob som roul”, which is the activity of making sure something goes smooth, to arrange something[19].

Cambodia’s facilitation PE

The 2023 addition with reference to performing a primary role as facilitator must have been meant as an expansion of already existing Cambodian PE notions. For example, the “primary facilitator” must be interpreted to capture activity which was not already captured by the “network or connection PE”, and more so, the agent with authority to conclude contracts. The fact that the “primary facilitator” is mentioned in the same sentence as and as an extension of the agency, makes it very likely that we need to understand this concept side by side with the agent who has the authority to conclude contracts. That is to say, the “primary facilitator” may be a person that may or may not have any authority to conclude contracts, but if he played the most important role in getting to the contract, that will suffice.   

It is clear that “some” facilitation to reach the contract does not suffice to deem a “facilitation PE”. It is required that the person in Cambodia played the primary, leading role.

On the other hand, it is not required that the person in Cambodia played any role at all in carrying out or performing the contract. It need not be a subcontractor, or part of the implementation at all. What is required by the definition is that the role concerned reaching to the contract, procuring the contract. It is immaterial for this type of PE whether or not the person in Cambodia was involved in furnishing any services as in the UN Model DTA’s furnishing of services PE.

The differences between “a connection” and “primary facilitation” in the sense of the LOT definition are a source of puzzlement. Would a “primary facilitator”, or indeed any kid of facilitator not ipso facto be “a connection” as well? If that is true, then why was it needed or useful to add the “primary facilitation” to the definition, given that the same function is already captured in “a connection”.

The Cambodian “facilitation PE”, inserted in the LOT in 2023, was not a local invention. It was inspired by the insertion in the 2017 OECD Model DTA which was updated in 2017 as follows:

“[…] where a person is acting in a Contracting State on behalf of an enterprise and in doing so habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modifications by the enterprise, and these contracts are […] a) in the name of the enterprise […][20].  

According to the OECD, this provision is aimed at situations where a contract is the direct consequence of actions by the person in the source state, even though that person does not conclude the contract[21]. 

Perhaps we may consider that the OECD offers some interesting context to help us interpret the “facilitation PE” provision in the LOT. The “principal role leading to the conclusion of the contract”, according to the OECD, refers to the actions of the person who convinced the third party to enter into the contracts”[22]. Again in the OECD’s view, a PE is constituted where:

“a person solicits and receives but does not formally finalize orders which are sent directly to a warehouse from which goods belonging to the enterprise are delivered. It does not apply however where a person merely promotes and markets goods or services of an enterprise in a way that does not directly in the conclusion of contracts”[23].  

Cambodia’s permanent establishments as per its tax treaty practice

Cambodia started its tax treaty policy relatively late, with the first treaties signed in 2016 notably Singapore and China, followed by Thailand and Brunei in 2017, Vietnam in 2018, and Malaysia and Korea in 2019. Then, DTAs followed with Hong Kong in 2020, and Macao and Indonesia in 2021. Reportedly, DTAs are presently in various stages of negotiation or conclusion with The Philippines, Japan, Turkey, Laos, the United Arab Emirates and Myanmar.[24]

Although the basic rule and structure of the PE is the same in all DTAs, following OECD and UN Model DTAs, from the beginning there would be a number of differences in the PE definitions between DTAs. Here are some of the key differences between individual DTAs when it comes to PE’s:

• Building sites are deemed PE’s in all treaties (and according to the Prakas Income Tax)[25], generally if they exceed 6 months or 183 days. Not so in the DTA with China, Malaysia and Korea, which require 9 months rather than 6 months;

• Furnishing of services: Providing services through employees for a period or periods of 6 months triggers a PE as is set out in the UN Model DTA (and according to the Prakas Income Tax)[26]. Most Cambodian DTAs provide this as well, except in the DTAs with China and Korea;  

• Substantial equipment: Cambodia DTAs generally provide that exploration and exploitation of natural resources triggers a PE, but the DTA with Malaysia states the operation of substantial equipment in Cambodia for any purpose triggers a PE if it continues for 6 months or more[27]. In the DTA with Indonesia, a drilling rig or working ship used for exploration or exploitation is also deemed a PE, regardless of the time used[28].

• Negative PE: All Cambodian DTAs accept that facilities for storage, display or delivery of the goods of the non-resident, a stock of goods itself for delivery or processing, a purchasing office and other preparatory or auxiliary activities, do not trigger a PE, with very few variations. Only the DTA with Vietnam omits that a combination of various preparatory or auxiliary activities remains carved out from the PE rule[29], while Indonesia has a more detailed rule on the subject[30].  

• Dependent agents: Cambodia’s DTAs, in addition to the OECD-based agent with authority to conclude contracts, provide in the UN Model DTA’s so-called stock-agent, who has no such authority but who has a stock of goods. Cambodia’s DTAs with Thailand and Vietnam in addition provide that an agent without authority nevertheless triggers a PE if he secures orders, in following of the ASEAN Model DTA.  The DTAs with Brunei, China, Macao, Hong Kong, Singapore and Korea do not have a rule for an order-securing agent. The DTAs with Malaysia and Indonesia state that an agent (except an independent agent) who manufactures or processes goods belonging to the non-resident enterprise, is also deemed a PE[31].

• Independent agents: All Cambodia’s DTAs provide that an agent of independent status is not a PE, except if the independent agent is quasi-exclusively dedicated to one enterprise, or if terms are not at arm’s length. The DTA with China, however, does not have a reference to the agent working exclusively with one enterprise or non-arm’s length conditions. The DTAs with Macao and Indonesia have a rule to define “closely related” for independent agents, in following of the current Art 5 par 8 OECD Model DTA 2017.

Which income is attributable to a PE under Cambodian law and treaties?

Cambodian tax law does not provide much detail on how to determine which income that is derived from Cambodia should be included in the income of a Cambodian PE. The LOT merely provides that “business income from a non-resident through a PE in Cambodia” is considered Cambodia sourced income[32].  “Through a PE” was the original language of the draft law in 1997, prepared by consultants who were well aware of the internationally customary attribution of income to PE’s, as per the OECD Model DTA.  In Cambodian language this was translated into “tam royak” which means “by means of” or “through”[33]. The main regulation on income tax, the Prakas on Income Tax, remarkably, merely repeats the LOT’s statutory rule, without adding any clarification or detail.

In our view, the use of the word “through” a PE (or, in Cambodian language “tam royak”) in the LOT before 2023 at least meant that the PE must have been the link between the income and the non-resident. Not only must the PE have been involved, it must have been in the middle between the income and the non-resident. This seems to be the equivalent of the OECD’s approach in art. 7 OECD Model DTA. 

Cambodia’s transfer pricing regulation does offer some more color on determining a PE’s income. Prakas 986 provides in rules to determine the arm’s length price for transactions between related enterprises and follows, by and large, the OECD’s main concepts in the matter such as functional analysis, comparability, CUP and other methods, etc. In the 2023 amendment of the LOT, it is emphasized that the relationship between a PE and its head office is also a related party relationship for transfer pricing purposes[34]. The arm’s length principle is not a source rule per se, but it will operate with much the same result under the circumstances.   

In 2023, the allocation of income to a PE was amended. A new sub-paragraph was added reading:

“The allocation of income to the PE of a non-resident in Cambodia must also include income from the same or similar supply of goods or services to the business activity of the PE supplied by the non-resident in Cambodia”[35]. 

There is a similarity here with the UN Model DTA’s “limited force of attraction”, but both concepts are not the same.

The UN Model’s provision reads:

“[…] may be taxed in the [source] state …(b) sales in the [source] state of goods or merchandise of the same or similar kind as those sold through that PE or (c) other business activities carried on in that [source] state of the same or similar kind as those effected through that ME”[36].

The Cambodian amendment of art. 18 LOT does not include “other business activities” in the scope of the provision, only “income from the supply of goods or services”. In that sense, Art. 7 par 1 c UN Model is not fully implemented, except insofar the “other activities” are services.

The idea that all income from a source country should end up in a PE’s tax calculation is not uniformly considered workable, even by the developing countries in the UN Committee of Experts:

“Some members from developing countries pointed out that the force of attraction rule had been found unsatisfactory and abandoned in recent tax treaties concluded by them because of the undesirability of taxing income from an activity that was totally unrelated to the establishment and that was in itself not extensive enough to constitute a PE. They also stressed the uncertainty that such an approach would create for taxpayers”[37]

Under Cambodia’s DTAs the attribution of income to a PE is largely in line with the OECD Model DTA. Only income that can be attributed to the PE can be taxed by the source country. This is the case in the DTAs with China, Hong Kong, Korea, Macao, Malaysia, Thailand, Singapore and Vietnam. A few Cambodia DTAs allow the source state to tax more, in line with the limited force of attraction which is provided in UN Model DTA. That is to say, apart from the income attributed to the PE itself the source state may also tax income which is derived from sales in the source state of the same or similar goods or activities. This is the case in the DTAs with Brunei and Indonesia.

Applying the new PE rules to the construction industry

Let us take an illustrative case study as an example. Construction company “ConCo” has signed a contract to build a port in Cambodia for a Cambodian Government department. The contract provides in the following elements:

For the performance of the contract, ConCo registers a branch in Cambodia that will carry out the 1,200$ portion. We assume that the services A were not contracted or derived through the Cambodian PE.

Before the amendment in 2023, services B would likely be the only income of the Cambodian PE, taxed on a net-income basis at 20% income tax. The services A were, it was assumed, not derived “through” the PE in the sense of the LOT pre-2023. Thus, this income would be generally not be taxed on a net-basis as PE income but on the gross through a withholding by the principal of the works at 14% (subject to DTA reduction)[38].

The LOT 2023 amendment to art. 18 changes this. From 2023, the “supply of goods or services which is the same or similar to the PE activity” needs to be included in the allocation to the PE income. If the engineering services are “similar”, the PE “attracts” the similar income as well, increasing its table income to 3,000 + 1,200, despite the fact that the PE was not involved in the services A.

How similar is “similar” might be a hotly debated issue in practice. Despite the idiom, are apples in fact similar to oranges? Are electronic toasters similar to electronic water heaters? Or, turning to our example, are supervisory and design services “similar” to installation services. Some may see the similarities in apples and oranges which are both fruits, round, roughly the same size. Others may focus on the differences (an orange is a citrus while apples are surprisingly closely related to roses). Along the same lines, both services A and B are technical and relate to engineering.  But work that consists out of assembly or installation of equipment and materials on the other hand, is very different from designing a plant or overseeing the assembly work.

As no regulation or practice exists yet in Cambodia on what goods or services are in fact “similar”, there will be significant uncertainty which income is actually attracted into the branch of a Cambodian branch of a non-resident construction company. Taxpayers should note that it will not matter if the branch was at all involved with securing the construction contract or not, or even if it was at all involved in the performance of the contract. The only things that matter are the activity of the branch and the nature of the goods or services provided by the non-resident in Cambodia. 

This example illustrates that in a wide range of industries, including construction, Cambodian branches have an increased risk for source taxation on all income derived from Cambodia after the 2023 changes to the LOT.  

Applying the new PE rules to international transportation

An international transportation group “TranCo” has a branch in Cambodia. The branch (which we assume is a PE under the LOT) charges customers for transportation needs to overseas locations. Of each 100$ collected from Cambodian customers, the PE regards 95$ as revenue realized by TranCo overseas, recognizing 5$ as the PE’s income, based on an intragroup arrangement.  After deduction of local expenses at 3$, the remaining 2$ is taxed as a net income for the PE. According to TranCo, the 95$ corresponds with the cost for the international air or sea freight while the 5$ represents the local portion of the service. 

In this example, TranCo itself derives 95$ from Cambodian customers. Putting the PE’s 5$ aside for a moment, the LOT Amendments raise the question under which conditions, situation and evidence TranCo may be taxable on that 95$ in Cambodia by means of Cambodia’s source of income rules[39].

First of all, even at the outset of the LOT in 1997 TranCo’s 95$ which went through the bank account of the Cambodian PE might, potentially, have been deemed income which was realized through a Cambodian PE. Because the statutory source rule of the LOT was never properly detailed in regulation or explored in court decisions, we have pretty much only the GDT’s practice as a reference[40].  In the 90ies and early 2000’s, the GDT rarely if ever applied Art. 33 par 10 LOT in such manner to PE’s of international transport enterprises. But that has changed. So many branch offices of freight forwarders and logistics companies have been challenged on this issue, particularly in the last  decade, that many have converted into subsidiaries in search of a more predictable or desirable taxation of their income. But the amendments of 2023 have clearly exasperated the matter. As from 2023, the GDT need not provide any evidence that the income of TranCo was realized “through” the branch. It suffices that the service income of Tranco is the same or similar to that of the PE.

Here, again, we encounter a troubling question of interpretation. To decide if there are “the same or similar services”, should we look at the headline type of industry, or at what the PE really does? Both the PE and the enterprise are clearly in the international transportation services industry, but in actual reality the PE only does some local formalities and marketing. The enterprise does the actual freight, the branch just does some marketing and administration. How should this be interpreted? There is no official Cambodian guidance on the subject yet.   

This example illustrates that in certain industries, including international transportation, the limited force of attraction in combination with the wider definition of a PE under the LOT in 2023 and 2020 significantly raises the potential for Cambodian taxation of international business income.

Alternatively, the GDT could approach the above example from the angle of transfer pricing (“TP”) rather than from the angle of taxable presence. To gain taxing rights on the 95$ in dispute, the GDT could argue that the revenue split of 5$/95$ is not at arm’s length, that independent parties would not have agreed to such a split[41]. This may very well be a valid argument, if it is true. The difference between the two approaches is obvious. A TP challenge would never lead to the GDT obtaining taxing jurisdiction over the entire revenue of 95$. With the taxable presence challenge, it is really all or nothing. 

Can a subsidiary be deemed a PE of its parent?

In this example, we consider an overseas manufacturer of farming equipment “EquiCo”. EquiCo had a PE in Cambodia but recently closed it. Instead, EquiCo now serves its Cambodian customers through a Cambodian subsidiary “EquiCam”, which exclusively works with EquiCo. EquiCam receives a 3% commission. EquiCo earns 97% revenue on sales through its own subsidiary EquiCam. We assume the manufacturing and all other costs for a unit for EquiCo amounts to 80$ on any 100$ sale.

Should EquiCo have kept its PE, that PE’s gross revenue would have included the full 100$ from the sales to customers provided the PE was indeed involved in all these transactions. The question would have been how much of the 20$ net profit on each 100$ sale realized between EquiCo and its PE should be attributable to Cambodia. It is possible that the 3$ the taxpayer reports as income of the subsidiary EquiCam, is in fact also an arm’s length profit for the PE. There should not be a difference in tax position depending on the choice of entity of the taxpayer.    

After the group replaced the PE by a subsidiary, can EquiCam continued to be deemed a PE of EquiCo in the sense of the LOT 2023? A subsidiary could certainly be “any person” in the sense of art. 5 par. 4 LOT 2023. The conditions of the statute provide two substantial alternative conditions:

(1) Does EquiCam have and regularly use the right to enter into a sale on behalf of EquiCo (and thus is a dependent agent)?; or

(2) Does EquiCam perform the leading role as a facilitator in reaching the sales contract?       

For the dependent agent condition (1), it will be important to know who negotiated, concluded, signed the sales orders or contracts. If this were employees or directors of EquiCam, there is a potential risk that EquiCam is deemed a PE of its parent EquiCo. 

For the “facilitation PE” (2) the conditions are different. The GDT need not prove that there is a dependent agency relationship. Even if the orders and contracts were not concluded or signed by the parent company, the subsidiary might still be deemed a PE if it performed the leading role in facilitating the deal or deals. For example, should there be evidence that EquiCam performed general marketing operations, found this customer,  performed and assumed the cost of all the negotiations subject to parent company final approval, helped the customer decide which equipment to order, and made sure the transportation was planned correctly, one might decide that this constitutes primary facilitation to reach the contract. If however EquiCam generally plays no role in finding customers (because the parent is the one with the marketing channels) or negotiating with them (e.g. if only the parent leads the negotiations), it is hard to see how it might be deemed a PE under this heading. It is worth noting that any role for EquiCam after the conclusion of the contract is not relevant for a “facilitation PE”, which is only focused on reaching the contract, not performing it.

How would this discussion be impacted if EquiCo is a resident of a country which has a DTA with Cambodia? It is internationally accepted that a subsidiary is definitely not ipso facto a PE of its parent[42]. But it is equally accepted internationally that a subsidiary can be the PE of the parent, under certain circumstances. For example, in a case where the subsidiary acts as the dependent agent of the parent, or where the parent has the disposal over a fixed place of business at the subsidiary, this becomes entirely possible. As the OECD Commentary provides:

“However, a subsidiary will constitute a PE for its parent company under the same conditions stipulated in par. 5 as are valid for any other company […]”[43] 

“[…] any space or premises belonging to the subsidiary that is at the disposal of the parent company […] and that constitutes a fixed place of business through which the parent carries on its own business will constitute a PE[44]

A 2017 addition to the OECD Commentary also provides that a wholly owned subsidiary in the source state can be deemed a PE of an online seller of products if

“the subsidiary’s employees send emails, make phone calls to or visit large organizations in order to convince them to buy […] products […]”[45]  

The main default rule and situation remains however that a subsidiary carries on its own proper business and not that of the parent, which is reflected in the OECD Model[46] and all of Cambodia’s DTAs. As was discussed above, the OECD Model DTA also recognizes the role of facilitation triggering a PE since 2017[47].

Can an independent reseller be deemed the PE of the supplier?

Let us take the above example of EquiCo again, but with one change. Now, EquiCo is also supplying goods to the Cambodian market through a third party “DisCo”, a company resident in Cambodia. DisCo purchases equipment from EquiCo at 97$ and resells them to its Cambodian customers for 100$, earning 3$ gross profit in the process.  Again, the manufacturing and other costs of EquiCo are assumed to be 80$.  

Gross profit of DisCo                        3$

                                Revenue of EquiCo                          97$

                                Profit of EquiCo                                  17$ (97-80)

Under the OECD and UN Model DTAs, DisCo would generally not be deemed a PE because here, the person in Cambodia is not acting on EquiCo’s behalf, but on its own behalf. Even if DisCo has a sales force trying to convince customers to choose for EquiCo products, DisCo simply securing its own revenue, the products DisCo owns and resells. Furthermore, DisCo does not need to have or use an authority to conclude contracts on behalf of EquiCo. DisCo just concludes its own contracts with its customers.

This is quite clearly confirmed in the text of Art. 5 OECD and UN Model DTA which requires that the PE acts on behalf of the non-resident enterprise:

“Where, for example, a company acts as a distributor of products in a particular market and in doing so sells to customers products that is sells from an enterprise (including an associated enterprise) it is neither acting on behalf of that enterprise nor selling properties that are owned by that enterprise since the property that is sold to the customers is owned by the distributor. This would still be the case if that distributer acted as a so-called “low-risk distributor” (and not, for example, as an agent) but only if the transfer of the title sold by that low-risk distributor passed from the enterprise to the distributor and from the distributor to the customer (regardless of how long the distributor would hold that title in the product sold) so that the distributor would derive a profit from the sale as opposed to a remuneration in the form of, for example, a commission”[48]. 

The same reasoning applies to the Cambodian PE set out in the LOT, even after the amendments of 2023. Art. 5 par. 4 LOT remains in line with the OECD Model 2017 even after 2023 in the sense that the agency PE is focused on a non-resident doing business in Cambodia through a person that acts on that non-resident’s behalf, such as some kind of agent. It does not address situations where a person in Cambodia acts on his own behalf. Along the same lines, in the example above DisCo does not play a primary role in facilitating the contracts of EquiCo, because EquiCo only has a contract with DisCo. DisCo cannot be at the same time a facilitator and the party to the contract. In the example, EquiCo does not have its own contracts with customers in Cambodia, only DisCo has those. But, various distribution business models remain vulnerable to Cambodian source taxation, among other reasons because the LOT does not explicitly have the concept of an independent agent as an exception to the dependent agency, as the DTA has. In other words, an even if an independent agent has the authority to conclude contracts, this does in and of itself not trigger a PE for the DTA[49]. That crucial limitation is not provided in the LOT’s PE, and it never was.

* Senior Partner VDB Loi Legal and Tax Advisory. The author was formerly a full time advisor to the Ministry of Finance and General Department of Taxation in Cambodia for the conclusion of its Double Taxation Agreements in 2006-2008

[1] Cambodia’s Law on Taxation was first promulgated by its National Assembly on January 8, 1997, and comprises chapters in income tax and capital gains tax, and value Added Tax. The structure and concepts broadly follow the World Tax Code, and it was originally drafted in English, then translated to Cambodian language and promulgated. It was most recently amended in 2023 with NS/RKM/0523/004 available online at https://www.tax.gov.kh/en/categories/523PD19523624237

[2] Art. 33 (10) LOT

[3] Art. 3 par. 4 LOT 1997

[4] Prakas on Tax on Income nr. 539 dated 3 August 2000

[5] Prakas Tax on income nr. 539 sec. 1.2.

[6] Despite a widespread unofficial translation which keeps the word “association” in place after the amendment. 

[7] Prakas 098 on Tax on Income 29 January 2020, sec. 1.2. 4.

[8] Art. 5 par. 4 LOT 2023

[9] Art. 5 par. 4 LOT 2023

[10] International Monetary Fund, Cambodia: Recent Economic Developments - ISCR/98/54

[11] Cambodia concluded its first actual DTAs in 2016 with Singapore and P.R. of China.

[12] Art. 5 par. 4 OECD Model DTA

[13] Art. 5 par. 4 a) to f) OECD Model DTA

[14] Assuming, which is more than likely, that the representative office is indeed a fixed place of business.

[15] Prakas 098 on Tax on Income 29 January 2020, sec. 1.2. 4.

[16] Such as the Sub-Decree on Implementing the VAT on E-Commerce nr. 65 AnKr. BK

[17] Dictionary of the Cambodian language issued by National Council of Khmer Language (NCKL) at the Royal Academy of Cambodia

[18] Dictionary of the Cambodian language issued by National Council of Khmer Language (NCKL) at the Royal Academy of Cambodia

[19] Dictionary of the Cambodian language issued by National Council of Khmer Language (NCKL) at the Royal Academy of Cambodia

[20] New Art. 7 par. 5 2017 OECD Model DTA

[21] OECD Commentary on Art. 5, par. 88

[22] OECD Commentary on Art. 5, par. 88 (sentence 4)

[23] OECD Commentary on Art. 5, par. 89

[24] https://www.khmertimeskh.com/50998026/cambodia-in-talks-with-six-countries-on-double-tax-agreement/

[25] Prakas Tax on income nr. 539 sec. 1.2.

[26] Prakas Tax on income nr. 539 sec. 1.2.

[27] Art. 5 par. 3 d) Cambodia- Malaysia DTA

[28] Art. 5 par. 2 h) Cambodia- Indonesia DTA

[29] Art. 5 par 4 Cambodia-Vietnam DTA

[30] Art. 5 par. 5 Cambodia-Indonesia DTA

[31] Art. 5 par. 5 c) Cambodia-Malaysia DTA

[32] Art. 33 par 10 LOT 2023

[33] In the dictionary of the Cambodian language issued by National Council of Khmer Language (NCKL) at the Royal Academy of Cambodia “tam royak” is explained to mean the Khmer equivalent of “by means of”, or “through”. 

[34] Art. 5 par. 10 (new) LOT 2023 inserted the words “or the connection between a PE and the non-resident taxpayer” into the definition of “related persons”.

[35] Art. 18 par 2 LOT 2023

[36] Art. 7 par 1 UN Model DTA 2017

[37] UN Commentary on Art. 7 paragraph 1.

[38] A hybrid method of taxation also exists in practice in case no acceptable accounting evidence can be provided. Then, the PE net income may be determined as a percentage of its gross revenue. The net profit margins are not set on a case by case basis by the official in question. 

[39] Other means, besides taxable presence and source of income might be employed. The GDT could try the transfer pricing route to gaining more tax liability of this income. This alternative is raised further below.

[40] Art. 33 par 10 LOT

[41] Much will depend on the actual freight costs. If the freight costs TranCo indeed 95$, including both a revenue of 95$ and freight costs of 95$ in a net-income calculation in Cambodia will not change much, apart from the 1% Minimum Tax Cambodia imposes on gross revenue.

[42] Art. 7 par. 7 OECD Model 2017

[43] OECD Commentary 1977 par. 41, 2005 par. 116

[44] OECD Commentary 2017 on art. 5 par. 116.

[45] OECD Commentary 2017 on art. 5 par. 90.

[46] Art. 7 par. 7 OECD Model 2017

[47] Art. 7 par. 5 OECD Model 2017

[48] OECD Commentary 2017 on art. 5 par. 96.

[49] Art. 5 par 6 (independent agent) is an exception to Art. 5 par. 5 (dependent agent) in both the OECD and the UN Model DTA.