Red tape up ahead for expatriates

Cambodia has been a relatively laissez-faire environment for foreign business owners and expatriates working here, however that may all be about to change if government ministries get their way.

The first sign that times may be changing came from a recent announcement from the Ministry of Labour that it will enforce a law requiring foreigners working in Cambodia to obtain a labour card and permit. The law has been on the books since 1992, but it has been irregularly enforced.

This policy shift follows the recent overhaul and transformation of the General Department of Taxation. The department intends to be more assertive, if not aggressive, in casting its net for higher tax revenue collection.

Together these changes could become a lethal combination for expatriates who own registered businesses.

It is also problematic for the vast community of expatriate freelancers, consultants and business owners who operate without business licences. The result is that the cost of doing in business Cambodia is rising rapidly. If the trend continues, it may price small foreign investors out of the Cambodian market.

The minimum capital requirement of only $1,000 to start and register a company in Cambodia is still very competitive compared with most countries. Also lucrative is the fact that a foreigner can own 100 per cent of a Cambodian company, thus no need for the so-called “local partner”. This has historically created a conducive environment for foreign investors to enter the Cambodian market.

Likewise the generally lax enforcement of local tax and labour laws has created a haven for expatriate freelancers and consultants seeking an economical and less-stressful lifestyle in the Kingdom.

The only significant regulatory compliance cost in the past was obtaining the Business Visa (E Visa), which allows extended stays of three, six and 12 months.

Existing expatriate-owned registered companies that haven’t complied with the Labour Law are now faced with new and significant costs of doing business in Cambodia. These include a company-level registration with the Ministry of Labour and Vocational Training or, for companies with 100 employees or less, the Department of Labour and Vocational Training.

The company registration cost is generally about $180. However, that is not as simple as it seems. There are additional costs and documents required for companies with more than 10 employees, more than 40 employees and so on.

Navigating through the exact requirements and paperwork will probably require legal advice or at least a trusted agent who will ensure compliance without excessive fees.

The company must then register its employees in order to obtain labour books and work permits. Costs for Khmer employees range from $7-$10. Expatriates must retroactively pay $100, starting from the year of issuance of their first Business Visa. There is also a quota charge, book charge and medical exam fee, the quota, and medical exam fee being annual charges.

Additionally, there is the 10 per cent rule that limits foreign workers to 10 per cent of the total workforce at any one company. Companies must obtain special permission and pay additional fees for waivers.

Foreigners who are freelancers, own businesses, or work for businesses that are not registered either with the Ministry of Commerce or other ministries, are faced with a more challenging dilemma.

Unregistered businesses would need to register a business either as a sole proprietorship or company, and then register with the Tax Department. To comply with the Labour Law and obtain a work permit, an unregistered business or person will also need to register with the tax department.

While the government is touting Labour Law compliance, the consequential outcomes are also bringing in foreign workers and business into the tax net, with all the associated costs of registration and monthly tax payments.

Although initial compliance with the Labour Law is costly, it is relatively low compared with Asian neighbours. The same cannot be said, however, for the Cambodian tax system, which punishes those who pay taxes with an increasingly uncompetitive environment, while not going after tax evaders.

Expatriates who have are accustomed to a relatively unrestrictive and inexpensive living in Cambodia are unfortunately in for a rude awakening.