Interest Free Loans – Tax Reassessment Risk

With a lack of thin capitalization rules in Cambodia, interest free loans have been the norm for many Multinational Enterprises funding their investment and ongoing operations in Cambodia. However, loss making or small profit margin Cambodian Taxpayers with interest free loans have found themselves facing large tax reassessments over the past three and a half years. This has taken the form of deemed interest on inbound loans creating withholding tax (“WHT”) reassessments. The reason this is particularly pertinent for loss making and small profit margin companies is that even if a corresponding adjustment in respect of Corporate Income Tax is successful this will either not offset the WHT amount due at all (loss making taxpayers) or in totality (small profit margin taxpayers).

This Article discusses the issues facing Cambodian Taxpayers with interest free loans and how international guidance may help to mitigate their risk.

Highlights of this note

• Tax Audit Risks on Interest Free Loans;
• Limitations of Cambodian guidelines;
• How VDB Loi can help;
• International Guidance;
• Test of Substance;
• Next Steps.