Doing Business in Cambodia
Located in South-eastern Asia bordering the Gulf of Thailand, the Kingdom of Cambodia is a constitutional monarchy. The Royal Cambodian Government was formed in 1993 on the basis of UN-sponsored elections that were internationally recognised as free and fair. It is located in between Thailand, Vietnam and Laos. Cambodia established full diplomatic relationship with the US after the formation of the freely-elected royal Government.
Following Japanese occupation in World War II, Cambodia emerged as an Independent country in 1953 after being freed by its colonizer, France. Extension of Vietnam war to Cambodia resulted in the birth of ‘Khmer Rouge’ rebel group which took over Phnom Penh in 1975. At least 1.5 million Cambodians died from execution, forced hardships, or starvation during the Khmer Rouge regime under Pol Pot. After much internal strife and bloodshed, Cambodia sought to reappear on the world scene as a nation with socialist leanings, People’s Republic of Kampuchea. The travails of citizens continued until the war-ravaged society was reunited under the monarchy in 1993 ( http://en.wikipedia.org/wiki/Cambodia
Basic Facts About Cambodia
Cambodia lies entirely within the tropical region. As is the case with any other Southeast Asian nation, Cambodia’s climate is marked by monsoons, which are characterised as tropical wet and dry, due to the distinctly marked seasonal variations.
Cambodia’s topography consists of Central plains, drained by the Tonle Sap (Great Lake) and Mekong and Bassac Rivers. The country is known for its thick forests and has mountains in the southwest (Cardamom Mountains) and in the north (Dangrek Mountains).
With substantial hydro-power potential and abundant natural bio-diversity, Cambodia has other natural resources like oil and gas, timber, gemstones, some iron ore, manganese and phosphates ( http://www.nationsonline.org/oneworld/cambodia.htm Exploitation of these natural resources have taken the forms like illegal logging and strip gemming.
Chief among its industries are – tourism, textiles and garments, beverage, food processing, rice milling, fishing, wood and wood products, rubber, cementa and gem mining among others. It has a coastline of 443 kilometers.
Cambodia is divided into 24 provinces including the capital Phnom Penh. Districts and municipalities are the second-level administrative divisions. The country’s provinces are divided into 159 districts and 26 municipalities. Cambodia’s official language is Khmer. Majority of Cambodians practise Theravada Buddhism.
Cambodia got into the Association of Southeast Asian Nations (ASEAN) in 1999 and acceded to the World Trade Organization (WTO) in 2004. Since then, Cambodia has been making efforts to ensure integration of its legal system with other systems in the ASEAN member countries ( Guide to Business in Cambodia (PDF ), BNG Legal, Feb 2010 @ www.bnglegal.com
Business Laws in Cambodia
Cambodians often employ traditional methods of dispute resolution which are informal. Everyday disputes are frequently taken to elderly persons or to other people commanding respect in villages and communities. Instruments of Alternative Dispute Resolution (ADR) are also put to use. In 2001, Cambodia ratified the ‘UN Convention on the Recognition of and Enforcement of Foreign Arbitral Awards’. Cambodian law empowers courts to recognize and enforce foreign arbitral awards (ibid.) Under Cambodian law, a foreign business is a legal person formed under the laws of a foreign country which has a place of busines and conducts business in the Kingdom of Cambodia. Foreign enterprises are subject to registration at the MOC. Three main forms of foreign business are- a representative office (RO), a branch and a subsidiary.
An RO is considered as a cost centre deriving no income from its activities and is not subject to Cambodian tax laws. However, an RO is subject to – withholding tax on salaries paid to employees in Cambodia, a patent tax and an annual business operation tax.
Branch office of foreign business entity is the same as the parent company. The branch and the foreign company have joint liability with respect to losses and debts of a branch office and the Branch office must alo meet local tax obigations.
A subsidiary is a company incorporated in the Kingdom of Cambodia and has at least 51 percent of its capital held by a foreign company. Each subsidiary is subject to commercial registration, handled by the Cambodian MOC.
However, insuffiecient legal framework is sometimes blamed as a hurdle to doing business in Cambodia and for lack of foreign investment befitting the potential of modern day Cambodia.
Opening a Business in Cambodia
Cambodia business opportunities are getting some attention in recent years. Cambodian Government has brought in several legislation to make Cambodia an open economy and encourage foreign investment. Incentive schemes for investors entering Cambodia, have been placed among the most liberal ones in the Southeast Asia (ibid.). Except for the ownership of land, the country does not discriminate against foreign nationals. Investors can own 100 percent of their businesses. Cambodian government does not fix prices of products and services administratively, allowing business owners to have a greater control of their operations (Guide to Business in Cambodia (PDF), BNG Legal, Feb 2010 @ www.bnglegal.com)). Investors can avail a corporate tax exemption up to eight years based on the nature of the business project. Special Economic Zones have been introduced in the last few years in order to bring several industrial activities at one place.
Cambodian law expressly prohibits certain businesses due to concerns of national security, social safety and national economic necessity. Prohibited projects include those in: production and process of psychotropic and narcotic substances; poisonous chemicals, agricultural pesticides and insecticides and production of electrical power from imported waste.
Council for Development of Cambodia (CDC), the nodal agency for approving FDI, first issues a Conditional Registration Certificate and a Final Registration Certificate is issued after a detailed review. Law requires CDC to arrive at a decision on issuing the Conditional Registration certificate within three business days after receiving the investment proposal.
Related: Franchising a business in Cambodia?
However, the CDC must seek the approval of Cambodian Ministry of Commerce (MOC) in the case of certain projects including: Capital investments of over $50 million; Exploration and expoitation of minierals and other natural resources; Projects involving environmentally unsound practices and Infratstructure schemes like Build-Operate-Transfer projects. Following Cambodia business news may prove worthwhile for those interested in Cambodia tenders.
According to World Bank’s ‘Doing Business Survey 2012’, Cambodia ranks 138 out of 183 national economies, with a high ranking on the Ease of Doing Business Index implying a regulatory environment which is more conducive to starting and operation of a local firm ( http://www.doingbusiness.org/rankings ). In the rankings related to Starting Business, Cambodia has a rank of 171 out of 183 countries. In ‘Dealing with Construction Permits’, Cambodia ranks 149. The overall ‘Doing Business’ ranking is given based on the percentile rankings on ten topics made up of a variety of indicators, with each topic given equal weight. Cambodia’s rank in the other topics of the Doing Business survey 2012: Getting Electricity, 130; Registering property, 110; Gteeting Credit, 98; Protecting Investors, 79; Paying Taxes, 54; Trading Across Borders, 120; Enforcing Contracts, 142 and Resolving Insolvency, 149.
World Bank’s Doing Business Survey 2012 provides a detailed summary of bureaucratic and legal hurdles faced by entrepreneurs looking to incorporate and register a firm in 183 countries ( http://www.doingbusiness.org/data/exploreeconomies/cambodia/starting-a-business/ ). The survey gives details like ‘Time to Complete a procedure’ and ‘Associated Costs’. In the case of Cambodia, ‘Time to deposit the Initially Required Capital in a Bank and obtain Deposit Evidence’ is one day; ‘Checking the Uniqueness of a Company name’ takes five days and costs $10.
Time taken to ‘Incorporate the company with the Commercial Register maintained at the Office of clerk of Commercial Court’ will be 25 days and cost $105 in Cambodia. Time taken to ‘have Registration Documents stamped and approved by the Phnom Penh tax Department’ is three days and cost $49. Time taken to ‘Notify the Ministry of Labour of the start of operations and hiring of employees’ is 30 days and it costs $250. This is applicable if the number of employees hired ranges between eight to 200.
Cambodian wages remain low and this may be a partial incentive to those doing business in Cambodia. Business start-ups can put money in its textile sector, handicrafts and similar labor-intensive enterprises. Cambodia news on the web suggests that the government is focusing on large scale agriculture, ethanol, bio-diesel, sugar and forest plantations ( http://www.business-in-asia.com/cambodia.htm
Work Culture in Cambodia
Cambodia is a collective society with altruistic spirit. Individuals are subservient to group whether such a group is family, neighbourhood or company ( http://www.kwintessential.co.uk/resources/global-etiquette/cambodia.html ). Etiquette and protocol guidelines are used to maintain a sense of societal harmony.
The Cambodian traditional greeting is a bow combined with folding of hands together at the chest level. However, with foreigners, Cambodians are used to handshakes and local women may adhere to traditional greeting. The usual practice is to reciprocate with the greeting as extended.
In Cambodia, showing emotions is considered to be a negative behaviour. Anger, impatience or frustration shall be kept to oneself by hiding the feelings. Otherwise, it would lead to a loss of face.
In business meetings, one is advised to speak clearly, slowly and avoid use of slang, adages or colloquial utterances.
Business Practices of Cambodia
As its culture values hierarchy, the business people here adhere to suitable protocols. Showing respect and deference to the most senior person is a given. In a group meeting , the guest will be introduced to the person of highest rank first. In a similar fashion, if a delegation is to meet a local group of hosts, the most senior of the visiting delegation must greet the hosting group.
Subtle communication styles are employed in order to minimize chances of causing offence to others. Handshakes are normal but one has to be careful so as not to be too firm since that can be construed as being aggressive. If men has to deal with women, they should wait and see if the latter extend a hand before doing so. It is advisable to keep eye contact to a minimum.
In Cambodian culture, protecting one’s own and other’s face is extremely important. Business cards are exchanged usually after an initial interaction.
Until 1999, the Cambodian society continued to be cautious and fearful as it was believed that remnants of the dreaded Khmer Rouge were hiding in the jungles of northern Cambodia. Only after the Government ensured the complete removal of guns from streets by 1999, businesses got a fillip.
Being a predominantly agricultural economy, industrial activity has centered on the processing of agricultural produce and forestry products. Manufacture of consumer goods did not go beyond small-scale. Rice milling has been the main food-processing industry ( http://www.web-cambodia.com/en/trends/industry After achieving political stability in the 1990s, Cambodia managed to get increasing amounts of foreign direct investment. When viewed from a ‘dollar per $1,000 GDP’ basis, Cambodia pulled in FDI which compares favorably with China and Vietnam. This has coincided with the macroeconomic situation getting better, as also the openness of the economy. According to the official figures supplied by the Cambodian government, Malaysia accounted for major investments during the 1994–2001 period, with 31.2% of all investment and 79% of all ASEAN country investments over this period ( http://www.business-in-asia.com/why_cambodia.htm As the decade of 1990s drew to a close, a substantial amount of FDI went into tourism, manufacturing, infrastructure and construction in that order. By 2001, Cambodia has attracted proportionately more FDI than its neighbours and even China in terms of ‘per $1000 of GDP ‘. Of late, Cambodia business news related to success of first-time entrepreneurs including those of expatriates, are becoming frequent on the internet (one such story at http://internationalliving.com/2012/05/starting-a-business-in-cambodia/ The key challenges before Cambodia are its inadequately trained human resources and poor education levels. Poor infrastructure and lack of transparency in government are the other major problems. Hence, entrepreneurs looking forward to doing business in Cambodia need to address these shortcomings.
Cambodia In Summary
Cambodia is entering the next stage of classic industrial mode whereby, in the beginning, fly-by-night companies come to take advantage of the low-paid, low-skilled workers to produce for external markets before the domestic market comes into play and resident industries diversify both in terms of skills and sectors (from Foreign Business Leaders’ Survey 2011 @ ( http://www.cambodianembassy.org.uk/ The country has achieved a great deal since the end of Khmer Rouge regime but key challenges like corruption (‘informal fees’) and an insufficient legal framework keep investors away from the country, despite the Cambodians’ growing appetite for products and services.