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CAMBODIA: An Introduction to General Business Law

Contributors:
Heng Chhay
Hout Sotheary
Chum Socheat
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Cambodia: General Business Law Overview 

Cambodia’s Business Climate. Cambodia has emerged as one of the fastest growing economies over the last few decades from being a once war-torn country. Following a genocide regime in the late 1970s where the whole economy had been destroyed, the country transitioned through a socialist regime until 1989 when it started to open up its free-market economy. Cambodia adopted its first Law on Investment in 1994 to attract and facilitate foreign direct investment (FDI) into the country and joined ASEAN and WTO in 1999 and 2004 respectively.

Through economic reforms, Cambodia regained steady macroeconomic stability and remarkable economic growth. Cambodia championed economic growth amongst other ASEAN countries by recording its highest GDP annual growth rate of 13.25% in 2005 and achieved in 2009 the Millennium Development Goal (MDG) of halving its poverty. In 2015, Cambodia was reclassified from ‘lower-income’ to ‘lower-middle-income’ status and in 2016, the Asian Development Bank (ADB) endorsed Cambodia to become one of the new tiger economies of Asia. Over the past few decades, Cambodia’s GDP annual growth rate averaged at 7.5% and is projected by the International Monetary Fund (IMF) to stay at 5.7% for 2022 due to COVID-19. According to ADB, Cambodia’s GDP is forecast at 5.5% for 2022.

Geographically, Cambodia sits at the heart of ASEAN and is considered to be the gateway into a market of more than 600 million consumers. Cambodia is the first ASEAN country to secure a bilateral free trade agreement with China, signed on 5 October 2020. This is believed to signify both countries’ commitments to comprehensive strategic cooperation partnership in the joint construction of the Silk Road Economic Belt and the 21st Century Maritime Silk Road of the Belt and Road Initiative. Demographically, Cambodia’s population is relatively young with the median age at 25.6 years, and Cambodia was reported by International Labour Organization (ILO) in November 2018 to have the highest labour force participation rate in the Southeast Asia/Pacific region with 82.7% of the working population.

Recently facing the pandemic, Cambodia is fortunate to not suffer from a severe community-wide spread of COVID-19 and the situation has been well under control through accelerated vaccination programme of the Government. With businesses trying to recover and adapt to the ‘new normal’, technology has now become more important than ever within both the private and public sectors. The Government has recently moved towards online platforms for various administrative and registration processes, including commercial and tax registration. While businesses in certain sectors such as tourism and construction are severely hit, other sectors including infrastructure, banking and finance, and services, with adjustment and adaptation, continue to operate reasonably well. We have seen new project financings, cross-border M&A, and offshore/onshore listings proceeding amidst this unpredictable time.

At R&T Sok & Heng Law Office together with our Rajah & Tann Asia network, we have managed to keep the impact under control and continued to service our clients with minimal interruptions. Our technology that we have put in place prior to COVID-19 as we have been preparing ourselves for the Industrial Revolution 4.0 has enabled us to navigate our clients to overcome the challenges during this crisis.

Legal System and Legal Market. Cambodia’s legal system was originally based on the French codified civil law system. With a rapid regional integration and globalisation of economies, the legal system has evolved into a hybrid system as it has absorbed and been inspired by various foreign law concepts (including features from the common law system) through various foreign aids and assistances to Cambodia’s legal and judicial reform as well as influences from diverse practices brought by extensive foreign direct investments into the country. The mixture of these elements into Cambodia’s legal system requires a combination of both local expertise and international experiences for a proper understanding and practice of laws in Cambodia.

Even though Cambodia’s legal market is small if compared to its neighbouring countries, with constant growth of FDI influx, demands for legal services and qualified legal professionals to assist and advise on large scale projects and complex transactions are growing over the years.

As one of Cambodia’s most highly regarded full service law firms, R&T Sok & Heng Law Office has young, dynamic and qualified teams of lawyers advising clients on a wide range of areas of practice across the corporate and commercial spectrum, with particular knowledge and experience in various important industry sectors.

Together with our regional Rajah & Tann Asia network, we have built a network of more than 800 legal professionals who are exceptionally talented, skilful and highly motivated individuals to provide seamless legal services across the region with our current footprints in Cambodia, China, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam plus Brunei, Japan and South Asia desks. Having such diverse local qualified lawyers with multiple languages proficiency, we are proud to call ourselves the region’s new ‘home team’ of ‘Lawyers Who Know Asia’.

Recent Legal Development in Cambodia. In spite of the COVID-19 pandemic, the Royal Government of Cambodia has not slowed down the implementation of its development plans. Between 2019 and 2021, Cambodia has adopted various important laws such as the Trust Law, the Law on Management of Petroleum and Petroleum Product, the Construction Law, the Law on E-Commerce, the Law on Social Security Scheme, the Law on Consumer Protection, the Law on the Management of Commercial Gaming, the new Law on Government Securities, the Law on Competition and the new Law on Investment. The Government also steps up its effort to expand its coverage of double taxation agreements (DTAs). Other key draft laws are also in the pipeline, including the draft Law on Public Private Partnership and draft Law on Cyber Security which would come to further enhance the investment climate under the new Law on Investment and the Law on E-Commerce respectively.

The number of legislations adopted during this critical period can be seen as among the highest historically, which would suggest a well-prepared and reshaped legal foundation for the economic recovery post-pandemic. We, at R&T Sok & Heng Law Office, have had the privilege to be engaged and consulted with during the drafting process of these new legislations.

It is worth noting that among the new legislations recently adopted, some are new concepts to the Cambodian market and most require more detailed implementing regulations for full enforcement. It is therefore critical for investors and all business stakeholders to start familiarising themselves with the new legal framework and stay alert on further development. Of critical note, FDIs into Cambodia as well as existing ones are being reshaped and reinforced by the new Law on Investment, of which key features are elaborated below.

Key Features of the New Law on Investment.

The new Law on Investment was promulgated on 15 October 2021 to replace the former investment law. The law has been a key part of the Government’s policy commitment and action plan within the framework of the “Cambodia Industrial Development Policy, 2015-2025”, aimed at responding to the concrete need for developing the industrial sector by way of making the business climate conducive to attracting investment, enabling technology transfer, creating jobs and enhanced skill-training and increasing value-added.

The following are key features introduced under the new Law on Investment:

• The law introduces a new online investment registration in a one-step process as opposed to the former physical two-step process, and thereby reducing the overall registration timeline.

• A list of sectors subject to investment incentives has been introduced to also include certain sectors that contribute to (i) skill training, research and innovation; (ii) promotion of growth of small and medium enterprises; (iii) creation of large industrial parks and commercial hubs; and (iv) promotion of logistics and digital industry sectors.

• Additional investment guarantees and incentives are introduced including ‘real’ tax incentives in a replacement of the former deferred tax incentives regime under the former law. On top of the base investment incentive, investors may also be eligible to receiving additional incentives which include VAT exemptions on purchase of production inputs locally produced and deduction of expenses involving certain activities such as research, development and innovation. The new Law also introduces special incentives to be provided to certain specific investment projects considered as contributing to the country’s national economic development, subject to further specification within the Law on Financial Management.