Trusts in Cambodia: The Legal Regime of Investment in Land Foreign Investment in Land Prior to the Trust LawSeptember 1, 2022
As per the Constitution of Cambodia, the Investment Law, and the Land Law, foreigners (including foreign-owned entity) are restricted to own land in Cambodia. The land ownership rights are reserved only for Cambodian individuals or entities. Thus, prior to the implementation of the 2019 Trust Law in Cambodia, as the structural options to use land that were considered included the following:
- Land holding company (“LHC”): an LHC could be incorporate for land holding provided that the Cambodian shareholder must own 51% or more shares of the company. With the LHC structure, the land would be registered under the ownership of the LHC.
- Land holding right through concession: foreign investors could also obtain the land use right through concession awarded by the concession agreement with the Royal Government. Rights of foreign investors on the concession land shall be documented through the land concession certificate issued under the name of the foreign investor with a term no longer than 50 years.
- Land holding right through perpetual lease hold (long-term lease): As provided under the Civil Code of Cambodia, foreign investors could receive its right to use land in Cambodia through entering into long-term lease agreement for a term of up to 50 years with 50 years renewal option. Once the long-term lease is registered with the competent authorities, the foreign investors will receive a long-term lease registration certificate in its name.
Nevertheless, some of these structures may not always be available for specific project. Other traditional structure that may have been used in practice are associated with a number of potential legal challenges and risks, and thus reduced overall bankability of the project.
To bridge the gap, the new Trust Law offers an alternative solution aimed, among things, to provide another option of obtaining rights to immovable property.
What is Trust Law for? Why it is enacted?
In simple terms, a trust is a legal arrangement by which allows one person to hold property for the benefit of another person. A trust imposes obligations upon a person (trustee) to deal with the property for the benefit of another person or class of persons (beneficiary(ies)) or for the advancement of certain purposes.
In order to catch up with the international market (especially within the ASEAN region) and to establish a well-regulated framework for trust transactions in Cambodia, the Royal Government of Cambodia introduced Law on Trust 2019. The implementation of Trust Law aims to regulate the currently available and future trust transactions including the arrangements to hold land for foreign investments.
In addition to a more comprehensive framework to govern the trust mechanism, the Law on Trust 2019 also governs the rights, duties and responsibilities of the trustor, trustee and beneficiary, thus granting more protection to the parties and provides more venues for the trustors to enforce the trust in case of a breach by the trustee as well as more appealing to the lenders due to the transparency of the trust arrangement.
How will this work? Who can be trustee?
For the creation of a trust, the most important aspect the trustor (investor) is the selection of a qualified trustee who is properly registered with the trust regulator and currently holds a valid trustee certification.
Under the Law of Trust 2019, trustee could either be a legal entity or an independent individual trustee. However, it is to be noted that, the total value of the trust asset that an independent individual trustee can manage, dispose, and keep custody shall not exceed 10,000,000,000 KHR (approximately US$2.5M) unless otherwise approved by the Trust Regulator.
Another important aspect for the trust transaction is the preparation of trust deed that shall meet the minimum requirements set out by the Trust Regulator and registering the trust with the Trust Regulator within 3 months from the trust creation date.
Are the “old style” nominee arrangements still applicable?
The Trust Law in practical terms replaces the nominee-type arrangements that could be seen in the market previously.
The shift of the legal landscape imposes the compulsory registration obligation upon the trustors and trustees. The Trust Law also recognizes only licensed trustee in holding land.
Having said that, the popular choice of the LHC structure does not fall within the purview of the Trust Law as there is no entrustment of property to the LHC. Hence such structure remains available, and continues to serve as an alternative option for the foreign investors depending their needs in the market. Therefore, to reconcile these two structures, the new Trust Law merely introduced a new option for the foreign investors to appoint a licensed trustee to manage the land.
Some salient factors in considering the appropriate structure for the investment:
- Protection: Governing framework for the trust mechanism offers more certainty and predictability to the parties involved in the investment. It reduces the risk that often encountered in a nominee-type arrangement and increases enforceability against the defaulting party.
- Control: While the foreign investor may “manage” its trustee via a well-crafted trust deed, such governance must be exercised within the limitation of the Trust Law.
- Cost: In trust structure, the costs incurred would be the annual fee towards the appointed trustee and other official and managerial fees.
- Tax: Tax implications between the previously used nominee-type arrangements and the trust structure are substantially distinct. A careful assessment of the tax implications between different structures is recommended to achieve the best tax optimization for the business.
What is being done now to create trustee system? Is the trust structure being implemented?
Currently, there are still limited regulations and legal framework to govern the trust sector in Cambodia. In 2021, there were still only less than 20 trusts registered with the regulator.
However, it is anticipated that the trust sector in Cambodia will develop rapidly. On 25 July 2022, the Trust Regulator organized its first training course where 241 attendees passed exams to become an approved person in the trust services area. As of the date of this article, there are approximately 500 trusts filed for registration with the Trust Regulator and these registrations are still pending review. This appears to be a positive sign of improvement and expansion to the using trust structures in practice.
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