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VDB Loi briefs business community on Notification 437

June 28, 2012

PHNOM PENH, Cambodia, 28 June, 2012 – Over 20 influential business leaders gathered at VDB Loi’s Phnom Penh office this morning to gain a better understanding of Notification 437, which was issued by the General Department of Taxation (GDT) on 19 April 2012.

“This notification raises a number of important questions,” said Edwin Vanderbruggen, Partner, VDB Loi. “As tax experts, with a wealth of experience in Cambodia, we felt it was important to share our analysis with the business community.”

Notification 437 recalls, in short, that under Article 71 of the 1995 Law on Financial Management, the buyer of a business, an enterprise or property is co-responsible with the seller for payment of taxes and fines that shall be paid by the seller at the time of the sale. After a comprehensive analysis of Article 71, as well as other pertinent provisions in the Law on Taxation (LOT), the Law of Commercial Enterprise, the Civil Code, and Cambodian Accounting Standards, VDB Loi believes that the Notification needs to be interpreted and applied within the limited context of Article 71 and Article 108 of the LOT.

As such, here is a brief summary of VDB Loi’s analysis on Notification 437 (link to full analysis at end of this release):

Q. Is a buyer in an asset-deal co-responsible for the seller’s unpaid taxes?                    

A. Yes, the buyer of assets may under Article 71 and the Notification be co-responsible for the tax owed by the seller, but only for taxes that are payable on the sale, at the time of the sale (such as VAT and Registration Tax for the transfer of an immovable property). We believe that the buyer is not responsible for the seller’s historical underpaid taxes or for Tax on Profit.

Q. Can a transfer of shares only be effectuated after the seller has carried out a comprehensive tax audit (“tax clearance”)?

A. The transfer of shares is, according to the LCE, not subject to a tax audit clearance. It is reasonable and in accordance with good governance that the GDT requires companies to at some stage carry out a final tax clearance of their tax situation, but such procedure can be carried out either before or after the transaction.

Q. In a share-deal, is the shareholder-buyer (i.e. not the transferred company, but the new shareholder) responsible for the unpaid taxes of such company?

A. The shareholder-seller of a company can, in certain limited circumstances (intention to evade taxes), be held liable for tax debts of the company under Article 108 LOT. The buyer can, according to Article 71, be co-responsible with the seller for taxes that are payable on the sale, at the time of sale. Read together, if the seller-shareholder evades taxes on that sale of shares, the buyer is co-responsible up to the sale-price. The sale of shares is however in many circumstances not actually subject to tax.

“Our conclusion is that the Notification still remains a very useful and valid representation of GDT interpretation, however, mostly as a reaffirmation of the company’s ongoing liability for the taxes owed, even in the event that a buyer acquired the entity,” said Vanderbruggen.

Please visit our website for a full detailed analysis of Notification 437: http://www.vdb-loi.com/main/hot-topics/is-the-buyer-of-shares-or-assets-liable-for-the-sellers-unpaid-taxes-in-cambodia/

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