International In-house Counsel Journal Vol. 5, No. 19, Spring 2012, 1

Legal Considerations for Investment in

JOSEPH M. LOVELL Group General Counsel and COO, Leopard Capital Ltd, Cambodia

The Kingdom of Cambodia has come onto the radar of international investors as economic development has continued in the Kingdom providing opportunities for investment across a wide range of sectors. While numerous factors support the continuing expansion of international investment in Cambodia, the trend for international investment in Cambodia has been supported by the growth and maturation of the local legal system. However, while it continues to improve, the Cambodian legal system remains opaque and not fully formed and, therefore, reliable legal outcomes are not always guaranteed in local forums. It is, therefore, important for international investors in Cambodia to take note of a number of legal issues when planning a deployment of capital to the Kingdom. Over the last decade, Cambodia has posted strong economic growth rates. Based on a range of public sources, from 2004 to 2007, the economy grew about 10% on an annual basis, driven largely by growth in the garment sector, construction, agriculture, and tourism. GDP contracted slightly in 2009 under the impact of the global economic downturn, but bounced back to over 4% in 2010 despite continuing international economic uncertainties. 2011 GDP growth was approximately 6.5%. The government is forecasting 2012 GDP to be 7-8% year over year. In addition to the attraction of the expanding economy, investment in Cambodia is driven by its advantageous geographical positioning, stable government, trade integration, improving transport and communications infrastructure, and wealth of natural resources, including arable land and mineral deposits. Since the 1993 United Nations Transitional Authority in Cambodia election, Cambodia has maintained a stable government and social structure. Elections subsequent to 1993 have been noted by international observers to be increasing in fairness and efficiency. The prime minister, Hun Sen, while still under 60 years of age, has retained his post since 1985 and most of the senior officials in the government have held the same or similar positions for close to two decades. This continuity has provided stability and a growth in administration expertise. While fostering domestic stability, Cambodia has also effectively reintegrated itself into the international diplomatic regime. In April of 1999, Cambodia joined the Association of South East Asian Nations (ASEAN) and for 2012 is acting as chair of the Association. Besides encouraging increased trade between its member nations, in 2010 the ASEAN-China Free Trade Agreement came into effect to support expanded economic integration between its members and the world’s second largest economy. In October of 2004, Cambodia became the 148th member of the World Trade Organization (WTO) with the commitment to enact all necessary laws and regulations under WTO guidelines. These initiatives have successfully brought Cambodia into important frameworks that strengthen its economic position and commit the government to international standards in regards to a number of legal protections and rights.

International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online 2 Joseph M. Lovell

Since the reorganization of the government, Cambodia has moved to update and improve its legal system. Many key basic regulatory building blocks have been put into place to build the legal foundation for a modern economy. These laws include the Law on Investment (1994), Labor Law (1997), Banking Law (1999), Property Law (2001), Trademark, Copy Right and Patent Laws (2001-2003), Law on Negotiable Instruments (2005), Law on Commercial Enterprises (2005), Law on Commercial Arbitration (2006), Secured Transactions Law (2007), and Insolvency Law (2007). However, while indicative of the government’s genuine dedication to modernizing the economy and legal system, the implementation and interpretation of many key elements of these and other laws is not always standard or clear in practice. A new milestone in the advancement of the Cambodian legal system was reached in December 2011 with the promulgation of the new Civil Code. Previously there was a lack of a comprehensive body of private law clearly establishing personal rights and obligations in private sector transactions where such had only before been addressed piece meal in various decree laws. The Civil Code addresses, inter alia, major issues of private law including contracts (including sales, leases and employment), torts, the concept of unjust enrichment, secured transactions, and marriage, family and succession. While the new Civil Code represents a significant advancement in the legal framework of Cambodia, a number of notable issues remain in regards to implementation. Potential conflicts between antecedent and un-repealed decree laws remain, as while in some articles the new Code is specified to take precedence over older decrees, there remain areas which are still unclear as to what laws should be applied. At the same time, not all of the provisions of the Civil Code are self- executing and further regulatory promulgation and revision are necessary for the effective implementation of such Code provisions. These areas include issues regarding land transfer and title registration and the formation of business entities. Moreover, as the Code is new, there is a certain lag time for judges, lawyers, ministry officials and other concerned authorities to become fully knowledgeable regarding the new Code and the necessary implementation regulations. This further contributes to uncertainty regarding the specific application of Code provisions in Cambodian legal proceedings. Except for the ownership of land and restriction on a limited number of business activities, the Cambodian commercial law does not discriminate against foreign nationals. Foreign investors can own 100% of a Cambodian registered business enterprise. There are no practical restrictions on fund transfers and no exchange controls. Though the Foreign Exchange Law allows the National Bank of Cambodia to implement emergency exchange controls in the event of an economic crisis, this power has never been exercised. Cambodian law also offers investors various tax and duty exemptions and employment allowances. With regards to tax exemptions, investors can enjoy a corporate tax exemption for up to eight years depending on the nature of the project. Additionally, there is a 100% exemption of export tax available for some investors. The Ministry of Commerce (MOC) and the Council of the Development of Cambodia (CDC) are the institutions responsible for regulating business registration and foreign direct investment in Cambodia. Forming a company in Cambodia is generally not complex and can often be completed in as little as two weeks. Company formation is effectuated by the filing of the necessary documentation with the MOC. Legal Considerations in Cambodia 3

The current allowable forms of business entities registrable in Cambodia are the limited liability company, branch office, representative office and a sole proprietorship. Limited liability companies can be organized as a single member private limited company, and a private limited company. Partnerships may be organized as a general partnership and . The business entity most used by foreign investors in Cambodia is the private limited company. It is most often established as a subsidiary of an offshore holding company. A limited liability company must issue a minimum of one thousand (1,000) shares with a par value of four thousand (4,000) riels per share. If specified in the articles, including the specific rights, restrictions and conditions, the company may issue more than one class of shares. The Law on Commercial Enterprises limits a shareholder’s liability to the price of the shareholder’s subscription with the exception of a sub decree (2005) that provides for shareholder liability for unpaid taxes of the company. The sub decree gives authority to the tax office to withhold the property of shareholders, directors or managers who are liable for unpaid taxes of their company. A director may be any legally competent person over the age of 18 and does not need to be a shareholder in the company. A private limited company must have one or more directors and a public limited company must have at least three directors. Directors are elected by an ordinary resolution of shareholders who have the right to vote. The Law on Commercial enterprises imposes a number of obligations on directors. Like shareholders, directors may be liable for the unpaid taxes of a company where the director had knowledge and an intention not to report to the taxation office. A director or officer of a company also has a duty to disclose in writing, the nature and extent of his or her interest in the company in relation to any contracts with the company or his or her material interest in any person who is a party to a contract or proposed contract with the company. Branch offices and representative offices have very limited scopes of operation and are not eligible for CDC investment registration. The use of partnerships, outside of small local operations, has been, so far, limited by the lack of clarity from MOC on registration and implementation details. A representative office may be established by an eligible foreign investor to source local goods and services and to collect information for its parent company. They may also act as to promote and market the parent company’s products and services in Cambodia. A representative office should derive no income from its activities. A branch office can be registered for the purpose of conducting a particular commercial activity in Cambodia. The branch office is considered the same entity as the parent company. It can conduct the same activities as representative office and may, in addition, purchase, sell or conduct regular professional services or other operations engaged in production or construction in the Cambodia. The branch and parent company have joint liability with respect to losses and debts of a branch office. Every registered business entity must file an annual declaration with the MOC. Any company that fails to submit this declaration at the end of the year is subject to monetary fines and if the company fails to submit a declaration for three consecutive years, it can be legally dissolved by government decree. For Qualified Investment Projects (QIPs), i.e. investments that may qualify for mandated incentives, including tax exemptions, special depreciation and import duty exemptions, it is necessary to register with the CDC or the Provincial/Municipal 4 Joseph M. Lovell

Investment Subcommittee (PMIS). The Law on Investment (2001) awards investment incentives to QIPs unless they are detailed in the Negative List of Sub Decree No. 111. Prohibited investment projects concern national security, social safety, and national economic necessity. Prohibited projects include: production and processing of psychotropic substances or narcotic substances; production of poisonous chemicals, agriculture pesticides and insecticides, and chemicals prohibited by international agreements and the World Health Organization; processing and production of electrical power from imported waste; exploitation of forests prohibited by the Forestry Law; and any other legally prohibited investment activities. The CDC must obtain further approval from the MOC for applications involving the following circumstances: investment capital over US$ 50 million; politically sensitive issues; exploration and exploitation of mineral and natural resources; environmentally sensitive projects; long-term strategies; and infrastructure projects. QIPs can elect to enjoy either a profit-tax holiday or a depreciation allowance. The tax holiday cuts the profit tax from 20% to 0% for a specific number of years. The depreciation allowance can provide a significant tax incentive for investors that need to import capital goods. QIPs are exempt from import duties on construction materials, production equipment, and input materials. With certain exceptions, any goods manufactured by the QIP are also exempted from export taxes. There are two stages in the CDC application process: the investment project must first obtain a Conditional Registration Certificate and then a Final Registration Certificate. The CDC must decide on the application for within three business days after receiving the Investment Proposal. In its review, the CDC may ask for more information or an amendment to the Investment Proposal. However, they must make this request within three working days of the Investment Proposal’s submission. The CDC may either deny the Investment Proposal by issuing a Certificate of Non-Compliance or accept the proposal by issuing a Conditional Registration Certificate. If the CDC does not make its decision within three business days, the Investment Proposal will be considered accepted, and the CDC should issue a Conditional Registration Certificate. The CDC is in charge of obtaining all required approvals, authorizations, licenses, permits and registrations on behalf of the investor within 28 business days after the issuance of the Conditional Registration Certificate. The CDC or the sub-committee must also issue the Final Registration Certificate within 28 days after the issuance of the Conditional Registration Certificate regardless of whether all approvals authorizations, clearances, licenses, permits and registrations are obtained. The CDC will include the following information upon the issuance of a Conditional Registration Certificate: a list of all the required approvals, authorizations, licenses, permits and registrations for the QIP approval noting the ministries, departments or agencies responsible for issuance; the applicant’s choice of tax exemption; recognition of the status of the responsible legal entity of the QIP; and the investment guidelines and requirements for all required approvals, authorizations, licenses, permits and registrations. A Certificate of Non-Compliance will be issued for a prohibited investment activity listed in Sub-Decree No 111, an investment proposal that has already been submitted by the investor or a non-qualifying or incomplete investment proposal. The refusal must state the reason for the denial of the investment proposal. Legal Considerations in Cambodia 5

According to Sub-Decree 111, QIPs that are involved in a merger or acquisition must apply to the CDC in order to pass on the rights. An application for a merger must be submitted within ten working days before the merger and include the name of the new registered investor and a request to have the Final Registration Certificate transferred to the new entity. Within ten working days after the submission of the application, the CDC must review the application and provide the new entity written confirmation or rejection. The CDC must be notified when the transfer of shares results in a transfer of at least 20% of voting rights. Within ten working days of the share transfer, the investor must notify the CDC of the transfer and the name and address of the transferee. An investor must notify the CDC within 10 working days of an acquisition of a QIP. The CDC must then review the notification and provide written confirmation of acceptance or refusal to the purchasing investor within 10 working days after the notification has been received. At the conclusion of QIP investment activities, the investor must inform the CDC by a registered or hand-delivered letter. The investor or his attorney-in-fact must sign the letter. Additionally, the investor must provide proof of all settled debts, including any complaints and claims from the Ministry of Economy and Finance and pay applicable dues if imported machinery and equipment have been used for less than five years. Fulfillment of the requirements will cancel the Final Registration Certificate. Upon cancellation, the investor must cease activities and dissolve the company in the appropriate manner subject to commercial law. An investor may transfer the remaining proceeds of the assets upon cancellation. All investment incentives are void after cancellation. The CDC may withdraw the privileges and incentives granted to a qualified investment project. It may do so when the investor violates or fails to comply with required conditions. The CDC may terminate a QIP investment activity by revoking the Final Registration Certificate. The certificate will be revoked if an investor obtains a Final Registration Certificate or a Certificate of Compliance through fraud or misrepresentation or does not commence the investment activity within six months of receiving the Final Registration Certificate. The CDC must immediately notify the investor of the revocation in writing. Revocation of the Final Registration Certificate immediately divests the investor of all investment incentives. An investor may appeal to the Chairman of the CDC in writing within 20 days of the issuance of the revocation notice. Cambodia has also introduced Special Economic Zones (SEZs). Each SEZ includes a production and service area. SEZs offer a one-stop service for imports and exports, with government officials stationed on-site to provide administrative services. Applications to establish factories within the SEZs are dealt with on-site as well as all administrative clearances, permits, and authorizations. Enterprises established within an SEZ can benefit from income tax, customs, and VAT discounts. Foreign-owned companies can generally undertake the same business activities as Cambodian-owned companies, with the notable exception of land ownership. However, there are a number of ways to structure an investment such that a foreign- owned company can effectively control and manage land. While foreigners cannot own land in Cambodia pursuant to Article 44 of the Constitution, under the Investment Law of 1994, foreign investors are permitted to use and develop land, and to sign long-term lease agreements. Land in Cambodia may be 6 Joseph M. Lovell privately owned by individuals with Cambodian citizenship or by business entities if 51% or more of its voting shares are held by Cambodian citizens or by a qualified legal entity. While foreigners are not allowed to own land outright in Cambodia, foreign investors can incorporate a local company (51% Cambodian owned), set up a joint venture with Cambodian partners or sign long-term leases. Investors can also use a nominee structure acquiring land in the name of Cambodian partners. Foreigners can, however, own the buildings or structures they develop on leased land or on land owned by a locally incorporated company. It should be well noted that land disputes are frequent in Cambodia. The system of title registry is still immature, and many land transactions are not properly registered. Before acquiring an interest in real property, it is essential to verify unencumbered ownership of the land through a title search. The search report will show whether the title is legally encumbered and the identity of the legally registered owner. Long-term leases are only enforceable if written. In a further move to modernize the economy and bolster investment and corporate finance, Cambodia has also recently established a stock exchange, however, no listings have yet taken place. It is expected that state-run Water Supply Authority, Telecom Cambodia and Sihanoukville Autonomous Port will be the first three companies to list on the stock exchange. Trading is expected to begin sometime later this year. While Cambodia has made great advancements in modernizing its economy and infrastructure, there is still much room for improvement. A lack of strict enforcement of some existing regulations and the opaque nature of the legal system are sometimes cited by foreign businesses as impediments to successful investment. However, with careful planning and the cultivation of local relationships, the opportunity to profit from the growing economy is clearly realizable as has been demonstrated by the numerous successes of foreign investors in a number of economic sectors. For foreign investors, it is advised that when possible investments be structured via an offshore holding company through which the local operating company is owned in order to best take advantage of more familiar legal systems for shareholder disputes and other issues which can become more complex if left to Cambodian jurisdiction. Nonetheless, despite the challenges, the trend of rapid development and the need for business capital make the Kingdom an attractive market for international investors. *** Joseph M. Lovell is Group General Counsel and COO for Leopard Capital Ltd. He has more than two decades of Asia-focused business experience. Previous to joining Leopard, Joseph served as corporate counsel for a Beijing based group, an international attorney specializing in China-ˇUS cross border transactions & investment, senior consultant for PricewaterhouseCoopers (Taipei), and as General Counsel/Managing Director for an investment bank with offices in New York and Beijing. He has negotiated and structured numerous international private equity investments in Asia and has played a lead role in the public listing of a number of Chinese companies in the US and UK. Joseph has a BS from Georgetown University (Chinese Language), and MA (Asian Studies) and JD degrees from the University of Hawaii. He is licensed to practice law in New York, Hawaii and Texas.

Leopard Capital launched the pioneer private equity fund in Cambodia and specializes in investment management in frontier markets.