Capital gain tax

Subject: Tax

On 1 April 2020, the Ministry of Economy and Finance issued Prakas No. 346 MEF to enforce the tax on capital gains achieved by taxpayers in accordance with the new Article 7 (one) of the Law on Taxation (Prakas 346).

Key definitions

“Capital gains” refers to a taxable income derived from the generation of income from the sale or transfer of capital minus the allowable expenses. Then what is capital?

“Capital” refers to a property, lease, investment assets, business reputation, intellectual property, and foreign currency. For the purpose of this paragraph, the following terms are defined as follows:
A- Property refers to land, house, building and constructions built on that land in accordance with the regulations on property tax.
B- Lease refers to the transaction, in which a lessor signs an agreement with a lessee, through which a lessee is authorized to occupy and use the property for a period of time by paying rent based on the duration or equivalent rate. The lease also includes a sublease except the financial lease of a movable property and special lease as stated in the in Law on Special Lease.
C- Investment asset refers to a share, bond, and security issued by a private enterprise.
D- Business reputation refers to a license, customer list and brand;
E- Intellectual property refers to a patent, literary and artistic works, logo, picture and drawing used for commercial purpose;
F- Foreign currency refers to any currency other than Riel.

Tax rate
The capital gains tax rate is fixed at 20%.

Capital gains tax = Capital gains x fixed rate 20%

Capital gains calculation
In accordance with Article 8 of this Prakas, taxpayers are permitted to choose one of the two capital gains calculation methods:
1- Determination-based expense deduction

Mr. A sold a house to Mr. B at a price of 800,000,000 riels. Mr. A has failed to maintain expense documents related to the house. Therefore, Mr. A may choose the determination-based expense deduction as follows:
Income from the property sale or transfer = 800,000,000 riels
Determination-based expense deduction = 80% x property sale or transfer
= 80% x 800,000,000 riels
= 640,000,000 riels
Capital gains = income from property sale or transfer – determination
= 800,000,000 – 640,000,000
= 160,000,000 riels

2- Actual expense-based deduction
Example 11.2
Mr. A sold a house to Mr. B at a price of 600,000,000 riels purchased at a price of 400,000,000 riels, by paying registration tax on the transfer of ownership or right to occupy property of 16,000,000 riels, a commission fee of 24,000,000 riels for the sale of house, and a renovation fee of 20,000,000 riels.
Mr. A has retained documents related to the occupancy and renovation of that house. Therefore, Mr. A may chose actual expense-based deduction, calculated as follows:
Income from property sale or transfer = 600,000,000
Total actual expense = cost + tax paid + commission fee + renovation fee
= 400,000,000 + 16,000,000 + 24,000,000 + 20,000,000
= 460,000,000 riels
Capital gains = Income from property sale or transfer – total actual expense
= 600,000,000 – 460,000,000
= 140,000,000 riels

Time of realizing capital gains

For the purpose of this Prakas, taxpayers achieve capital gains when:
1- Selling or transferring or creating the right to occupy property or;
2- Registering the transfer of ownership or right to occupy property at the competent authorities or;
3- A decision is made to transfer ownership or right to occupy property through a court verdict or judgment.

Deductible expenses
Deductible expenses shall meet the three requirements as follows:
1- An event that proves the increase in expenses or costs with verifiable evidence;
2- Outcome of economic activities related to the expenses;
3- Invoices or supporting documents proving the amount of expenses.

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