1 25 August 2016 | Page
Breakfast Seminar: Real Estate and Construction
DEVELOPMENT or
DISASTER?
Phnom Penh, 25 August 2016
and
2 25 August 2016 | Page
VDB Loi offices
3 25 August 2016 | Page
Quick overview of our Cambodia practice
Senior Cambodia legal and tax team VDB Loi is a network of leading law and advisory member firms and affiliates delivering local law, tax and regulatory advice in Cambodia as well as Indonesia, Laos, Myanmar and Vietnam. Our team passionately pursues a hands on approach. We deliver practical solutions that commercially fit in the dynamic context of the emerging markets we cover.
Legal office and tax office in Cambodia
2 Partners (full-time Cambodian residents)
30+ Fee earners
50+ Staff in total in Cambodia
Core expertise
• Foreign investment • Corporate M&A • Real estate law • Licensing and regulatory • International trade • Secured lending • Taxation
Outstanding experience
• TMT • Real estate and infrastructure • Power • Financial services • Manufacturing • Agriculture • Oil & gas, resources
What commentators write about us:
Phnom Penh Office Level 6 Phnom Penh Tower 445 Monivong Boulevard, Phnom Penh +855 23 964 430
Jean Loi MANAGING PARTNER
Potim Yun LEGAL PARTNER AND PRINCIPAL, VDB LOI & YUN LAW OFFICE
Laysym Sim PARTNER
Robert Porter DIRECTOR
Yumi Ishimoto DIRECTOR, JAPANESE DESK
Lucas Vosch SENIOR ASSOCIATE
Alessandra Laureiro Martinez SENIOR ASSOCIATE
- “advises an impressive range of leading corporations” (Legal 500)
- "widely known regional firm with strongholds in some of Southeast Asia’s most promising emerging market" (IFLR)
- "strong on tax, very creative and innovative" (Chambers)
4 25 August 2016 | Page
Construction Permits
Real Estate Developer Licenses (and how they relate to Construction Permit process)
Strata Title Conversions (and how they relate to Construction Permit process)
Sample Timeline for Permits/Licenses/Conversions (based on practice)
Taxes associated with Real Estate Transactions
Contents
5 25 August 2016 | Page
Construction Permits
6 25 August 2016 | Page
Construction Permits 1. Foundations
Law on Land Management, Urban Planning and Construction (1994)
Construction works - to be carried out in accordance with Master Plans for each Province, Municipality and Region.
Master Plans to be developed according to the particular conditions of each Province, Municipality and Region
Sub-decree No. 86 on Construction Permit (1997)
Construction Permit must be issued in accordance with the relevant Master Plan and land use (zoning) plans (if they exist) for the Province, Municipality or Region.
Otherwise, must follow the General Rules On Land Use i.e. Sub-decree No. 86
7 25 August 2016 | Page
Construction Permits
Sub-Decree No. 38 General Rules on Land Use include:
Process – how to make application/admin. requirements
Density– ratio between ground floor and total size of land e.g. <=75% for flats, <=50% for residential house
Boundaries between buildings
Set-backs from public road
Parking Spaces
Septic tanks – in absence of sewer system
Note that under Sub-Decree No. 38 the PM has power to approve a change in the density ratios
8 25 August 2016 | Page
Construction Permits
Sub-decree No. 42 on Urbanization of the Capital, Towns and Urban Areas (2015) (Clarification/supplementation of Sub-decree No. 86)
Implemented and in use
Principles/process for the development and implementation of Master Plans, Land Use Plans and Spatial Plans on a national and sub-national level ⇒ Policy + Technical Requirements
Buildable land with zones: residential, commercial, industrial, mixed
Restricted buildable land with zones: agricultural zone, forest zone, water resource zone, conservation zone
Also sets out area ratios (density restrictions) and height ratios (height restrictions) of constructions to be applied plans
Technically - is the build suitable to the land?
9 25 August 2016 | Page
Construction Permits
Phnom Penh Master Plan 2035
Adopted by Sub-Decree signed by the PM late 2015
Technically applies now to new Construction Permits in Phnom Penh
Practice is unknown/undeveloped
Implementation/application is uncertain
The full Master Plan 2035 is not publicly available, not available online (would need to contact Phnom Penh Municipality)
Map released but it is unclear and does not give adequate details to understand the zoning
10 25 August 2016 | Page
11 25 August 2016 | Page
Construction Permits
Land Type (and air space use)
Angkor Wat there are 5 zones controlled by Apsara Authority (blanket ban on construction in Zones 1 and 2)
Preah Vihear Temple area also has similar restrictions - requires approval also of Preah Vihear Temple Management Authority
If near airport, Secretariat of Civil Aviation may need to be consulted
Undocumented practice
12 25 August 2016 | Page
Construction Permits 2. What are they?
A Construction Permit is not a Construction Business License
Obtained also from the Ministry of Land Management, Urban Planning and Construction (MLMUPC)
4 Categories of Construction Business License
Construction Business License is granted to an entity which will actually construct buildings (e.g. Developer, Contractor or Sub-Contractor)
13 25 August 2016 | Page
Construction Permits
The Construction Permit is not an Environmental Impact Assessment approval (Sub-decree No. 72 on the EIA Process)
EIA approval may be required separately for the construction from Ministry of Environment (MOE)
Buildings height > 12m or > 8,000m2
Hotels > 60 rooms (if adjacent to coastal area > 40 rooms)
Restaurants > 500 seats
Officially 1 month to get the EIA approval following submission. 6-12 months in practice
EIA Report and any required feasibility study to prepared by accredited MOE consultant
Significant discretion regarding the application process and the documentation requirements
14 25 August 2016 | Page
Construction Permits
A Construction Permit is:
a legal document required prior to construction
to ensure public safety and reserve necessary public areas for urban planning or agricultural development
Construction Permit attaches to the specific piece of land for which it is granted and can be potentially be transferred with that land
15 25 August 2016 | Page
Construction Permits 3. When do you need one?
When is a Construction Permit not required?
Regardless of size or materials, a construction a permit is not required:
Small population rural areas
Isolated areas far away from the National roads, rail roads, tourism resorts, national monuments and other protected areas
Maintenance and repair works which do not modify the structure or the characteristics of the construction (but don’t change the facade!)
Some other minor exceptions such as Pagoda works which require a declaration only
16 25 August 2016 | Page
Construction Permits
When is a Construction Permit required?
All constructions (or demolitions) in city and towns
Reconstruction, expansions, floor additions of existing building
Renovation (of factories, building facade, floor area, premises being opened to public)
Construction or renovation of installations with potential fire dangers (e.g. fire depots, services stations)
Hanging advertising panels, solar panels, and other structures to building which border the street or are exposed to public view
17 25 August 2016 | Page
Construction Permits 4. Where do you get one?
IF PERMIT IS REQUIRED
National
Royal Government
Ministry of Land Management and Urban Planning and
Construction
45 Days approval process (longer in practice)
Local
Authority of Provincial or Municipal Administration
30 Days approval process (longer in practice)
< 3000m2 > 3000m2
Land owner must sign on the Construction Permit application
If Construction Permit is refused, applicant must be notified of the refusal in writing and modifications required shall be notified to the applicant in writing (starts the process and timeline again, if you re-apply)
18 25 August 2016 | Page
Construction Permits 5. What do you need to get one?
Required Documents may include:
Application Form in official format in Khmer
Copy of Certificate of immovable property
Copy of Identity card of land owner
Architectural Plan/Construction Plan (Note: No Building Code as yet but the Draft Law on Construction is expected…2017?)
Comparison study of surrounding buildings/area
Insurance – compulsory insurance required for build – need evidence of this
19 25 August 2016 | Page
Construction Permits 6. Is anything else needed?
1. Letter of Opening of Construction Site
(Official time frame of 7 days – 2-3 weeks in practice)
2. Letter of Closing of Construction Site
(Official time frame of 7 days – 2-3 weeks in practice)
Note: Construction must be in compliance with Construction Permit
⇒to get Letter of Closing of Construction Site
Note:
Construction Permit is valid for 1 year
Authorities can order resumption or demolition of work completed if delay of more than 1 year
20 25 August 2016 | Page
Construction Permits 7. What if you don’t have a permit or don’t build in line with
permit?
Consequences:
Any violation of requirements of Construction Permit may result in suspension of works i.e. a stop order
Court orders may also be sought to demolish or rectify the works and for the confiscation of construction equipment and materials
Pre 1997 unauthorized Buildings – if seriously affect public interest or beauty, competent authorities may seek to demolish
21 25 August 2016 | Page
Construction Permits 7. What if you don’t have a permit or don’t build in line with
permit?
Some practical observations regarding permits:
Due Diligence - Due Diligence on Buildings under LSPA (Conditions Precedent). Did they have all the permits required?
Leasing – to build under a lease need the co-operation of the owner to obtain the permit (needs to be provided for in the lease)
Financing issues – are the Buildings being built and completed according to the Permit? Non-compliance will affect the security
Insurance – insurances may be voided or not renewed or available
22 25 August 2016 | Page
Real Estate Developer Licenses
(and how they relate to the Construction Permit
process)
23 25 August 2016 | Page
Real Estate Developer Licenses
Real Estate Developer License (Prakas No. 1222 on Real Estate Development Business Management (2009) (PK 1222))
Issued by Ministry of Economic and Finance (MEF) (not land ministry)
The development of at least 4 units is required to have the RED License
Without a RED License no advertising for sales purposes or pre-sale activity allowed
Documentation requirements to receive a RED License include:
1. Construction Permit and
2. Letter for Opening of Construction Site
3. All Architectural plans
24 25 August 2016 | Page
Real Estate Developer Licenses
Categories of RED license:
1. Developer 1 uses own capital to finance the project until completion of the project before sale
2. Developer 2 uses a foreign reserve fund as its principal capital or uses a loan from banking or financial institutions to finance the project until completion of the project before sale
3. Developer 3 refers to the Developer who finances the project by collecting deposits from customers or persons who are not Developer 1 and Developer 2 above (i.e. from the public)
25 25 August 2016 | Page
Real Estate Developer Licenses
For Category 3 Developer:
- requires a Developer Deposit of 2% of the total investment amount of the Development with MEF (to protect buyers if project fails)
- a separate Developer Account set up to collect sales money from public (MEF oversight and restrictions)
Upon completion of Project (i.e. issue of Letter of Closing of Construction Site), the Developer Deposit is returned and restrictions lifted on Developer Account
Official time frame - 45 days to get RED License following submission. 6 months in practice.
But developer can get Pre-Sale Permit (Interim – validity up to 6 months by which time Red License should be issued) – 2-3 weeks to obtain.
26 25 August 2016 | Page
Real Estate Developer Licenses
Consequences if do not have a RED License or a Pre-Sale Permit:
MEF can bring legal actions against the developer (including fines)
MEF can publicly announce that developer is unlicensed and that buyers do not have the required legal protections
27 25 August 2016 | Page
Strata Title Conversions (and how they relate to the
Construction Permit process)
28 25 August 2016 | Page
Strata Title Conversions
Co-owned buildings (Sub Decree No. 126 on the Management and Use of Co-owned Building (2009))
Under Sub-decree 126 – need 1 single hard title per Strata Development
the type of ownership noted in the 1 Certificate of Title needs to be changed from normal ownership to “co-ownership” (pre the conversion of the 1 title into many strata titles)
Conversion of 1 underlying title certificate into a number of titles covering the individual units in the building can occur with the land authorities once construction is completed.
Sub-Decree No. 114 (2014) provides that strata titling can occur once structural construction work is complete (i.e. not including internal fit out).
29 25 August 2016 | Page
Strata Title Conversions
Completion of structural construction work is indicated by the Letter of Closing of Construction Site:
Documentation for strata titling application includes:
1. Construction Permit
2. Letter of Closing of Construction Site (i.e. completion of structural work)
3. Architectural plan of the Co-owned building (including unit details and common area)
Timeframe for issuance of the strata titles for units in a Co-owned building is 3-6 months in practice
30 25 August 2016 | Page
Sample Construction Timeline (based on practice)
Construction Permit (MLMUPC)
3-6 Months
Letter of Opening
2-3 Weeks
Construction Construction time
RE Developer License
3-6 Months
Pre Sale Permit 2-3 Weeks
Sales Advertising/Sales/Pre-sales to Public
Developer Deposit (MEF) (if Category 3)
Deposit to MEF/Developer Account (with restrictions)
Deposit returned/ Account restrictions lifted
Letter of Closing (MLMUPC)
2-3 Weeks
Strata Title Conversion
3-6 Months
31 25 August 2016 | Page
Taxes associated with Real Estate Transactions
32 25 August 2016 | Page
Taxes applicable to Real Estate transactions
4% Transfer tax on sale of land and buildings
20% Tax on Profit (1% minimum tax for non-QIP company)
10% VAT on sale of buildings (not land)
10% VAT on lease (where company is lessor)
10% WHT on lease payments (where company is lessee)
33 25 August 2016 | Page
Taxes applicable to Real Estate transactions
Sale of title by individual
4% Transfer Tax on market value
No VAT
No WHT
No TOP for individual seller
Company
34 25 August 2016 | Page
Taxes applicable to Real Estate transactions
Long term or short term lease
No Transfer Tax
No VAT
10% WHT – per payment
No TOP for individual lessor
Company
35 25 August 2016 | Page
Taxes applicable to Real Estate transactions
Sale of title Company to Company
4% Transfer Tax on market value
10% VAT on sale of building, not on land
No WHT
20% TOP or 1% Minimum Tax for Company A
Company B Company A
36 25 August 2016 | Page
Taxes applicable to Real Estate transactions
Long term or short term lease
No Transfer Tax
10% VAT charged by Company A
10% WHT – once payment made deducted by Company B
20% TOP or 1% Minimum Tax for Company A
Company B Company A
37 25 August 2016 | Page
Immovable Property Development
Incentives:
Trade Exhibition, Conference Center (US$8M)
Retail or market (10,000 m2)
Hotel (3-star)
Resort (100 rooms)
Natural Tourism Site (1,000 hectares)
Resort complex (includes tourism facilities) (50 hectares)
38 25 August 2016 | Page
Thank You