DEVELOPMENT or DISASTER? - VDB Loi · Issued by Ministry of Economic and Finance (MEF) (not land...

1 25 August 2016 | Page

Breakfast Seminar: Real Estate and Construction

DEVELOPMENT or

DISASTER?

Phnom Penh, 25 August 2016

and


VDB Loi offices


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)

http://www.iflr1000.com/JurisdictionFirm/8409/9/VDB-Loi.html#Jurisdiction137


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


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



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



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?



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



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


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)



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



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


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



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


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)


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


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


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


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


Real Estate Developer Licenses

(and how they relate to the Construction Permit

process)



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



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)



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.



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


Strata Title Conversions (and how they relate to the

Construction Permit process)


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).


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


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


Taxes associated with Real Estate Transactions


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)



Sale of title by individual

4% Transfer Tax on market value

No VAT

No WHT

No TOP for individual seller

Company



Long term or short term lease

No Transfer Tax

No VAT

10% WHT – per payment

No TOP for individual lessor

Company



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



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


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)


Thank You

DEVELOPMENT or DISASTER? - VDB Loi · Issued by Ministry of Economic and Finance (MEF) (not land...

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Transcript of DEVELOPMENT or DISASTER? - VDB Loi · Issued by Ministry of Economic and Finance (MEF) (not land...