The UN has criticized the freshly minted deal between Phnom Penh and Canberra as a "worrying departure from international norms."
Australian Immigration Minister Scott Morrison and Cambodia's Deputy Prime Minister Sar Kheng signed the memorandum of understanding in Phnom Penh on Friday.
Outside Australia's embassy in Cambodia, about 100 people demonstrated against the agreement, clashing briefly with police.
Under the agreement Australia-bound refugees are to be resettled in Cambodia, one of the poorest countries in the region.
Australia already sends asylum seekers arriving by boat to camps on Manus Island in Papua New Guinea and the remote Pacific state of Nauru for processing and resettlement.
Under the terms of the deal, Australia will pay Cambodia AUD 40 million ($35 million / 27.6 million euros) in development aid if Cambodia permanently resettles asylum seekers currently on Nauru who have been granted refugee status.
"The number and timing of refugee settlement will be determined by Cambodia," the countries said in a joint statement. The resettlement would begin with a trial of a small group of refugees, it added.
Cambodian authorities declined to provide further details, but earlier Morrison told the Australian Broadcasting Corporation that there were no caps on how many refugees might be sent, with transfers likely to start later in the year.
"This is about a regional solution. This is about providing genuine resettlement in a third country which is Cambodia, a signatory to the Refugee Convention," Morrison told the Australian Broadcasting Corporation.
"It enables us to fulfill on the policy which says no one will be resettled in Australia."
In return, Cambodia would receive AUD 40 million over four years and would carry the cost of resettlement, Morrison said, adding that refugees would only be relocated on a volunteer basis.
"The most important thing we're giving them is our expertise. Cambodia wants to be a country that can resettle refugees properly and they're seeking our advice and expertise on how we can do that," he added.
'Signing away' refugee rights
Rights groups such as Amnesty International have condemned the agreement, saying it "signs away refugee rights."
"A new low in Australia's deplorable and inhumane treatment of asylum seekers has been reached with a deal to apparently ship refugees to Cambodia, where respect for human rights cannot be guaranteed," the rights group said on its website.
"This agreement is putting the short-term political interests of the Australian government ahead of the protection of some of the world's most vulnerable people - refugees," said Rupert Abbott, deputy Asia-Pacific director at Amnesty.
"It makes Cambodia complicit in Australia's human rights breaches and seriously flawed offshore processing system," he continued.
The Australian Greens party has also condemned the move, saying refugees, especially female ones, could face dangers such as exploitation.
'Horrendous' camp conditions
Greens Senator Sarah Hanson-Young said refugees would likely only choose to go to Cambodia to escape the "horrendous" conditions at Australia's Nauru detention center for refugees, where there have been a number of reports of self-harm, hunger strikes and attempted suicides among asylum seekers.
"It's like the school bully asking whether you want a punch in the face or a kick in the guts, there's nothing voluntary about this … it is inhumane, it is dangerous and it's going to put particularly women and girls at extreme risk," she told reporters.
Australia uses offshore detention facilities in Papua New Guinea and the tiny South Pacific Island nation of Nauru to process would-be refugees who arrive on boats.
There are 1,127 people in detention on Papua New Guinea's Manus Island and 1,146 people in the facilities on Nauru, according to government data.
Human rights groups continue to criticize living conditions at the camps. A veteran nurse with over 40 years of experience last year told Australian media conditions at Nauru were like at a concentration camp.
sb, crh/nm (AP, AFP, Reuters)