Mongolia
Ulaanbaatar GMT +8
EY
+976 (11) 314-032 Suite 200
Fax: +976 (11) 312-042
8 Zovkhis Building Seoul Street 21 Ulaanbaatar Mongolia
Principal Tax Contacts
Martin Richter
+852 2629-3938 (resident in the Hong Kong SAR) Email: martin.richter@hk.ey.com
Khishignemekh (Nicky) Regzedmaa
+976 (11) 314-032
Mobile: +976 9905-1144 Email: khishignemekh.regzedmaa @mn.ey.com
Mongolia is currently in the process of undergoing potentially significant tax reform. At the time of writing, it was not known what changes would be enacted. Because of this expected tax reform, readers should obtain updated information before engaging in transactions.
A. At a glance
Corporate Income Tax Rate (%)
1/10/25 (a) Capital Gains Tax Rate (%) 1/10/25 (a)(b)
Nonresident Corporate Income Tax Rate (%) 1/10/25 (a) Withholding Tax (%) (c)
Dividends 20 Interest 20
Royalties 20
Rent 20
Management and Administrative Fees 20
Lease Interest 20
Use of Tangible and Intangible Assets 20 Goods Sold, Work Performed or Services Provided 20 Branch Profits Remittance Tax 20
Net Operating Losses (Years)
Carryback 0
Carryforward 4 (d)
(a) The corporate tax system is progressive, with annual taxable income of up to MNT6 billion subject to tax at a rate of 10%, and taxable income in excess of this amount is taxed at a rate of 25%. In addition, entities (except those engaged in exploring and mining minerals, selling and importing alcoholic beverages and tobacco, producing and wholesaling crude oil, and trading and importing gasoline and diesel fuel) with annual taxable income up to MNT300 million are subject to tax at a rate of 1%.
(b) Gross proceeds derived from the sale of immovable property are subject to tax at a rate of 2%.
(c) These withholding tax rates apply to payments to nonresidents.
(d) The general rule is that losses can be carried forward for four years, and the use of such losses is limited to 50% of taxable income in any year.
B. Taxes on corporate income and gains
Corporate income tax. Permanent residents of Mongolia are taxed on their worldwide income. A company is regarded as a permanent resident of Mongolia if any three of the following conditions are met:
• More than 50% of shareholders (or their nominees) reside in Mongolia.
• More than 50% of shareholder meetings have been held during preceding four years.
• Accounting or financial documents are maintained in Mongolia.
• More than 25% of board members or their nominees reside in Mongolia.
• More than 60% of total income is sourced from Mongolia.
Permanent residents may qualify for a tax credit with respect to income generated from the production and planting of specified products (see Tax incentives).
Nonresidents of Mongolia are taxed on Mongolian-source income only. The term nonresident is generally defined to include foreign corporate entities that conduct business in Mongolia through a permanent establishment and foreign entities that gen erate income sourced in or from Mongolia.
Rates of corporate tax. The corporate tax system is progressive, with annual taxable income of up to MNT6 billion subject to tax at a rate of 10%, and taxable income in excess of this amount is taxed at a rate of 25%. Small companies with annual taxable income up to MNT300 million are taxed at a rate of 1%. This concessionary rate applies to all companies except for those engaging in exploring and mining minerals, selling and importing alcoholic beverages and tobacco, producing and wholesaling crude oil, and trading and importing gasoline and diesel fuel.
Certain types of income received by residents are taxed at differ ent tax rates, as indicated in the following table.
Income Rate (%)
Dividends
Sale
rights
lottery
Sale of immovable
intellectual
Tax incentives. A 50% tax credit is available to taxpayers that gen erate income from the production and planting of the following:
• Cereal, potatoes and vegetables
• Milk
• Fruits and berries
• Fodder plants
• Meat and meat products produced in the chicken industry
A tax credit of 50% or 90% is available to taxpayers that are lo cated in remote provinces. The credit is 50% for taxpayers that are 500 or more kilometers away from Ulaanbaatar and 90% for taxpayers that are 1,000 or more kilometers away from
Ulaanbaatar. However, the following activities are excluded from this incentive:
• Exploring and mining of minerals
• Sale, production and importation of alcoholic beverages and tobacco
• Crude oil imports or sales
• Providing communication services
• Construction of energy sources and networks, and production, sale and distribution of energy
• Aviation operations
• Construction and repair of roads
A tax credit of 90% is available to taxpayers that have annual taxable income of not greater than MNT1.5 billion, except for those in the following sectors:
• Mineral resources, radioactive mineral resource exploration, mining, transportation and sale
• Sale and importation of alcoholic beverages and tobacco
• Crude oil production, and wholesaling, trading and importing of gasoline and diesel fuel
Domestic law provides that foreign tax credit relief is limited to jurisdictions that have legal arrangements with Mongolia regard ing information exchange.
An exemption from corporate tax is available to investors that operate in the oil industry in Mongolia under a product-sharing contract with the Mongolian government.
Certain tax incentives are available to infrastructure developers in free-trade zones in Mongolia, subject to certain qualifying condi tions, such as an investment threshold. They include tax incentives for projects with respect to power generation, heating facilities, sanitary facilities, auto roads, railways, airports and telecommuni cation infrastructure.
Both foreign and domestic companies may apply for a taxstabilization certificate (subject to meeting certain criteria such as introducing new technology and creating stable jobs) to govern their investment in Mongolia. This certificate provides for stable tax conditions for a fixed term (consistent tax treatment regardless of changes in the tax law) across four different taxes; which are corporate income tax, customs duty, value-added tax (VAT) and tax on royalties. The term (5 years to 18 years) of a tax-stabilization certificate depends on the industry, the amount of investment and the geographical location of the investment. For investments over MNT500 billion (approximately USD185 million), if requested by an investor, the government may enter into an “investment agreement” to stabilize the environment in which the investor will be carrying out its operations. The areas of the stabilization arrangements that can be of interest to investors include not only taxation, but also more secure legal protection, government incentives, licensing and permitting, repatriation of profits and other areas.
Capital gains. Capital gains and losses are treated in the same manner as other taxable income and losses. Gains are subject to the progressive Mongolian corporate tax rates of 10% and 25%. The exception to this rule is that gains derived from the sale of
immovable property are subject to tax at a rate of 2% on a gross basis.
Administration. The tax year in Mongolia is the calendar year.
Taxpayers with taxable income of MNT6 billion or more must file quarterly returns within 20 days after the end of each quarter. Taxpayers with taxable income up to MNT6 billion must file semiannual returns by 20 July. An annual return is due on 10 February following the end of the tax year, and the taxpayer must settle all outstanding liabilities by that date.
If it is necessary to withhold tax on dividends, royalties, sales of rights, transfers of profits overseas by permanent establishments of foreign companies and other Mongolian-source income earned by nonresident taxpayers, the withholding tax must be remitted to the state within 10 working days. All withholding tax statements must be submitted within 20 days after the end of the quarter, and an annual statement must be filed by 10 February following the end of the tax year.
On submission of the tax returns, the Mongolian tax authorities generally conduct an administrative check of the returns to ensure that all requirements have been satisfied with respect to the filing. At a later stage, the tax authorities can conduct a more detailed review of the returns through a tax audit.
Dividends. Dividends paid between permanent residents of Mongolia are subject to a 10% withholding tax. Dividend income received by a nonresident from a permanent resident is subject to withholding tax at a rate of 20%. This rate may be reduced under an applicable double tax treaty.
Foreign tax relief. Domestic law provides a unilateral foreign tax credit, regardless of whether a tax treaty is in place.
C. Determination of trading income
General. Taxable income is broadly defined as total revenue less the following:
• Deductible expenses
• Exempt income
• Tax losses
Taxable revenue falls under the following four categories:
• Income from operations. This is primarily income generated from business activity. However, it also includes, among other items, income from lottery and gambling, income from man agement and consulting services, and income from goods and services received from others without consideration.
• Income associated with property. This includes rental income, royalties, dividends and interest income.
• Income from the sale of property. This includes the sale of movable and immovable property and the sale of intangible assets.
• Other income. This includes gains on realized foreign-currency exchange rates, insurance compensation, and penalties and interest received from others as a result of the failure of con tractual obligations.
Different sources of taxable income are taxed at different rates (see Section B).
The following types of income are exempt from tax (this is not an exhaustive list):
• Interest earned on government bonds (which includes bonds issued by the Development Bank of Mongolia, a governmentowned bank)
• Income and dividends earned by taxpayers trading in the oil industry in Mongolia under a product-sharing contract and de rived from the sale of its share of product
• Income earned by certain education and health institutions
• Income earned from the mediation of intellectual property rights from one party to another (type of commission income)
• Interest income from a loan secured by intellectual property rights
The tax law provides specific criteria for deductible expenses. Any expense items that have not met such criteria or additional qualifying conditions for deduction must be added back when computing taxable income.
In general, deductible expenses should fulfill the following criteria:
• They are incurred for the reporting period.
• They are incurred for income-generating purpose.
• They are recognized according to accounting laws with sup porting documents.
• They are recorded in the VAT system or customs clearance with some exceptions, if applicable.
• They are paid or expected to be paid by the taxpayer.
Specific restrictions apply to the deductibility of the following:
• Regular maintenance expenses
• Voluntary insurance premium fees
• Reserves accumulated in the risk funds of banks and other nonbanking financial institutions
• Per diem expenses
• Depreciation of inventory
Third-party interest payments on loans to finance the company’s primary and auxiliary production, operations, services and purchases of properties are generally deductible for tax purposes. Mongolia has an earnings before interest, tax, depreciation and amortization (EBITDA)-based restriction and a thin-capitalization restriction to limit related-party loan interest for tax deduction purposes. Thin capitalization arises when an investor’s debt-toequity exceeds a 3:1 ratio; any interest attributable to the debt exceeding such ratio is nondeductible for tax purposes. In addition, such related-party loan interest should not exceed 30% of EBITDA for any given year.
Nonresidents carrying out trading activities in Mongolia through a permanent establishment may deduct business expenses in ac cordance with the rules applicable to permanent residents, sub ject to certain restrictions specific to permanent establishments.
Tax depreciation. Tax depreciation of noncurrent assets is calcu lated using the straight-line method. The following are the useful economic lives of various noncurrent assets.
Useful economic
Noncurrent assets life (years)
Building and construction
Mining 40
Non-mining 25
Machinery and equipment 10
Computers, computer parts, software 2 Intangible asset with definite useful life (includes licenses for mineral exploration and extraction)
Validity period Other noncurrent assets 10
Relief for losses. In general, tax losses can be carried forward for up to four years and the use of such losses is restricted to 50% of taxable profits in any tax year.
The carryback of losses is not allowed.
Groups of companies. Tax grouping is not allowed in Mongolia.
D. Other significant taxes
The following table summarizes other significant taxes.
Nature of tax Rate (%)
Royalties; paid on the sale of mining products; the two types of royalties are standard flat rate royalties and surtax royalties; the rates of the standard flat rate royalties depend on the type of minerals and whether they are sold within Mongolia; the rates of the surtax royalties vary depending on the type of minerals, their market prices and their degree of processing; surtax royalties are not imposed on minerals below a certain market price
Standard flat rate royalties 5 (with certain exceptions)
Surtax royalties
Copper 0 to 30
Other minerals 0 to 5
Value-added tax (VAT); applicable to the supply of taxable goods and services in Mongolia and to goods imported into Mongolia; taxpayers must register for VAT if taxable turnover exceeds MNT50 million; taxpayers can voluntarily register for VAT if taxable turnover reaches MNT10 million; the tax law specifically indicates zero-rated and exempt items; taxable supplies are subject to VAT on the fair market value of the goods sold, work performed or services provided; the taxpayer is responsible for VAT on goods and services received from nonresidents; the Mongolian tax law allows VAT-registered taxpayers to offset output VAT with input VAT if this is supported
Nature of tax Rate (%)
by appropriate documentation; the excess of input VAT over output VAT can be carried forward for offset against future VAT or other tax liabilities; VAT exemptions are available in certain industries; VAT grouping is not possible; VAT is accounted for monthly and VAT payments must be made by the 10th day of the following month; VAT returns must be filed by the 10th day of each month 10 Excise tax; levied on individuals and legal entities that manufacture or import goods, such as alcoholic beverages, tobacco, gasoline and diesel fuel and automobiles; physical units of technical devices and equipment used for betting and gambling are also subject to excise tax; rate varies depending on the amount and the product Various Customs duty; levied on the majority of goods imported into Mongolia; information technology, medical equipment and pure-bred livestock are zero-rated and specified equipment imported into Mongolia by small and medium-sized enterprises and renewable energy sectors are exempt 5 to 40 Stamp duty; levied on various types of services; the rate depends on the type of services involved Various Immovable property tax; levied on the value of the immovable property; the value on which the tax is levied is the value registered with the government registration authority; if the property has not been registered, the insured value is used; if neither the registered nor the insured value is available, the accounting value is used in the calculation; rate depends on the size, location and market demand
0.6 to 1 Air pollution payment; applies to domestically produced raw coal, used or imported organic solvents and vehicles Various Social security taxes; applicable to Mongolian citizens and foreign citizens employed on a contract basis by economic entities, the government or religious or other organizations undertaking activities in Mongolia; consists of compulsory health and social insurance taxes; charges are capped at MNT483,000 per month for employees
Employers
12.5 to 14.5
Employees 11.5
E. Miscellaneous matters
Foreign-exchange controls. The Mongolian currency is the tugrik (MNT).
Foreign revenue and expenses must be converted into tugriks on the date of the transaction.
Realized foreign-exchange gains and losses are taxable and de ductible, respectively.
Transfer pricing. Transactions between the taxpayer and a related party must follow arm’s-length principles. If these principles are not followed, the tax authorities may seek to adjust the transac tion to fair market value. The Ministry of Finance has released guidelines setting out the pricing methodologies that can be used by taxpayers and the documentation requirements for relatedparty transactions.
Debt-to-equity rules. Interest paid to certain related parties is sub ject to a debt-to-equity ratio of 3:1.
F. Treaty withholding tax rates
The table below provides Mongolian withholding tax rates for dividends, interest and royalties paid from Mongolia to residents of various treaty jurisdictions. The rates reflect the lower of the treaty rate and the rate under domestic law. The table below is for general guidance only.
Dividends Interest Royalties % % %
Austria 5/10 (a) 10 5/10 (b)
Belarus (c) 10 0/10 (d) 10
Belgium 5/15 (e) 10 (f)(q) 5 (q)
Bulgaria 10 10 10
Canada 5/15 (g) 0/10 (h) 5/10 (i)
China Mainland 5 10 10
Czech Republic 10 0/10 (j) 10
France 5/15 0/10 0/5
Germany 5/10 (k) 0/10 (l) 10
Hungary 5/15 (m) 0/10 (n) 5
India 15 0/15 (o) 15
Indonesia 10 0/10 (p) 10 Kazakhstan 10 10 10 Korea (South) 5 5 10
Kyrgyzstan 10 10 10
Malaysia 10 10 10
Poland 10 0/10 (r) 5
Russian Federation 10 10 20 (s)
Singapore 0/5/10 (t) 5/10 (q)(u) 5 Switzerland 5/15 (v) 10 5
Thailand (c) 10 10/15 (w) 5/15 (x)
Turkey 10 10 10 Ukraine 10 0/10 (y) 10
United Kingdom 5/15 (z) 7/10 (aa) 5
Vietnam 10 10 10
Non-treaty jurisdictions 20 20 20
(a) The 5% rate applies if the recipient of the dividends is a company (excluding partnerships) that holds directly at least 10% of the capital of the company paying the dividends. The 10% rate applies to all other dividends.
(b) The 5% rate applies to royalties paid for patents, trademarks, designs or mod els, plans, secret formulas or processes, or information concerning industrial, commercial or scientific experience. The 10% rate applies to royalties paid for the use of, or the right to use, copyrights of literary, artistic or scientific works, including cinematographic films.
(c) This treaty is not yet in force.
(d) The 0% rate applies if the loan is provided to the government or the central bank. The 10% rate applies in all other cases.
(e) The 5% rate applies if the beneficial owner of the dividends is a company that holds directly or indirectly at least 10% of the capital of the company paying the dividends. The 15% rate applies to all other dividends.
(f) The following types of interest are exempt from tax in the contracting state in which the interest arises:
• Interest on commercial debt claims
• Interest paid with respect to loans made, guaranteed or insured by public entities or credits extended, guaranteed or insured by public entities, the purpose of which is to promote exports
• Interest on loans granted by banking enterprises
• Interest on deposits and interest paid to the other contracting state, or a political subdivision or local authority thereof
(g) The 5% rate applies if the beneficial owner of the dividends is a company that controls directly or indirectly at least 10% of the voting power in the company paying the dividends (except in the case of dividends paid by a nonresidentowned investment corporation that is a resident of Canada). The 15% rate applies to other dividends.
(h) The 0% rate applies to interest paid on loans made to the government or a political subdivision. The 10% rate applies in all other cases.
(i) The 5% rate applies to copyright royalties and similar payments with respect to the production or reproduction of literary, dramatic, musical or other artis tic works (but not including royalties with respect to motion picture films or works on film or videotape or other means of reproduction for use in connec tion with television broadcasting) and royalties for the use of, or the right to use, computer software, patents or information concerning industrial, com mercial or scientific experience (but not including royalties paid with respect to rental or franchise agreements). The 10% rate applies in all other cases.
(j) The 0% rate applies to interest paid to (or by) the government (or specified institutions), subject to further conditions.
(k) The 5% rate applies if the recipient of the dividends is a company (other than a partnership) that owns directly at least 10% of the capital of the company paying the dividends. The 10% rate applies to other dividends. Silent partner ship income is taxed at the domestic rate of 25%.
(l) The 0% rate applies to interest arising in Germany that is paid to the Mongolian government or a Mongolian bank.
(m) The 5% rate applies if the beneficial owner is a company that holds directly at least 25% of the capital of the company paying the dividends. The 15% rate applies to other dividends.
(n) The 0% rate applies to interest paid on loans to the government, the central bank, a political subdivision or a local authority. The 10% rate applies in all other cases.
(o) The 0% rate applies to interest paid on loans to the government, the central bank, a political subdivision or a local authority, the Trade and Development Bank in Mongolia or the Industrial Development Bank of India or another recipient approved by the government. The 15% rate applies in all other cases.
(p) The 0% rate applies to interest paid on loans to the government or central bank. The 10% rate applies in all other cases.
(q) Please consult treaty for further details.
(r) The 0% rate applies to interest arising in the contracting state and derived by the government of the other contracting state or a political subdivision, local authority or the central bank thereof or a financial institution wholly owned by that government or by a resident of the other contracting state, with respect to a debt claim indirectly financed by the government of that contracting state, a local authority or the central bank thereof or a financial institution wholly owned by the government.
(s) Royalties may be taxed in the contracting state in which they arise and accord ing to the laws of that state.
(t) The 0% rate applies to dividends paid by a company that is resident in a con tracting state to the government of the other contracting state. The 5% rate applies if the beneficial owner of the dividends is a company that holds directly 25% of the capital of the company paying the dividends. The 10% rate applies to other dividends.
(u) The 5% rate applies to interest received by banks or similar financial institu tions. The 10% rate applies in all other cases. Interest is exempt from tax under certain circumstances.
(v) The 5% rate applies if the beneficial owner of the dividends is a company (other than a partnership) that holds directly 25% of the capital of the com pany paying the dividends. The 15% rate applies to all other dividends.
(w) The 10% rate applies if the interest is received by a financial institution (including an insurance company). The 15% rate applies in all other cases.
(x) The 5% rate applies to royalties paid for the use of, or the right to use, copy rights of literary, artistic or scientific works. The 15% rate applies in all other cases.
(y) The 0% rate applies to interest paid with respect to bonds, debentures or similar obligations of the government, political subdivisions, local authorities or the central bank. The 10% rate applies in all other cases.
(z) The 5% rate applies if the beneficial owner of the dividends is a company that controls directly or indirectly at least 10% of the voting power in the com pany paying the dividends. The 15% rate applies to other dividends.
(aa) The 7% rate applies to interest paid to banks and other financial institutions. The 10% rate applies in all other cases.