Tax by numbers: A brief and concise review of the tax environment

Economic and business activities in Mongolia are regulated by a variety of laws, including: the Company Law of July 2, 1999, with a major revision on September 13, 2007; the Civil Code of January 10, 2002; and the Law on Foreign Investment of May 10, 1993.

Currently, Mongolian legislation allows for several forms of business entities, which include joint stock companies, joint venture companies and limited liability companies.

HOW TO SET UP A COMPANY: To establish a registered presence in Mongolia, foreign companies may also choose to operate through a representative office or branch. There are many financial, legal, commercial and tax implications arising from the choice of vehicle.

For example, representative offices cannot conduct commercial income-generating activities and are not considered legal entities. Foreign companies that are looking to engage in business activities structure their presence through a limited liability company (LLC). Below are the main features of an LLC.

ESTABLISHMENT: An LLC is formed on the basis of a charter and the decisions of founders. Initial capital is provided by contributions from shareholders and may take the form of cash or other property and property rights assessed in money equivalent.

The LLC may be founded by one or more individuals or legal entities and must be properly registered. They acquire legal status only when registered.

The minimum amount of charter capital for an LLC is $100,000 for a foreign-invested LLC (a company with at least 25% foreign ownership). The share capital must be paid before registration takes place.

SHARES & RIGHTS: There are two types of shares – ordinary and preferred. There is no limit to the number of preferred shares that can be issued.

The holder of an ordinary share has the right to vote at the general meeting of shareholders and take part in the election of management bodies and the audit committee.

The holding of preferred shares grants priority rights to shareholders to receive dividends and to participate in prior distribution of property in case of liquidation (as determined by the company’s charter). A holder of a preferred share has no right to take part in the management of an LLC, except for certain cases provided by the law. Dividends may be paid in monetary form, in property or in the form of securities.

REGISTRATION: The registration of new foreign invested companies takes place at three agencies: the Foreign Investment and Foreign Trade Agency (FIFTA); the State Registration Office (SRO); and the District Tax Office. The process involves registering a name with the SRO. It is suggested that a potential company come to the SRO with a list of four to five alternative names.

OPENING A US DOLLAR BANK ACCOUNT: Once the SRO has granted name approval, the applicant needs to open a US dollar bank account in the company’s name at a reputable local bank (currently there are no international banks operating in the country). The required capital fund of $100,000 will be deposited into this bank account. The capital fund must remain in the account until registration has been completed.

REGISTERING AT FIFTA & SRO: The documents to be submitted include: the application form; the company’s charter; a document to confirm the company address; the minutes of the foundation meeting; the balance sheet confirming the required minimum amount of owner’s equity; a letter from the banking institution stating the shareholder has maintained its accounts in good standing; documents confirming the identity of founders; and payment of the required fee for state registration. Following the submission of these documents and forms, the FIFTA and the SRO will then issue certificates.

MAKING A COMPANY STAMP: After FIFTA and the SRO certificates have been issued, a company stamp will be made. The company stamp is crucial as all official company documents, from banking slips to financial statements, must be stamped with the stamp.

FINANCIAL REPORTING REGULATIONS: The fiscal year ends on December 31 for all Mongolian companies. Financial statements should be prepared in accordance with International Financial Reporting Standards (IFRS).

Companies should file their annual financial statements with the relevant state regulatory agency by February 10. However, the state regulatory agency may accept a request for later filing.

Companies must also submit quarterly financial statements by March 20 in accordance with specific forms approved by the Ministry of Finance. In accordance with the current Mongolian Law on Auditing, the following organisations are required to have their financial statements audited:

• Listed companies;

• Companies applying for listing on the stock exchange;

• Entities with total assets over $39,000;

• Entities being restructured, liquidated, or intended to sell all its capital by auction;

• If not otherwise stipulated by the law and international treaties of Mongolia, foreign invested business entities and organisations;

• Cooperatives conducting savings and loan disbursement activities;

• Banking, financial and insurance organisations; and

• Securities companies carrying out brokerage and dealer activities and companies running investment funds.

OVERVIEW OF TAX REGULATIONS: The Mongolian tax law and its implementation are still developing. Mongolia has only had a tax system for a relatively brief period.

There are several principal taxes in Mongolia. The Corporate Income Tax Law (CIT) imposes corporate tax on companies that are incorporated or have their head office in Mongolia (residents) and those that conduct business through its representative office, or earn income in Mongolia (non-residents). Taxes on corporate income are at the following rates:

• 10% for the first annual income of MNT3bn ($2m);

• 25% applies for any excess of MNT3bn ($2m).

The CIT also imposes corporate tax and withholding tax obligations with respect to certain payments, to both residents and non-residents:

• Dividends, interest and royalties paid to non-residents are subject to a 20% withholding tax, which may be reduced under a double tax treaty;

• Dividends, interest and royalties paid to residents are subject to a 10% withholding tax;

• Income from gaming and lottery are subject to a 40% withholding tax;

• Income from the sale of rights is subject to 30% tax;

• Foreign entities operating through a permanent establishment in Mongolia are subject to a profit repatriation tax at 20%. This can be reduced under an applicable double tax treaty. There is no specific capital gains tax regime in Mongolia, however, the disposal of certain assets are separately described and assessed. For example, the sale of immovable property is subject to tax at 2% of the gross value, and the net gain on the sale of shares and securities are subject to the progressive Mongolian corporate tax rates that are noted above.

Mongolia has enacted a flat personal income tax (PIT) rate of 10% for earned income, income from activities and income from property. The PIT is a very competitive rate — lower than many tax-friendly countries.

A non-resident taxpayer of Mongolia is subject to tax on the income earned in the territory of Mongolia in a tax year. A non-resident taxpayer is an individual who has no residence in Mongolia and has not resided in there for 183 or more days in a tax year.

However, foreigners who reside in Mongolia for more than 183 days are considered permanent resident taxpayers and are subject to tax in Mongolia on their worldwide income.

Double-tax treaties should also be considered as there may be alternative personal tax outcomes which arise if the employee is seconded from a treaty location.

A tax credit equal to MNT84,000 ($66) shall be deducted from tax imposed on annual income. A credit is also available for individuals who have paid tax in other countries under the terms of a double-tax treaty.

Citizens of Mongolia, foreign citizens and stateless persons employed on a contract basis by all types of economic entities, government servants, religious or other organisations and foreign economic entities carrying out activities in Mongolia are subject to the following compulsory social insurance:

• Pension insurance (employer: 7%; employee: 7%);

• Benefit insurance (employer: 0.5 %; employee: 0.5%);

• Health insurance (employer: 2%; employee: 2%);

• Industrial accident and occupational disease insurance (employer: 1% to 3%); and

• Unemployment insurance (employer: 0.5%; employee: 0.5%). Employee charges are capped at MNT140,400 ($109) per month. Employer charges are not capped. These charges are deductible for PIT purposes.

VAT: Value-added tax (VAT) at the rate of 10% is imposed on the supply of taxable goods and services in Mongolia, and on imports into Mongolia. Taxpayers are required to register for Mongolian VAT purposes when their taxable turnover exceeds MNT10m ($7800). Taxpayers may also voluntarily register when their taxable turnover reaches MNT8m ($6240) or if they have invested more than $2m in Mongolia.

The advantage of registering is that input VAT credits can then be claimed. VAT is levied on the following in Mongolia:

• Work performed and services rendered;

• Goods sold;

• Goods imported to be sold or used; and

• Goods exported from Mongolia for use or consumption outside Mongolia. The following are zero-rated for VAT purposes:

• Export sales of goods;

• International transportation services;

• Services provided outside Mongolia;

• Services provided to a foreign citizen or legal entity not present in Mongolia during the provsion of services (including tax-exempt services);

• Services provided to domestic or international aircrafts conducting international flights;

• Export of finalised mining products. The following goods are exempted from VAT:

• Income from sale of an apartment used for residential purposes;

• Equipment, materials, raw materials, spare parts, gasoline and diesel fuel imported for the purpose of oil exploration, extraction and use under a production-sharing agreement entered with government in the oil industry;

• Gold sold;

• Gas fuel, container, equipment and special-purpose machinery and parts approved by the government;

• Financial services including currency exchange, banking services, insurance and property registration services, securities transactions and underwriting, advances and loans, interest, dividends, credit guarantees, insurance contracts and financial leases;

• Residential accommodation rental;

• Educational services, health services and services provided by religious organisations;

• Services rendered by government organisations;

• Public transportation;

• Services of tour companies to foreign tourists other than tourist camps and restaurants; and

• Transport and hotels. Input VAT — the VAT that is required to be paid by a company on purchased goods, work or services — can be offset against output VAT, which is the VAT that is charged by the company to customers, to arrive at the net VAT payable to the government.

This must be substantiated by documentary evidence, however. The excess of input VAT over output VAT may generally be carried forward against future VAT liabilities or offset against other tax liabilities.

In practice refunds are difficult to obtain, although the rules do prescribe a procedure for refunds under certain conditions. VAT is accounted for each month and has to be paid by the 10th of the following month. Returns must be submitted by the 15th and records kept for six years.

EXCISE TAX: Excise tax is levied on goods that are manufactured in or imported into Mongolia such as tobacco, alcohol, gasoline, diesel fuel and passenger vehicles. Excise tax is also imposed on the physical units of special-purpose technical devices and equipment used for betting games and gambling, and activities of individuals and legal entities that conduct such activities.

PROPERTY TAX & CUSTOMS: An immovable property tax is levied at 0.6% of the value of the immovable property. For tax purposes, the value used is the value registered with the government registration authority. If the property is unregistered, the insured value is used. In the absence of a registered or insured value, the accounting value is used.

A flat Customs tariff of 5% applies in respect to goods imported into Mongolia. Certain equipment imported by small and medium-sized enterprises is exempt from this Customs duty tariff.

In addition, export duties apply to certain exported goods, such as waste iron, aluminium, copper, brass and indentured cashmere.

SPECIAL TAX REGIMES: A foreign investor investing certain amounts may apply for a stability agreement to govern their investment, providing stable tax conditions for a fixed term.

Currently an investment of up to $20m will entitle a company to a stability agreement with a 10-year term and a $50m investment to a 15-year term. A mining stability agreement covers tax stability in Mongolia, as well as other similar business rights.

The minimum investment that is required refers to the amount invested in the first five years of the project and will provide stability in terms of taxes for a fixed term as follows:

• $5m for 10 years;

• $10m for 15 years; and

• $30m for 30 years.

All exploration costs should be capitalised and then amortised on a straight line basis over the first five years following the commencement of production. The licence-acquisition costs are amortised over the life of the licence. Losses can be carried forward for four to eight years depending upon the exact nature of the business, and the whole taxable profit may be offset in a year.

In Mongolia the holder of a mineral licence is required to pay royalties on the sales value of the minerals produced. The flat royalty rates are 2.5% for domestically sold coal used for energy and for common minerals, such as sand, gravel and construction stone. All other minerals are subject to a flat royalty rate of 5%.

In addition to the flat-rate royalty a surtax royalty was introduced applicable from January 1, 2011 (replacing the windfall profits tax).

Surtax royalty rates range from zero to 5%. The rates for the surtax royalty vary depending on the type of minerals, their market prices and the degree of processing. Royalty payments are a deductible expense for the CIT. The rates increase as the market prices increase. Furthermore, these rates are lower for processed materials than for unprocessed minerals.

RULES FOR WINDING UP A COMPANY: A company may be terminated in the following circumstances:

• By agreement of its shareholders; and

• Under the court decision as provided by legislation, including for insolvency reasons.

Termination may be affected through reorganisation or liquidation. Company liquidation is carried out by a liquidation committee appointed by the general shareholder’s meeting, or in case of insolvency, by the courts. The legal system does recognise the concept of collateralised assets provided as security for loans, investment capital, or other debt-based financial mechanisms. The legal system also provides for foreclosure. All creditors have to go to court to collect on securitised collateral, adding months to the entire collection process. Once a judgment is rendered, the disputant faces a relatively hostile environment to execute the court’s decision. For example, a bank collecting on a debt in Mongolia must allow debtors to put forward assets for auction and set the minimum bid price for those assets. If assets do not sell, a second round of auctions occurs in which a reduced minimum bid is put forward. The State Collection Office (SCO) supervises this process but does not set the price. However, the SCO receives 10% from the sales price.

This article contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgement.

Neither Ernst & Young Mongolia Audit LLC nor any other member of the global Ernst & Young network can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this article. On any specific matter that is dealt with in this article, reference should be made to the appropriate legal specialist.