A look at the landscape: An overview of the tax system and its implications

Economic and business activities in Mongolia are regulated by a variety of laws, principally the Company Law of 1999, with a major revision in 2007, the Civil Code of 2002, the Law on Foreign Investment of 1993 and the Law on the Regulation of Foreign Investment in Entities Operating in Strategic Sectors of 2012. Currently, Mongolian legislation allows for several forms of business entities, which include a joint stock company, joint venture companies and limited liability companies.

HOW TO SET UP A COMPANY IN THE COUNTRY: 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 business vehicle.

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

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

An LLC may be founded by one or more individuals or legal entities and must have an appropriate state registration. 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.

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

REGISTERING AT FIFTA & THE SRO: The registration of new foreign invested companies in Mongolia takes place at three agencies: the Foreign Investment and Foreign Trade Agency (FIFTA), State Registration Office (SRO) and District Tax Office. The process involves registering a name with the SRO. It is suggested that you to come to the SRO with a list of four to five alternative names.

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 Mongolia). The required capital fund of $100,000 will be deposited into this account. The capital fund must remain in the account until registration has been completed.

The documents to be submitted include: the application form; company 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, FIFTA and the SRO will then issue certificates.

MAKING A COMPANY STAMP: Once the SRO certificate has been issued, a company stamp will be made, and is an important step given that all official company documents, from banking slips to financial statements, must be stamped.

FINANCIAL REPORTING REGULATIONS: The fiscal year ends on 31 December for all Mongolian companies. Financial statements should be prepared in accordance with International Financial Reporting Standards. Companies should file their annual financial statements with the relevant state regulatory agency by 10 February. However, the agency may accept a request for later filing, particularly where the audit of the financial statements has not been completed. Companies must also submit quarterly unaudited financial statements by the 20th of the month for April, July and October, 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 MNT50m ($35,714);

• 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;

• Securities companies carrying out brokerage and dealer activities and companies running investment funds. The audit should be completed in time for submission of the audited financial statements to the annual general meeting of the company, which in turn should be held by the end of April.

CORPORATE & OTHER TAX REGULATIONS: The Mongolian tax law and its implementation is still a developing area, with a relatively young tax system for a market economy. The principal taxes in Mongolia are as follows. Taxes on corporate income: The Corporate Income Tax Law (CIT) imposes corporate tax on both companies which are incorporated or have their head office in Mongolia (residents) and those which conduct business in Mongolia within its representative office, or otherwise earn income in Mongolia ( nonresidents). Taxes on corporate income are at the following rates:

• 10% applies for the first annual income of MNT3bn ($2.14m);

• 25% applies for any excess of MNT3bn ($2.14m). The CIT also imposes corporate tax and withholding tax obligations in respect to certain payments, both to residents and non-residents:

• Non-residents of Mongolia are subject to 20% withholding tax on Mongolian-sourced income, which may be reduced under an applicable double tax treaty. This includes dividends, interest and royalties, service fees paid to non-residents as well as income from goods sold in the territory of Mongolia;

• 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 tax at 30%;

• 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. Capital gains and losses are treated in the same manner as other taxable income, with gains subject to the progressive corporate tax rates of 10% and 25%. The exception to this rule is gains derived from the sale of immovable property, which are subject to tax at 2% of the gross value. Personal income tax (PIT): Mongolia has enacted a flat income tax rate of 10% for earned income, as well as income from activities and income from property. From a global perspective, this is very competitive and is lower than many countries that are considered tax-friendly. A non-resident taxpayer of Mongolia is subject to tax on the income earned in the country in a given tax year.

A non-resident taxpayer of Mongolia is an individual who has no residence in the country and has not resided in Mongolia 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 that arise if the employee is seconded from a treaty location.

A tax credit equal to MNT84,000 ($60) shall be deducted from tax imposed on annual income. A credit is also available for individuals who have suffered tax in other countries under the terms of a double tax treaty. Social insurance tax: Citizens of Mongolia, foreign citizens and stateless persons that are employed on a contract basis by all types of economic entities, organisations, government servants, religious or other organisations, and foreign economic entities carrying out activities in the country are subject to the following compulsory 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%);

• Unemployment insurance (employer: 0.5%; employee: 0.5%). Employee charges are capped at MNT140,400 ($111) per month. Employer charges are not capped. These charges are deductible for PIT purposes. Value-added tax (VAT): At the rate of 10%, VAT 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 when their taxable turnover exceeds MNT10m (approximately $7000). Taxpayers may also voluntarily register when their taxable turnover reaches MNT8m (approximately $5600) 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 in Mongolia;

• Goods sold in Mongolia;

• Goods imported into Mongolia to be sold or used; and

• Goods exported from Mongolia for use or consumption outside Mongolia. The following good and services 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 the territory of Mongolia during the provision of services (including tax-exempt services);

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

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

• Income from sale of an apartment and its part 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 product-sharing agreement entered with government in the oil industry; imported machinery, equipment, etc., according to crude oil productions agreements with the government;

• Gold sold;

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

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

• Residential accommodation rental;

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

• Services rendered by Government organisations;

• Public transportation;

• Services of tour companies to foreign tourists other than tourist camps, restaurants, tour transport and hotels. Input VAT (i.e. the VAT paid by a company on purchased goods, work or services) can be offset against output VAT (i.e. the VAT charged by the company to customers) to arrive at the net VAT payable to the government. This must be substantiated by documentary evidence.

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 proscribe a procedure for refunds under certain conditions.

Where the sale of goods or provision of services are rendered by a non-resident of Mongolia who is not registered for VAT in Mongolia, the Mongolian purchaser of these goods and services is required to self-assess and pay VAT to the state via a reverse charge mechanism.

VAT is accounted for on a monthly basis and must be paid by the 10th of the following month. Returns must be submitted by the 15th of the month and records should be kept for six years. Excise tax: Excise tax is levied on goods manufactured in or imported into the country, such as tobacco, alcohol, gasoline and 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, as well as the activities of individuals and legal entities that conduct such activities. Immovable property tax: 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 either a registered or insured value, the accounting value is used. Customs duty: A flat Customs tariff of 5% applies to goods imported into Mongolia. Certain equipment imported by small and medium-sized enterprises are exempt from Customs duty. Export duties apply to certain exported goods such as waste iron, aluminium, copper, brass and indentured cashmere.

SPECIAL TAX REGIMES: undefined General: 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. Mining: A mining stability agreement covers tax stability and other business rights. The minimum investment refers to the amount invested in the first five years of the project and will provide stability 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. 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 up the whole taxable profit may be offset in a year. Royalties: 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 (e.g., sand, gravel and construction stone) and at 5% for all other minerals.

In addition to the flat-rate royalty, a surtax royalty can apply. Surtax royalty rates range from zero to 5%. The rates of the surtax royalty vary depending on the type of minerals, their market prices and their degree of processing. The rates are significantly higher for copper than for other types of minerals, the rates increase as the market prices rise and the rates are lower for processed materials than for unprocessed minerals. Royalty payments are a deductible expense for the CIT.

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

• By agreement of its shareholders;

• Under the court decision as provided by legislation, including for insolvency reasons. Termination may be affected through reorganisation or liquidation. The latter is carried out by a liquidation committee appointed by the general shareholders 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 in which 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 those assets do not sell, a second round of auctions occurs in which a reduced minimum bid is put forward.

The State Collection Office supervises this process but does not set the price. However, the State Collection Office does receive 10% from the sales price or from the second auction minimum price even if there is no sale.

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 judgment.

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 featured in this article. On any specific matter that is dealt with in this article, reference should be made to the appropriate legal specialist.