Paying their dues: An introduction to founding a firm and paying taxes in Mongolia

Economic and business activities in Mongolia are regulated by a variety of laws, principally the Company Law of 2011, the Civil Code of 2002, the new Investment Law of 2013 (replacing 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 a variety of forms of business entities, which include a joint stock company, joint venture companies and limited liability companies (LLCs).

Establishing A Company

There are a number of options available to companies that wish to establish a registered presence in Mongolia, including representative offices and branches, as well as subsidiary companies. There are several financial, legal, commercial and tax implications arising from the vehicle choice. 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 an LLC vehicle. Below we outline the main features of the LLC.

LLC Establishment

A LLC is formed on the basis of a charter and a decision of its 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 have an appropriate state registration. They acquire legal status only when registered. The minimum amount of charter capital 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 can also take part in the election of various management bodies and the auditing committee. Meanwhile, the holding of preferred shares grants to shareholders priority rights to receive dividends and also (as determined by the company’s charter) to participate in prior distribution of property in the event of liquidation. A holder of a preferred share has no right to take part in the management of a 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 firms in Mongolia takes place at three agencies:

• Foreign Investment and Investment Regulation Agency (FIIRA);

• The State Registration Office (SRO); and

• District Tax Office. Companies should register a name with the SRO and we suggest companies apply to the SRO with a list of four to five alternative names. After registering a name, firms should complete these steps.

Opening a US Dollar Bank Account

Once 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.

Registering At Fiira & Sro

The documents to be submitted include: application form; charter; document confirming the address; minutes of the foundation meeting; balance sheet confirming the required minimum amount of owner’s equity; letter from banking institution stating the shareholder has maintained its accounts in good standing; and documents confirming the founders’ identities and payment of the state registration fee. Both agencies issue certificates.

Making Company Stamp

After the FIIRA and 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 it.

Financial Reporting Regulations

The fiscal year ends on December 31st 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 10th.

However, the state regulatory agency has indicated a willingness to 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 20th April, July and October in accordance with specific forms approved by the Ministry of Finance.

In accordance with the 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 ($30,000);

• Entities being restructured, liquidated, or intending 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 of companies 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. For other entities it should be completed by the end of March.

Corporate & Other Tax Regulations

The Mongolian tax law and its implementation is still a developing area. Mongolia has only had a tax system for a market economy for a relatively brief period.

The principal taxes in Mongolia are as follows:

Taxes On Corporate Income

The Corporate Income Tax Law (CIT) imposes corporate tax on both companies that are incorporated or have their head office in Mongolia (residents) and those that conduct business in Mongolia via a representative office, or otherwise earn income in Mongolia (non-residents). Corporate income is taxed at the following rates:

• 10% applies for the first annual income of MNT3bn ($1.8m);

• 25% applies for any excess of MNT3bn ($1.8bn). The CIT also imposes corporate tax and withholding tax obligations in respect of certain payments on residents and non-residents:

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

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

• Income from gaming and lotteries 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; 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 is subject to the progressive Mongolian corporate tax rates (noted above).

Tax On Personal Income

Mongolia has enacted a flat personal income tax (PIT) rate of 10% for earned income, income from activities and income from property. From a global perspective, this is a competitive rate that is lower than many countries that are considered to be tax friendly. 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 of Mongolia is an individual who has no residence in Mongolia and has not resided in Mongolia for 183 or more days in a tax year.

It is important to note that 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 ($50) shall be deducted from taxes of annual income. A credit is also available for individuals who have been taxed in other countries under the terms of a double tax treaty.

Social Insurance Tax

citizens of Mongolia, foreign citizens and stateless persons 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 Mongolia are subject to the following compulsory insurance:

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

• Benefit insurance (employer: 0.50 %; employee: 0.50%);

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

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

• Unemployment insurance (employer: 0.50%; employee: 0.50%). Employees charges are capped at MNT192,000 ($112) per month. Employer charges are not capped. These charges are deductible for PIT purposes.

Value - Addes Tax ( VAT)

A 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 purposes when their taxable turnover exceeds MNT10m ($6000). Taxpayers may also voluntarily register when their taxable turnover reaches MNT8m ($4800) 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 the country;

• Goods sold in Mongolia;

• Goods imported into Mongolia to be sold or used;

• 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 entity not present in the territory of Mongolia during the provision 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 exempt from VAT:

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

• Equipment, materials, raw materials, spare parts, petrol 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 production agreements with government;

• Gold sold;

• Gas fuel, container, equipment and special purpose machinery and technical 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 and insurance contracts, and 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, restaurants, tour; and

• Transport and hotels. Input VAT (i.e. the VAT paid by a firm 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 prescribe a procedure for refunds under certain conditions.

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 five years.

Excise Tax

Excise tax is levied on goods manufactured in or imported into Mongolia such as tobacco, alcohol, petrol and diesel fuel and passenger vehicles. Excise tax is also imposed on the physical units of special purpose technical devices and equipment that is utilised in 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 a rate of 0.6% to 1% of the value of the immovable property, depending on the location of the property. For tax purposes, the value used is the value that is registered with the government registration authority. If the property is unregistered, then the insured value of the property 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 in respect of goods imported into Mongolia. Export duties apply to some exported goods, like waste iron, aluminium, copper, brass and indentured cashmere.

Special Tax Regimes

Both foreign and local investors may apply for a tax stabilisation certificate to govern their investment, thereby securing stable tax conditions for a fixed term. The stabilisation agreement can cover four types of taxes; CIT, Customs duty, VAT and royalties. The term of a tax stabilisation certificate depends on the amount of investment and the geographic location of the investment, as set out in the tables on the previous pages. The stabilisation certificate can be extended by a period of 50% of the initial term granted provided certain conditions are met.

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 5%for all other minerals.

In addition to the flat-rate royalty a surtax royalty was introduced applicable from 1 January 2011 ( replacing the previous Windfall Profits Tax). 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 increase and the rates are lower for processed materials than for unprocessed minerals.

Royalty payments are considered a deductible expense for the CIT.

Rules For Terminating 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. Liquidation is carried out by a liquidation committee appointed by the general shareholder’s meeting, or in case of insolvency, by the courts.

Importantly, 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 or from the second auction minimum price even if there is no sale.

OBG would like to thank Ernst & Young for their contribution to THE REPORT Mongolia 2014