Taxation

Overveiw

Taxes of Mongolia consists of over 20 types of taxes in force. In 2019, the Mongolian Parliament made significant legislative reforms in the tax field to support the economy and businesses and introduced international concepts by adopting the revised versions of the key tax laws.  

The revised laws became effective from 1 January 2020. This information has been prepared for general guidance and does not constitute professional advice. Please get professional advice from your tax advisers upon your act. 

Major taxes in Mongolia include the following: 

• Corporate income tax (CIT);  
• Value added tax (VAT);  
• Personal income tax (PIT). 

Other taxes include the followings: 

• Immovable Property Tax 
• Customs Duty  
• Excise Tax 
• Stamp Duty Fee  
• Mineral Royalty Fee  
• Mining and Exploration License Fee  
• Land fee 
• Air Pollution Payment  
• City tax  

In addition to PIT, Mongolian citizens, foreign nationals, and stateless individuals working under a labor contract or service contract with all types of business entities are subject to a mandatory social insurance contributions. Furthermore, depending on activities/assets held by a company, it may be also subject to other taxes (such as mining royalty fee, customs duty, vehicle tax, immovable property tax etc.). 

Mongolia joined OECD’s Inclusive Framework on Base Erosion and Profit Shifting Project (BEPS) in December 2017. Consequently, the tax reform reflects some BEPS project recommendations and various international tax concepts including a general anti-avoidance rule, comprehensive transfer pricing, controlled foreign company rules and among others. 

From 2020, a tax audit is conducted generally based on the risk assessment criteria in addition to certain cases subject to compulsory tax audits such as the liquidation of a company or validation of VAT refund . A statutory limitation period for tax reassessment, fines, penalties, utilization of a tax credit, tax loss carry forward and validation of the VAT assessment is 4 years. 

Mongolia Double Tax Treaties 

Corporate Income Tax (CIT)

Under the CIT Law, taxpayers are classified as resident or non-resident taxpayers. The resident taxpayers are liable for Mongolian CIT from their worldwide income including both income earned in Mongolia and in foreign countries. The non-resident taxpayers are liable for Mongolian CIT from their income which is either (a) earned in Mongolia (such income can be taxed by the non-resident’s permanent establishment in Mongolia), or (b) sourced from Mongolia (such sourced income can be taxed by withholding mechanism).

There are the following four categories of taxable income:

1. Income from activities (income from business activities, sale of rights, shares and securities);
2. Income from property (rent, royalties, dividends, and interest);
3. Income from the sale of property (both immovable and movable); and
4. Other income.

Tax rates:

• 10% on the first MNT 6 billion on the net income from business activities.
• 25% on excess profits over the first MNT 6 billion on the net income from business activities.
• 1% can apply to entities with revenue of up to MNT 300 million. This is not applicable to entities operating in mining, petroleum, alcoholic beverages and tobacco sectors.
• 90% tax credit can apply to entities with revenue of up to MNT 1.5 billion. This is not applicable to entities operating in mining, petroleum, alcoholic beverages and tobacco sectors.
• 10% In case there is a tax Ultimate Beneficial Owner (UBO) ownership change as a result of a sale of shares, the transaction is deemed a ‘sale of rights’ and subject to 10% CIT on a net basis. The tax base for the transaction can be determined either by the share purchase agreement or the value of the associated mining license or land use/possess right. The Ministry of Finance approved the methods for defining the tax base for the sale of rights transactions.

Certain types of income may be taxed at different rates for resident taxpayers:

CIT rates for resident taxpayers:

*Applicable to interest income earned by a resident taxpayer (who does not hold mineral, radioactive mineral and petroleum exploration and mining license) from debt instrument traded at foreign and domestic market through initial and secondary public offering.

Depreciation

For tax purposes, depreciation is calculated using the straight line method over the useful economic life of the asset that depends upon the nature of the asset, ranging from 2 years for IT equipment to 25 years for buildings and constructions for the companies except those holding mineral, radioactive mineral, petroleum exploration and mining licenses:

Depreciation of assets:

Losses:

• Losses can be carried forward for up to 4 years.
• Limited to 50% of the taxable profit in any year.

 Deductible and non-deductible expenses:

Thin capitalization rule:

Following three different limits applied on interest expenses under the thin capitalization rule:

1. Deductible interest expense incurred on a loan received from the related parties shall be limited to 30% of the EBIDTA (sales revenue minus interest expense , depreciation and amortization);
2. Debt-to- ‘previously invested capital’ ratio of 3:1 applies to a loan received from investors. Interest paid in excess of this ratio will not be deductible and it will be treated as a dividend; and
3. For the loan received from a resident taxpayer shareholder individual, interest expense shall not be deductible at all.

Deadline for tax reporting:

Depending on the taxable income of a prior year, the CIT reporting frequency is determined as follows:

• Taxpayers with a taxable profit of more than MNT 6 billion report on a quarterly basis;
• Taxpayers with a taxable profit of less than MNT 6 billion report twice a year.
• All taxpayers report annually regardless of their taxable income.

CIT reporting deadline:

Transactions with non-residents:

Non-resident taxpayer’s service income earned from Mongolia is subject 20% withholding tax under the CIT Law. The 20% domestic withholding tax may be reduced or eliminated by the applicable double tax treaty provided

1. all the supporting documents are in place (this includes a tax residency certificate, issued by the competent authority in a foreign country, plus primary documents relevant for a particular type of transaction),
2. no permanent establishment of the foreign entity is created in Mongolia and
3. a foreign company is a beneficial owner of such categories of income, like dividend, interest etc.

Obligation for withholding, reporting and paying such tax rests with the Mongolian customer who provides such income to a non-resident taxpayer.

Value Added Tax

Mongolia operates the input-output model of VAT. The VAT withholder deducts the VAT paid on its inputs from the VAT charged on its sales and accounts for the difference. If output VAT exceeds input VAT, the difference is paid to the tax authorities. Otherwise, it is subject to refund (if eligible) or could be carried forward to offset future liabilities.

Taxpayer:

A VAT withholder is a legal entity whose sales revenue from business activities has reached 50 million MNT or over with the following activities:

• sold goods, work and services in Mongolian territory;
• imported goods, work and services;
• exported goods, work and services.

VAT registration can be mandatory or voluntary. The threshold for mandatory registration is MNT 50 million of VATable income received during 12 consecutive months, while for voluntary registration, the threshold should reach 20% of MNT 50 million.

VAT rate, base and imposing timing:

VAT base and rate

Zero rate
VAT zero rate applies to the followings goods, works and services:
• Export sales of goods;
• International transportation services;
• Services provided outside of Mongolia;
• Services provided to a foreign citizen or legal entity not present in the territory of Mongolia during the provision of services;
• Services provided to domestic or international aircrafts conducting international flights;
• State medals and coins produced domestically;
• Export of final mining products.

VAT exemptions:

Goods, exempt from VAT:

• special purpose appliances, equipment and machinery designed for disabled individuals;
• civil aviation aircraft, engines and ground engine, their parts, components, subassemblies, spare parts, equipment and related tools;
• gas fuel and its container, equipment, special purpose machinery, mechanisms and appliances;
• gold sold;
• exported mining products other than those zero rated;
• grain, potato, vegetable, plant and fruit that are
• domestically grown and sold by farmers domestically produced flour;
• processed meat;
• processed milk and milk products;
• equipment and spare parts produced and sold in Mongolia for use in small and medium enterprise’s production lines;
• raw materials, reagents that are not produced domestically, and required for carrying out production of new goods and products within innovation project for domestic and foreign markets;
• imported wood, logs, sawn timber, timber and semi-finished lumber;
• exported raw, washed and processed wool and leather;
• research study and production equipment, its spare parts of renewable energy etc.

Services, exempt from VAT:

• foreign currency exchange services;
• banking services related to the receipt, transfer of money, issuance of guarantee and payment invoices, notes and savings accounts;
• insurance, insurance intermediary and reinsurance and property registration services;
• services for issuing, transferring and selling securities;
• provision of the loan;
• services in respect of payment for a bank or financial lease interest, dividend, credit guarantees or insurance contract;
• medical services;
• tour operator services;
• virtual asset services;
• renting of residential accommodation etc

VAT refund:

In order to get a VAT refund, a VAT withholder shall submit its tax refund request to a corresponding tax office when doing VAT reconciliation and submitting tax return. The tax office shall check and confirm the entitlement as per the VAT Law. After this, the tax office shall submit the proposal for a tax refund disbursement to the State Treasury.

The State Treasury should then remit money to the applicant’s bank account within 45 business days after receiving all documents from the tax authorities. The VAT Law allows that instead of an alternative to a cash refund, offset such VAT refund against the future VAT or other tax liabilities (except RC VAT).

Customs Duty

Import duties are levied on the purchase price of imported goods in addition to transportation cost, in general. There are some exceptions. Export duties apply to only certain goods including but not limited to unprocessed wool and wood. Customs duty varies from 5% – 20% depending on the type of goods.

Under the Law on Customs Tariff and Duty, enacted on 20 May, 2008, Customs tariff on imported goods shall be classified into one if the following three types:

• Ordinary
• Most Favored
• Discounted Tariff

The rate of ordinary tariff will be twofold the most favorable tariff. Discounted Tariffs will be established by treaty. Most Favored tariffs on imported goods will be approved directly by the Parliament of Mongolia.

On 28 March, 2016, the Cabinet issued a decree to raise the customs duties on imported goods between for 100 types of products as part of the efforts to promote domestic manufacturing. The list of affected products includes a range of goods including selected dairy products, vegetables, construction materials, some types of furniture, and raw materials of animal origin. It is claimed that all these types of goods are produced domestically and that such domestically produced goods have the potential to meet local demand. The enforcement of this decree is effective from May 1, 2016.

Source: lehmanlaw.mn

Customs duty exemption:

According to the Customs Law, the following goods and among others are exempt from import tariff:

You can find more information from the General Department of Customs at www.customs.gov.mn or through its hotline 1800-1281.

Mongolia reforms its key tax legislation

Mongolia engaged an extensive tax reform discussion over the past months. As a consequence, key tax laws including General Law on Taxation, Corporate Income Tax Law, Personal Income Tax Law and
VAT Law revised substantially by Mongolian Parliament (the legislative body), under Government’s tax reform packages.

The package of amendments to the laws on taxation effective from January, 2020.

The approved package of tax amendments includes the following changes:

1. General Law on Taxation
   • The tax payment deadline for companies experiencing financial
     difficulties have been extended from 2 months to 24 months.
   • Taxes overpaid due to unfounded requests by tax authorities will
     be refunded immediately, along with the principal payment and
     any fines paid.
   • Taxpayers who have been determined to be “no risk” taxpayers,
     will not be audited.
   • An electronic tax registration and tax information portal with
     taxpayer information will be created, and services provided by tax
     authorities will be based on the electronic system.
2. General Law on Taxation
   • The license transfer tax was decreased from 30% to 10%, and will
     now be applied to net income instead of gross income.
   • The interest income of Mongolia’s commercial banks for loans
     and debt instruments obtained from local and foreign stock
     markets will be taxed at 5%.
   • The tax of 10% on financing obtained through debt instruments
     from initial and secondary markets has been lowered to 5%.
   • If a foreigner is found by the Tax Administration to owe 20 million MNT or more in unpaid taxes, and he does not have the funds to pay his debt, the Tax Administration can request a ban on crossing the Mongolian border until the foreigner pays off the tax debt.
   • The statute of limitations for tax audits, as well as penalties, fines, and tax payments assessed as a result of such audits, was lowered from 5 years to 4 years.
   • The interest income from loans and debt instruments of Mongolia’s commercial banks from local and foreign sources will be taxed at5%.
   • International regulations aligning transfer pricing rules with OECD standards (including reporting requirements) will be implemented.
3. Personal Income Tax
   • A flat 10% personal income tax will be applied
   • Resident tax was lowered from 20% to 15%, with interest at 10%
   • The tax return for first-time homeowners was raised from 3
     million MNT to 6 million MNT.
   • A tax credit will be given for the difference between account
     interest for mortgage loans and subsidized loans.

You can find more information from the General Department of Customs 
at www.ecustoms.mn or through its hotline 1800-1281

Tax Treaties

Bilateral foreign tax credits are only available to residents of Mongolia. To avoid double taxation, Mongolia uses the ‘tax sparing method’.

In this case, the amount of foreign tax paid is allowed as a credit against the Mongolian tax payable on the same income or capital.

However, the amount of such tax credits should not exceed the amount of tax payable on the same amount of income in Mongolia. The chart below shows the withholding tax rates (in percent) on Mongolian source dividends, interest and royalties remitted to a resident of other contracting state where the income is not connected with a permanent establishment in Mongolia.

Tax stabilization

The legal entity which is going to implement an investment project in Mongolia can obtain as stabilization certificate upon application, if it meets the requirements specified in the Law on Investment of Mongolia (2013).

 Types of the taxes to be stabilized:

The rates of the following four taxes are stabilized under the stabilization certificates from 5 up to 18 years depending on the size and target region of investment:

1. Corporate income tax;
2. Customs duty;
3. Value-added tax;
4. Mineral resource royalty.

 Criteria and duration for period of a certification of stabilization:

• Thresholds based on the regions;
• Environmentally friendly;
• New technology & know-how;
• Stable job creation;