Mining in Mongolia: Legal and taxation environment

• 2017-05-29
• 1,001

Mongolia is a resource rich country in Asia  

The Mineral Resources and Petroleum Authority of Mongolia (MRPAM) advises that, 6 new gold deposits, 33 placer, 4 iron, 2 copper, 2 mixed metal, 2 rare metal, 8 coal, 4 fluorspar, 1 uranium, 2 black lead, and 3 limestone deposits were registered in 2016.

Table 1: Mineral production, Mongolia, 2011-2016.

Product	Unit	2011	2012	2013	2014	2015	2016
Gold	tons	4.4	4.3	7.2	7.5	12.6	15.4
Copper concentrate	th.tons	516.1	1252.1	1334.2	1365.4	1346.2	1399.7
Molybdenum concentrate	th.tons	3.15	3.93	3.67	4.05	5.53	5.05
Zinc concentrate	th.tons	105.8	118.0	103.5	93.1	89.6	117.4
Iron ore	th.tons	4663.3	6382.1	6793.3	7557.8	6061.2	5083.0
Acidspar	мян.тн	50.8	98.8	57.2	61.0	51.6	80.0
Metspar	мян.тн	200.2	278.1	82.0	117.6	55.8	100.0
Tungsten concentrate	th.tons	0.20	0.13	0.53	1.08	0.68	1.42
Tin concentrate	tons	54.8	98.6	16.5	99.8	82.3	50.2

World class mines in Mongolia

Mongolia’s largest copper and gold mine – Oyu Tolgoi is operated by Rio Tinto in the southern Gobi region of Mongolia.

Currently it is operating an open cut mine. Oyu Tolgoi is also undertaking underground mine development to extract and process high grade ore. With the expansion of the underground mine and full ramp up Oyu Tolgoi will reach production capacity of 580,000 tonnes in 2025-2030.

The main minerals export market for Mongolia is China. The Gashuun Sukhait border point is located 80 kms to the south of the Oyu Tolgoi mine.

Gold resources are developed by companies such as Centerra Gold. An extensive gold exploration and mining program is supported by the Government Program – Gold II.

The Development Bank of Mongolia has recently announced a lending program for gold exploration and mining projects.

High quality thermal and coking coal mines are operated by MAK, Shenhua-MAK-Nariin Sukhait, and MMC. In addition, the same companies engage in washed coal and coal liquefaction.

Mining Investment

Mongolia is a special destination for potential investors, as it has less burdensome regulatory framework, and a cost effective legal and tax environment. The Government of Mongolia is committed to fostering an attractive environment for Foreign Direct Investment (FDI) and trade through an open policy, public sector efficiency, an attractive tax environment and legal certainty.

Reasons to invest in Mongolia include:

• Investment environment stability (ensuring tax and non-tax guarantees for investors)
• Large mineral resource base that can be leveraged for value added processing
• Neighborhood to the largest mineral market –China
• Developing Industry and Infrastructure
• A policy environment supporting the Mineral Industry; and
• A young and well educated population

Legal environment

Mongolia’s legal system is of the Continental (Romano-Germanic) legal tradition. The Constitution of Mongolia was last enacted in 1992. At this date, Mongolia is undertaking consultative discussions on the constitutional reform.

International treaties ratified by Mongolia prevail when conflicts arise between Mongolian laws and international treaties. However, international treaties that contradict the Constitution of Mongolia are not followed.

The court system of Mongolia is organized into three branches: civil, administrative and criminal. Extensive reforms were undertaken in the laws relating to the judicial system post socialism. Mongolian laws regulating courts and judicial review are being modernized in many respects. Appellate courts exist in each province and in the capital city. The system is overseen by the Supreme Court which reviews cases passed on from the lower courts. The judges of the Supreme Court and other courts are appointed by the President of Mongolia. The Supreme Court selects one of its members to be their Chief Justice and the appointment is made for a six-year term.

Mongolia has over 5000 attorneys licensed to practice law in Mongolia and act as advocates in judicial and arbitral proceedings. They are organized under the Bar Association which licenses, and trains lawyers. Many solicitors are also members of the Advocates Association on a voluntary basis.

The Arbitration Law of 2017 was enacted after extensive review. The amended Arbitration law aimed to substantially adopt the UNCITRAL Model Law on international commercial arbitration.

Many commercial contracts (in particular Investment Agreements signed with the Mongolian Government by multinational mining companies) use international arbitration as the method for dispute resolution.

Mongolia signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which mandates that arbitration awards made within the territory of Mongolia are enforceable in Mongolia and other countries that are parties to the New York Convention.

Mongolia has signed the Washington Convention on the Settlement of Investment Disputes between the States and Nationals of Other States in 1996, which provides for the settlement for international investment disputes. It is also a signatory to the Seoul Convention on Investment Insurance in 1999 and became a member of the Multilateral Investment Guarantee Agency (MIGA) the same year, which ensures the eligibility of foreign investors for risk insurance through MIGA.

Additionally, Mongolia signed the Encouraging and Mutual Protection of Investment Agreements with 39 other countries as well as the Exemption of Double Taxation Agreement negotiated between 29 countries.

Unlike many developing Asian markets, Mongolia does not enforce any form of capital controls. Foreign investors are free to inject or remove capital from the country at will. The currency is fully convertible and the exchange rate is freely floating.

In 2009, Mongolia enacted legislation requiring local transactions be expressed and settled in the local currency, with an exception for entities granted specific waivers from the Bank of Mongolia or Financial Regulatory Commission.

There is a wide range of laws which may affect the mineral industry. The major laws related to minerals in Mongolia are:

• Minerals Law (2006)
• Common Minerals Law (2010)
• Environmental impact assessment law (2012)
• Water Law (2012)
• Law on the Fees for Natural Resources  (2012)
• Nuclear Energy Law (2009)
• Petroleum Law (2014)
• Petroleum Production Law (2005)
• Land Law (2002)
• Law on Investment (2008)
• Concession Law (2010)
• Company Law (2011)
• General Law on Taxation (2008)
• Business Entities Income Tax Law (2006)
• VAT Law (2015)
• Customs Law (2008); and
• Customs tariffs and tax law (2008).

Minerals law (2006)

As mining continues to be the driving force of Mongolia’s economy, the legal framework in the mining sector is of vital importance. The most significant piece of legislation in the mining sector is the Minerals Law. The Minerals Law was last amended in 2016.

Main features of the Minerals Law

• It regulates mineral prospecting, exploration and mining.
• Royalty rates for a variety of minerals – are competitive in comparison with other mining nations.
• A scoping study (aerial picture, sample collection etc) may be undertaken without obtaining a license.
• A derivative deposit may be used subject to a license to reprocess secondary minerals.
• Mineral licenses are newly issued through a selection process when mineral licenses are relinquished or terminated.
• Exploration can be undertaken on a mining lease.
• Rehabilitation and mine closure costs are required to be reflected in a deposit feasibility study.
• A mining license holder is required to enter into an agreement with the local government on employment promotion, environmental matters and mine infrastructure development.
• The government may be transferred a mining license for a strategically significant deposit.
• “A strategically significant deposit” is defined as the one which has an impact on the national security, social and economic development and which produces no less than 5% of the country’s GDP.

Pursuant to the Minerals Law, an exploration license holder is granted an exclusive right to obtain a mining license if the holder deems the mineral deposit to be commercially viable.

Exploration licenses are granted for an initial term of 3 years, with the possibility of extending the term for an additional 3 years three times, with the exception of exploration licenses for radioactive minerals.

Mining licenses are valid for an initial term of 30 years, with the possibility of extending the term for an additional 20 years twice.

If state funding was used during the exploration phase, the state may purchase up to 50% of the shares in a company exploiting the strategically significant deposit. If no state funding was used, the government has the right to acquire up to a 34% interest in the company considering the amount of investment made by the government.

Until 2014 there had been temporary moratoria on the issuance of new exploration licenses since 2010, stemming from investigations into corruption at the Minerals Resources Authority of Mongolia. Repealing the prohibition on the granting of exploration licenses is certainly a welcome move for the investment community, as it demonstrates the Mongolian government’s willingness to take steps to encourage economic growth.

Common minerals law (2014)

This law regulates matters relating to exploration and mining of common minerals (sand, gravel, clay, basalt, granite, grindstone) for road and construction. Local government issues exploration license and mining licenses.  Exploration licenses are granted for an initial term of 3 years, with the possibility of extending the term for an additional 2 years, and mining licenses are valid for an initial term of 15 years, with the possibility of extending the term for an additional 10 years twice. The royalty rate is 2.5% for common mineral resources sold.

Nuclear energy law (2009)

Main features of this law are:  

• Radioactive mineral deposits are ‘strategically significant deposits’ regardless of the reserve level.
• The government will own (directly and without payment) no less than 51% of shares in a joint company if the state funds were expended on exploration and reserve determination of a deposit.
• No less than 34% of shares in a company holding a mining license will be owned (directly and without payment) by the government even if the government had no participation in exploration activities and reserve determination of a deposit.
• A royalty rate for radioactive mineral utilization is 5% of the sales value.
• Licenses for the utilization of a nuclear facility and radioactive minerals are granted for max. 20 years and may be extended for up to 20 years.
• “Deposit utilization agreement” must be entered into within 60 days of granting a license for radioactive mineral exploitation and such agreement regulates mine closure, product sales, environmental plan and associated costs etc.
• Investment Agreement of 10 years (extendable for another 10 years) may be executed at the request of a license holder for radioactive mineral or nuclear facility utilization to stabilize their operational environment, including tax environment.
• A license will be revoked and no new license will be granted for 30 years if human health and life, environment, and assets were damaged by a breach of this law.

Below you will find the key policies and legislations relating to nuclear energy:

• State policy on the exploitation of radioactive minerals and nuclear energy (2009)
• Sustainable development concept of Mongolia–2030 (2016)
• Law on Nuclear Weapon Free Status (2000)
• Law on State Inspection (2003); and
• Law on Licensing (2001).

The State Policy on the exploitation of radioactive minerals and nuclear energy sets out:

• Exploitation of radioactive minerals and nuclear energy is an important factor to ensure sustainable development and national security of Mongolia and to improve living standard of Mongolian people.
• Mongolia will pursue a complex policy aimed to the utilization of nuclear energy and production of electricity and power through the introduction of advanced technology.

Core regulations:

• Regulation on Safe Transport of Radioactive Material (1987)
• Code of Practice for Diagnostic Radiology (2010)
• Basic regulation on radiation protection and safety (2015)
• Radiation Safety Standard (2015)
• Regulation on security of radiation sources (2015)
• Radiation safety regulation on exploration of radioactive mineral (2015)
• Regulation on management of radioactive waste from mining and milling of ores (2015)
• Regulation on internal control of licensee (2015)
• Technical regulation for acid in situ leach uranium mining (2015)
• Mongolian Integrated nuclear security support plan (2015); and
• Draft radiation safety regulation for uranium mining and milling.

Relevant standards:

• “Radiation dose limits” MNS 5631:2006
• “Surface contamination limit” MNS 5630:2006; and
• “Permissible concentration of radon indoors” MNS 5627:2006.

Projects under implementation

A state-owned “Mon-Atom” company is working to collaborate with domestic and international investors on projects such as prospecting, extracting, and processing of uranium and other radioactive minerals in accordance with related laws, and regulations and exercise the government oversight.

• “Dulaan-uul”, “Zuuvch-Ovoo” projects – “AREVA” group’s invested “Cogegobi” LLC has done prospecting of uranium.
• “Kharaat”, ”Khairkhan”, “Gurvansaikhan” and ”Ulziit” projects – accurate geological studies and technology experiments has done.

Law on Petroleum (2014)

The Law on Petroleum regulates matters pertaining to petroleum and unconventional petroleum prospecting, exploration, and exploitation within the territory of Mongolia. The law aims to improve the competitiveness of the conventional oil industry and also intends to create a favorable environment for investment into the unconventional oil.

The main features of this law are:

• Specific time limits are set out for negotiating and concluding a product sharing agreement.
• A petroleum deposit or oil field located across the national border is to be regulated by a treaty between neighboring states’ governments.
• A business entity which signed a prospecting agreement on unconventional oil has a priority right to enter into “Production sharing agreement”.
• Petroleum and non-conventional oil operations will be regulated by separate production sharing agreements and licenses despite the fact that the contractor is one or the same person.
• Investment and sales income related transactions of a Contractor are undertaken by a commercial bank registered in Mongolia.
• A contractor under a product sharing agreement places in an escrow account 3% of the annual exploration investment and 1% of the beneficial petroleum allotted to the contractor to guarantee its’ commitment for environmental rehabilitation and demobilization of exploration and extraction facilities.
• An exploration period for petroleum is max. 12 years, for non-conventional oil 15 years while an extraction period can last for both petroleum and non-conventional oil for 35 years.
• Annual license fees are allocated to soum, province and central government budgets at 10%, 20% and 70% respectively.
• Royalty rate for petroleum and natural gas is 5-15% of the extracted petroleum and natural gas. Royalty rate for non-conventional oil is set at 5-10%.
• 30% of the royalties are paid to the local development fund while 70% goes to the national budget.

Contractor entitlements under Product sharing agreement include:

• Transfer contractual rights and obligations to another party in accordance with this law;
• Amend its annual plan and budget with the approval of the Petroleum Authority;
• Annual administrative costs of the Contractor may be up to 5% of the cost recoverable expenses.
• A contractor /subcontractor will be exempt from Customs tax and VAT during the first five years of operation for “imported equipment, facilities, materials, raw materials, appliances, spares, chemical and explosive materials, and special machines and techniques, which will be used for petroleum and unconventional oil operation”.

Law on Investment (2013)

In general, the Mongolian law does not discriminate against foreign investors. In an effort to support Mongolia’s economic growth, the government of Mongolia ratified a new investment law effective from November of 2013, which encourages investors to participate in all sectors of the economy without any government approval by establishing a common legal guarantee for investors, supporting investment and stabilizing the tax environment, etc. This law applies to both foreign and domestic investors. The law provides incentives, such as tax exemptions, tax credits, longer term for land tenure, increased quota of foreign employees, simplified visa arrangements, and others.

Only foreign state-owned entities (those with a minimum of 34% ownership of entities in the mining, media and communication, or financial sectors) must obtain approval from the newly established Invest Mongolia Agency, an official government representative. The Investment Law declares that a foreign state’s direct or indirect ownership exceeding 50% qualifies it as a foreign state owned entity.

According to the law, a foreign investor is defined as “a business entity with an overall equity of US$100,000 or more, not less than 25% of which must to be owned by (a) foreign investor(s)”. Investments into Mongolia can be made in the following ways:

• Establishment of a solely or jointly owned business entity
• Concession, product sharing, marketing and management and other agreements
• By the purchase of Mongolian companies’ shares, bonds, and other types of securities
• Merger and acquisition
• Franchises or financial leasing
• And by other forms that are not prohibited by law.

Furthermore, foreign investors who incorporate companies and conduct business operations in Mongolia are offered “Stabilization Certificates” which propose a stabilized amount and rate of taxes and other payments to the government during their business operation period in the country. The holder of a Stabilization Certificate is guaranteed stabilized tax rates for a period of five to eighteen years depending on the amount, industry, and geographic location of the investment in Mongolia. Taxes to be stabilized are Business income tax, Customs tariffs, VAT, and Mineral Royalty.

Subject to meeting Mongolian tax obligations, investors are entitled to freely export their income and assets (including profits, dividends, loan payments and interests).

For mining extraction, heavy industry and infrastructure sectors, the Stabilization Certificate conditions and grants the following:

Investment Amount (billion MNT)	Valid Length of Stabilization Certificate (in years)					Investment Completion Period (in years)
	Ulaanbaatar	Central Region	Khangai Region	Eastern Region	Western Region
30-100	5	6	6	7	8	2
100-300	8	9	9	10	11	3
300-500	10	11	11	12	13	4
500 & above	15	16	16	17	18	5

This law regulates tendering for granting government and local assets to investors under concession agreements, and related dispute resolution.

Main features of this law are:

• Seven (7) types of concessions have been specified in this law. However, the same law does not prevent other types of concessions.
• Loan guarantees, partial financing, taxation and financial supports may be provided by the government to a concession holder.
• The Government of Mongolia approves the state-owned concession projects.
• A concession agreement is to be established with the government administrative body responsible for concessions.
• Provincial or the Capital city representative meeting (or a local assembly) approves concessions of local ownership. They are not empowered to approve a type of concession identified as “Build and Transfer”.
• The concession list indicates whether the government fund or guarantee will be provided and whether a tendering process will be undertaken or direct agreement will be concluded.
• Mongolian and foreign legal entities, at their own initiative, have to submit a contract proposal and cost and profit calculations to a member of the Government of Mongolia or the Governor of Aimag/Capital city.
• A negotiation for concession agreement may be undertaken with a legal entity standing next to the best bidder at the time when the negotiation with the best proposal maker is not finalized.
• A concession agreement may be extended or amended as agreed by the parties and under circumstances specified by this law.

In September 2013, the Government of Mongolia has approved the Resolution number 317 (amended in 2016 by the Government Resolution 307) on “List of the Concession Projects”. The concession sectors are:

• Infrastructure and Construction projects
• Highway projects
• Airport projects
• Energy sector projects
• Environment sector projects
• Education projects
• Health, art, sport and tourism projects
• Railway projects

Tax environment

Taxes paid by miners

Mining license holders paid 638.7 billion MNT in tax to national and local governments in 2016. Copper concentrate producers paid MNT 415.8 billion MNT in tax, coal producers paid 114.2 billion MNT and gold producers paid 40.3 billion MNT, to central and local governments. Mining companies paid 224 billion MNT in royalties and 213.7 billion MNT in corporate income tax in 2016. Table 2 below demonstrates tax paid by mining commodity from 2014 to 2016.

            Table 2: Taxes paid by types of minerals from 2014 to 2016

The tax laws of Mongolia were updated to deal with the new market economy in the early 1990s. The General Law of Taxation was introduced in 1993 and provides the infrastructure for the tax regime and other tax laws followed.

There are four (5) principal tax laws affecting companies in the mining sector:

1. The General Law of Taxation: This law contains general provisions relating to tax but does not impose taxation. It also includes provisions regarding the administration of taxation, including the rights and duties of both taxpayers and administrators, and tax audit protocols.
2. The Minerals Law of Mongolia: It contains provisions specific to the prospecting, exploration and mining of minerals and also imposes royalties on mining license holders.
3. The BIT Law: The provisions within this law apply to all companies; there is no separate corporate tax law for mining companies.
4. The VAT Law of Mongolia: It is an indirect tax regime relevant to all companies, with no separate section for miners.
5. Customs tariffs and tax law: This law regulates customs tariffs and taxes on imports and exports. It also specifies goods which are exempt from customs tax.

The Mongolian Tax Authority (MTA) is responsible for administering and collecting taxes and is composed of the General Department of Taxation (which is in charge of taxation); tax agencies; and offices of the capital city, provinces, districts and district tax inspectors.

Mineral royalties

The primary tax that applies to mining companies is the royalty imposed on off-take and sales under the Mineral Law of Mongolia. A mining license holder must pay a royalty that is calculated on the basis of total sales value of the minerals extracted. The sales value is determined differently depending on the product, as mentioned below.

• Exported products: The sales value is the average monthly price of the product or a similar product, based on regularly published international market prices or on recognized principles of international trade.
• Products sold or used on the domestic market: The sales value is the domestic market price for that product or a similar product.
• Products sold in international or domestic markets where it is impossible to determine market prices: The sales value is based on the revenue derived from the sale of the product as declared by the license holder.

The standard royalty rate is 2.5% for coal sold in Mongolia and for other common mineral resources sold in Mongolia. A 5% royalty is levied on all other minerals that are sold, shipped for sale or used. Mineral royalties are deductible for tax purposes.

In 2010, the Parliament of Mongolia introduced an amendment to the Minerals Law and a new surtax royalty regime effective from 1 January 2011. Under the new two-tier system, a surtax royalty is imposed on the total sales value of 23 types of minerals in addition to the standard flat-rate royalty. The surtax royalty rates vary depending on the type of mineral, its market price and the degree of processing, generally from 0% to 5% of market prices.

The rates for processed minerals tend to be lower than unprocessed minerals, ostensibly to encourage further local investment. No surtax royalty is charged on any minerals below a certain threshold market price, which varies depending on the type of minerals.

According to the Mineral Law amendment of January 2014, royalty for gold is 2.5% if it is sold to the Central Bank or authorized banks.

Corporate income tax

Mongolia operates a system of worldwide taxation both on corporations and individuals. The Law on General Taxation contains general provisions relating to tax (including tax administration and the rights of taxpayers and the tax authorities). However, it is the BIT Law which regulates incomes and expenses that are taxable or deductible.

Taxpayers (resident or non-resident)

Permanent residents of Mongolia are taxed on their worldwide income. A company is regarded as a permanent resident of Mongolia if it is incorporated in Mongolia or if a foreign entity has its head office in Mongolia.

Non-residents of Mongolia are taxed on Mongolia-sourced income only. Non-residents are defined as foreign corporate entities that conduct business in Mongolia via a representative office and foreign entities operating there that do not qualify as permanent residents.

Taxable income

Taxable income is determined by excluding deductible expenses such as wages, health and social insurance, fixed asset depreciation, loan interests, rents, procured goods/services, foreign exchange loss, customs taxes paid on imported goods, and materials, vehicle taxes, water fees and mineral royalties. In addition, monies placed as rehabilitation fees, transportation costs and workplace safety costs are deductible expenses. Deductible expenses are explicitly listed in the BIT law.

Corporate income tax rate

The corporate tax system is progressive, with annual taxable income of up to MNT3 billion subject to tax at a rate of 10 %, and taxable profits in excess of this amount taxed at a rate of MNT300 million plus 25% of the income exceeding MNT3 billion. There is no separate tax regime for mining entities.

Other tax rates

• Dividends: 10%
• Royalties: 10%
• Interest income: 10%
• Immovable property: 2%
• Income from the sale of rights: 30%
• Profits transferred overseas by a permanent establishment 20%
• Mongolian sourced income by a foreign tax resident 20%

Tax exemption

• Product sales by a tax payer carrying out a business under a product sharing agreement
• Dividend income of a tax payer undertaking a business in Mongolia under a product sharing agreement
• Sales income earned from the sale of eco-friendly equipment
• Incomes of investment funds
• Incomes of savings insurance funds
• Investments in infrastructures and tourist facilities in free trade zones (30-50% of the investment amount are tax exempt)

Tax losses

Generally, tax losses can be carried forward for two years, and the use of such losses is limited to 50% of taxable income in any year. However, for companies in the mining and infrastructure sectors, tax losses can be carried forward four to eight years, depending on the investment amount. There is no percentage restriction on the use of these losses.

Depreciation for tax purposes

Depreciation and amortization for tax purposes is calculated on a straight-line basis using the below rates.

Noncurrent asset	Period of use (in years)
Building and construction	40
Machinery and equipment	10
Computers, computer equipment and soft ware	3
Intangible asset with indefinite useful life	10
Intangible asset with definite useful life (includes license for mineral exploration and mining)	Valid period: for mineral and mining licenses, depreciation rates are determined by service payments done to acquire/ transfer the license, license fee and sales value of the license
Other noncurrent asset	10

The depreciable value includes the excess of maintenance expenses over allowable limits. Leased assets shall be recorded in the financial statements of either a lessor or lessee upon mutual agreement of the contractual parties.

Machinery and equipment typically includes equipment fixed or attached to a building, machinery and equipment fixed or attached to a construction, and machinery and equipment fixed or attached to the underground infrastructure. Other noncurrent assets typically include capitalized pre-stripping and overburden removal, underground shafts and roadways, draw points, ventilation shafts, and other underground infrastructure.

Land and inventory reserves are non-depreciable assets. Unused assets are deemed to have been sold.

Tax compliance

The tax year in Mongolia is the calendar year. The MTA delivers monthly and quarterly tax schedules to the taxpayer who must, in accordance with these schedules, pay tax before the 25th of each month. Taxpayers must also file quarterly returns within 20 days after the end of each quarter. An annual return is due on 10 February following the end of the tax year, and the taxpayer must settle all outstanding liabilities by this date.

Withholding tax (WHT)

Non-residents of Mongolia are subject to a 20 % withholding tax on Mongolia-sourced income. This includes direct or electronic services, dividends, interest, royalties, management fees, and income from goods and services sold in the territory of Mongolia. The “goods sold” category is a common source of confusion; some mines, for example, insist on deducting a 20% WHT from payments for the acquisition of heavy equipment from offshore vendors.

Effective from 1 January 2015, non-residents who have bought bonds issued by Mongolian commercial banks at international and local stock exchange are subject to a 10% WHT on earned interest.

Any WHT due must be paid over to the state within seven working days. All WHT 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.

Double tax treaties (DTTs)

Double tax treaties (DTTs) can offer reduced WHT rates on most forms of passive income and can also operate to eliminate WHT from trading profits or purchases of goods. To date, Mongolia has 24 DTTs that are in force.

The application of a double tax treaty is usually a self-assessment process. That is, there is no advance clearance required. However, taxpayers need to demonstrate that the recipient is a tax resident of the foreign country, which usually involves obtaining a certificate of residence from the foreign state.

Country	Dividends (%)	Interest (%)	Royalties (%)
Austria	5/ 10*	10	5/ 10*
Belgium	5/ 15*	10	5
Bulgaria	10	10	10
Canada	5/ 15*	0/ 10*	5/ 10*
China	5	10	10
Czech Republic	10	0/ 10*	10
France	5/ 15*	0/ 10*	0/ 5*
Germany	5/ 10*	0/ 10*	10
Hungary	5/ 15*	0/ 10*	5
India	15	0/ 15*	15
Indonesia	10	0/ 10*	10
Kazakhstan	10	10	10
Korea (South)	5	5	10
Kyrgyzstan	10	10	10
Malaysia	10	10	10
Poland	10	0/ 10*	5
Russian Federation	10	10	20 (u)
Singapore	0/ 5/ 10*	5/ 10*	5
Switzerland	5/ 15*	10	5
Turkey	10	10	10
Ukraine	10	0/ 10*	10
United Kingdom	5/ 15*	7/ 10*	5
Vietnam	10	10	10
Non-treaty  countries	20	20	20

A table of WHT rates for all of Mongolia’s double tax treaties can be found in below table.

Permanent establishment

Mongolia’s tax law recognizes the concept of permanent establishment (PE). However, it is the source of income that is key in determining whether a foreign entity is taxable, not the PE.

Dividends

Dividends paid between permanent residents of Mongolia are taxed at a rate of 10%. Dividend income received by a non-resident from a permanent resident is subject to a 20% WHT. This rate may be reduced under an applicable double tax treaty.

Foreign tax relief

The domestic law states that a foreign tax credit is available only if the foreign tax is paid in a country with which Mongolia has a double tax treaty.

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%. Gains derived by non-residents on the disposal of Mongolian assets may be exempt from tax if the transaction is appropriately structured.

Thin capitalization

Thin capitalization rules restrict deductions for interest where the debt–to-equity ratio exceeds 3:1. Interest paid in excess of this ratio is instead reclassified as a dividend that is taxable or subject to WHT. Only related party debt sourced from certain “investors” are subject to this restriction.

Transfer pricing

There are various provisions within the CIT Law and the General Tax Law that require related party transactions to follow the arm’s-length principles. There is some weakness in the definition of “related party,” which makes these provisions not as strong as those in more developed markets. Although the law does not specify a preferred approach, the MTA usually accepts the OECD methodology.

Value-added tax (VAT)

10% VAT is imputed on the supply of taxable goods and services in Mongolia and on imports into Mongolia. In general, the taxable amount is the fair market value of the goods sold, work performed or services provided.

“0” percent VAT is imposed on exported goods, tax exempt services rendered outside of Mongolia, and finished mineral products.

Scope of VAT

VAT shall be imposed on the following goods, work and services:

• Goods sold in Mongolia
• Work performed in Mongolia
• Goods exported out of Mongolia for use or consumption outside Mongolia
• Goods imported into Mongolia for sale, use or consumption The provision of services includes:
• Electricity, heat, gas, water, sewers, postal services, communication and other utilities
• Leasing of goods for possession or use in other forms
• Renting of immovable and movable property other than buildings and houses or allowing to possess or use them in other forms
• Sale, transfer or leasing of patents, copyrights, trademarks, software, know-how and other information on assets
• Work performed and services provided for the repayment of debts owed to other entities
• Work performed and services provided by any entity that does not reside in the territory of Mongolia, based on orders placed by citizens or legal entities of this country

The following goods or services in the mining sector will be subject to VAT:

• Sale of a right
• Transfer, sale or lease of asset information or know-how etc
• Assets retained upon the termination of trade
• Goods or services used to settle debt balances
• Sale of goods or services by a non-resident to a resident
• Factoring, forfeiting or similar transactions

The following are VAT exempt:

• Sale of residential property
• Equipment, materials, raw materials, spare parts, gasoline and diesel fuel imported for activities of a product- sharing agreement in the oil sector
• Gas fuel, gas fuel containers, machinery, equipment, special purpose machinery, mechanism, tools and gears

Some services are exempt from VAT as set out in the law. These for instance include some banking, currency exchange, lending and insurance related services.

VAT calculation, offset and refund

Net VAT payable by a taxpayer is determined by subtracting the input VAT (VAT paid by a taxpayer to its suppliers) from the output VAT (VAT charged by the taxpayer) in a given reporting period. The excess VAT can be offset against future VAT or other tax liabilities.

VAT offsets are not available for goods and services imported for exploration and pre-mining activities. VAT refunds are available each month for a person/business entity which exports its products and are available quarterly to other tax payers.

Reverse-charge VAT

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 compliance

VAT is accounted for monthly and VAT payments must be made by the 10th day of the following month. An entity becomes a VAT taxpayer in Mongolia on the date when taxable turnover reaches or exceeds MNT50 million. The entity must submit their application for registration within 10 days of becoming VAT payer.

Excise tax

Excise tax is imposed on goods manufactured in or imported into Mongolia. These goods include tobacco, alcohol, gasoline, diesel fuel, passenger vehicles, physical units of special-purpose technical devices and equipment used for betting games and gambling, and the activities of individuals and legal entities that conduct such activities. Excise taxes will gradually increase from May 1, 2017 for passenger vehicles and increased taxes for other items will start from January 2018.

Customs tax

A flat customs tax of 5% applies in respect of goods imported into Mongolia. Innovation projects, and passenger aircrafts and relevant spare parts are exempt from customs tax. Also machinery and equipment imported by entities investing in petroleum exploration and extraction are exempt from customs tax for the entire period of exploration and the first 5 years of extraction. Gas fuel, and related equipment and machineries are customs tax exempt. The renewable energy sector enjoys customs tax exemption for research and industrial equipment and spare parts.

Personal income tax

The Parliament has recently amended the Law on Personal Income Tax and increased tax rates for those earning higher wages. The personal income tax (PIT) rates are fairly straightforward: 10% tax rate applies to annual income of 18 million, a 15% tax rate applies to annual income of over 18 million, and a 25% tax rate if the annual income is over 42 million.

Social insurance

Mongolian nationals and foreign citizens employed on a contract basis (both labor law agreement and service agreements) by economic entities undertaking activities in Mongolia are subject to compulsory health and social insurance. Both the employer and employee are subject to social insurance contributions. Below, you will find Employer and Employee contribution rates for each type of social insurance.

Starting from January 2018, the total social insurance contributions paid by employer and employee will increase to total 22.2% compared to the current 21%. (please look at the Table 3 below) .

However, the employee share of the social insurance contribution is capped at MNT 240, 000 per month (approximately US$120). Amendments to the Social insurance law suggest that social insurance contributions will increase 0.5-1.5% for both employer and employee in 2019 and 2020.

 Table 3. Social insurance contributions by Employer and Employee

Type of insurance	Employer contribution	Employee contribution
Pension insurance	8%	8%
Benefit insurance	1%	0.5%
Health insurance	2%	2%
Unemployment insurance	0.2%	0.5%
Total	11.2	11