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Income Tax in Mongolia


Individual Income Tax

According to the Personal Income Tax Law, a taxpayer is defined as “A citizen of Mongolia, foreign citizens and stateless persons residing in Mongolia who are responsible for payment of tax in accordance with law for their earned taxable income for the tax year or even when no income is earned.”

Taxpayers are further classified as “resident” and “non-resident” taxpayers.

A foreign individual is considered as Mongolian tax resident if he or she resides in Mongolia for 183 or more days in a tax year or owns a residence in Mongolia. Above days are calculated based on the number of days of a calendar year from the day of entry into Mongolia and in case of multiple entries, it will be determined based on the total days of stays in Mongolia.

A foreign individual is considered as a non-resident taxpayer in Mongolia if he or she has no residence in Mongolia and has not stayed in Mongolia for 183 or more days in a tax year.

Taxes on Personal Income:

A permanent resident taxpayer of Mongolia is subject to tax on worldwide income.

A non-resident taxpayer of Mongolia is subject to tax on the income earned in the territory of Mongolia during the tax year.

Personal income tax rates:

The current PIT rates are as follows:

Sources of income
Applicable tax rate (%)
Salary income
10
Income from property (i.e. dividends, royalties, interest, capital gain from sale of securities/stocks)
10
Sale of immovable property (gross)
2
Income from scientific, literary, and artistic works, inventions, product designs, and useful designs (gross); income from sports competitions, art performances, and similar income (gross)
5
Income from betting games, gambling, and lotteries (gross)
40

Income determination

Employment income:

Employee gross income consists of all direct and indirect income received through employment or related activities during a calendar year and includes both taxed and untaxed income at the source of payment.

Capital gains:

Gross income from the sale of immovable property is taxed at a rate of 2%. Income from the sale of movable property, including securities, is taxed on a net basis at a rate of 10%.

Dividend and interest income:

Dividend and interest income earned by individuals is subject to withholding tax (WHT) at the rate of 10%.

Individual – Deductions

Employment expenses:

There are no business deductions allowed for employees, except for a social insurance contribution made by an employee per Social Insurance Law of Mongolia.

Personal deductions:

There are no deductions for non-business expenses in Mongolia. However, starting from May 2014, donations made for the purpose of rehabilitation of national cultural heritage can be deducted from taxable income.

Standard deductions:

The most notable allowance is a general deduction of the minimum monthly wage of MNT 84,000 per annum.

Business deductions:

An individual may claim business deductions if registered as an entrepreneur.

Individual - Tax administration

Tax returns and payments:

In general, if an employee (local or expatriate) receives employment income from a Mongolian employer, the responsibility for reporting, withholding, and payment lies with that employer. If an employee receives other income (e.g. income from the sale of shares) or if there is no Mongolian employer, the responsibility for reporting, withholding, and payment lies with the employee.

The tax agent (i.e. employer) should transfer the tax withheld from a taxpayer’s income to the budget by the tenth day of the following month.

Furthermore, a tax agent should submit a quarter-to-date report of tax withheld by the 20th day of the first month of the following quarter and year-to-date tax report by 15 February of the following year to the corresponding tax authority.

Income should be reported on an individual tax form and submitted to the tax authority by 15 February of the following year.



Corporate - Taxes on corporate income:

Mongolian resident economic entities are taxable on aggregate annual income earned worldwide. Non-resident economic entities carrying out business activities in Mongolia are taxable on the income earned in the territory of Mongolia and from Mongolian sources.

Mongolian corporate income tax (CIT) is levied at the following rates, using a progressive-rate scale that ranges from 10% to 25%, as follows:

·        10% applies to the first MNT 3 billion of annual taxable income.
·        25% applies to any excess of MNT 3 billion of annual taxable income.

However, the income described in the chart below is excluded when determining the annual taxable income and is taxed at different tax rates on a gross basis:

Source of income
Applicable tax rate (%)
Dividends
10
Royalties
10
Interest
10
Gambling, betting games, and lotteries (net)
40
Sale of immovable property
2
Sale of rights (e.g. mining licences, special activity licences, and other rights granted by the authorised organisations for conducting specific activities)
30

"Ultimate Holder"

With the introduction of the amendment to the General Taxation Law of Mongolia, a concept of an “ultimate holder” of a legal entity is newly introduced for tax purposes.

 Any change of ultimate holders of a legal entity, which maintains a mining license or land use (or possess) right is deemed as a sale of its land right or mining license and subject to a 30% Corporate Income Tax (“CIT”). Importantly, a tax obligation is imposed on the legal entity holding such Rights, but not the person who earns the income from the transaction.

 “Ultimate holders” refer to the following types of persons who exercise control over management and assets of a legal entity directly or indirectly with a chain of ownership at one or more levels of legal entities through a number of shares, percentage of participation or a number of voting rights:

·        holding a majority of voting rights of a legal entity;
·        holding a majority number of shares or shares with the highest market value of a legal entity;
·        similar others.

Assessing taxable Income:

In general, a taxable income shall be assessed based on the value of Rights pro-rated to the number of shares or percentage of participation which are transferred from a Right-holding entity, or its ultimate holders. For the purpose of certainty, the Ministry of Finance passed the Decrees № 379 and 380, dated December 25, 2017, which set the following methodologies to assess taxable income: 
   
·        Methodology to assess and impose taxes on income from sales of the right to use or possess land (Decree №379)    
·        Methodology to determine the value of mining licenses and assess taxes on income from transfer of mining licenses (Decree №380).



 Penalties:

Breach of the above- mentioned legislative requirements (including failure to comply with requirements for assessing taxes, reporting and/or concealing relevant documents and information and providing false documentation for tax purposes) shall be subject to cancellation of the respective Rights (a mining license and/or the respective right to use or possess land).

Corporate - Income determination

Inventory valuation:

There is no specific provision in the tax law for inventory valuation.

Capital gains:

Capital and ordinary transactions are treated in the same way for tax purposes (i.e. included in annual taxable income). An exception is provided for income from sales of immovable property, which is subject to tax of 2% on gross sales proceeds.

Taxation of capital gains of non-residents is not clear. The CIT Law could be interpreted in a way that the net gain from disposal of shares in a Mongolian company should be subject to CIT. However, since there is no mechanism in practice for non-resident companies to declare income in Mongolia and show the basis for the taxable gain, only withholding tax (WHT) (20% on the gross payment) charged at source of payment is available. No mechanism for taxation of capital gains currently exists if the transaction takes place between two non-residents that have no taxable presence in Mongolia.

Dividend income:

Dividend income earned by a Mongolian resident entity is subject to WHT of 10%. Dividend income to be remitted out of the country to a foreign tax resident is subject to WHT at 20% but may be reduced by an applicable DTT.

Interest income:

Interest income is subject to a special income tax of 10%. Interest income to be remitted out of the country to a foreign tax resident is subject to WHT at 20% but may be reduced by an applicable DTT.

Rental income:

Rental income is included in taxable income for tax determination.

Royalty income:

Royalty income is taxed at a special rate of 10%. Royalty income to be remitted out of the country to a foreign tax resident is subject to WHT at 20% but may be reduced by an applicable DTT.

Partnership income:

There is no transparent partnership concept in Mongolia. Partnership income is treated as income of a legal entity and is subject to CIT.

Unrealised currency exchange gains/losses:

Unrealised currency exchange gains are not considered as taxable income, and, at the same time, unrealised losses are not deductible from taxable income.

Foreign income:

Mongolian legal entities pay tax on their worldwide income. Unremitted earnings are taxed the same as ordinary earnings.

Credit relief is available with respect to foreign tax on income arising from countries that have DTTs with Mongolia, capped at the level of Mongolian tax that would have been due on the same income in Mongolia.



Corporate residence:

A resident legal entity is an economic entity formed under the laws of Mongolia or a foreign economic entity that has its place of management in Mongolia. There has not been further development of this concept, so it cannot be assumed that the standard place of effective management or control test will apply.

A non-resident company is a foreign economic entity that conducts its business in Mongolia and earns income from Mongolian sources.

Permanent establishment (PE):

Although there is a theoretical possibility to establish a branch of a foreign entity in Mongolia, it is currently not practically possible due to uncertainties in the law related to the legal status of such entity, filing procedures, etc.

It is also possible to register a PE in Mongolia with the tax authorities, although neither the legal status nor respective taxation rules are clear. According to the draft law on CIT, which is under Parliament discussion at this moment, PEs can be created in Mongolia only by non-residents from those countries that have double tax treaties (DTTs) with Mongolia.

Corporate - Tax administration

Taxable period:

The tax year is the calendar year.

Tax returns:

Companies must submit a quarterly return by the 20th day of the month following the end of each quarter and an annual return by 10 February after the end of the tax year.

A withholder must prepare and submit a quarterly return of the tax deducted by the 20th day of the first month of the following quarter and an annual return by 10 February after the end of the tax year.

Payment of tax:

A taxpayer shall pay the taxes due in advance by the 25th day of each month in accordance with the payment schedule based on the previous year. Year-end settlement is made by 10 February of the following year (along with the annual tax statement).

In practice, the Mongolian tax authorities allow concessions as follows:

Where total tax paid exceeds the tax liability, the excess may be credited against other taxes due or credited against future tax payments. The overpayment also may, theoretically, be refunded; however, the practice of refunding in Mongolia is not clear or consistent.

An economic entity or organisation that has withheld tax from a payment of dividends, royalties, sale of rights, or a payment of income to a taxpayer should transfer the WHT to the tax authorities within seven working days. Tax withheld relating to the sale of immovable property should be transferred to the tax authorities within ten working days.

Tax audit process:

The tax audit cycle is not clearly stated in the tax laws. However, the regular cycle in Mongolia is three to five years in practice, and it is very common if the company requests a refund from tax authorities or liquidates its company. Moreover, a tax audit can come anytime if the tax authorities suspect some risk or misuse of the legislation or receive information from a trustworthy source about tax evasion.

Statute of limitations:

The statute of limitations in Mongolia is five years for tax arrears, fines, and penalties. However, the dispute settlement timeframe shall not pertain to payment of tax, fine, and penalty debts.



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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.


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This blog is Created by CA Anil Kumar Jain.