Mongolian Economic Entity Income Tax Law

Current Law

29 June 2006

Taxpayers

• Companies, cooperatives, partnerships, foreign companies and joint ventures in Mongolia

 • Foreign company representative office

 • Banks, credit or insurance companies and similar entities

 • Non-governmental organizations

 • Religious organizations  

 • State and municipal legal entities

 • Non-resident legal entities

• Any legal entity other than those described above

• Domestic and foreign companies, partnerships, and cooperatives

• Enterprises with state and local property registered with the state register that conduct business activities

Resident

Not defined

• Economic entity formed within the laws of Mongolia

• Foreign economic entity with headquarters in Mongolia

Non-resident

• Foreign economic entity conducting activities via a representative office:

     o Permanent location through which the taxpayer carries out commercial activities

     o Construction site, installation project or related supervision activities

    o Equipment, machinery or construction or related supervision activities for the purpose of searching for natural resources

    o Location for commerce or service activities

• Foreign economic entity conducting activities via a representative office:

         o Branch

         o Plant

         o Trade/service provider

         o Oil well, gas well, mine

• Foreign economic entity otherwise earning income in Mongolia

Residency Effects

• Representative office income is taxed only on income earned in the territory of Mongolia

• Foreign income of other taxpayers not specifically discussed

• Resident taxpayers are taxed on domestic and foreign income

• Non-resident taxpayers are taxed only on income earned in the territory of Mongolia

Related Parties

• Not discussed, although there is a general provision for revaluing transactions priced at below market value

• Related parties are those:

o Holding 20+% of common stock; or

o With right to receive 20+% of dividends; or

o With right to appoint 20+% of management or otherwise able to determine policies

• Transactions valued based on similar transactions between non-related parties (benchmark prices)

• Methodology for establishing benchmark prices approved by Ministry of Finance

Gross Taxable Income

Income from:

• Main and auxiliary manufacturing, work or services

• Commercial banks and credit transactions

• Insurance activities

• Brokerage and stock exchange activities

• Pawnshop • Disposal of immovable property

• Disposal of movable property

• Royalties

• Shareholder dividends

• Loan interest

• Property leases

• Commissions and gains from intermediary activities

• Lotteries, quizzes and games

• Interest on bank deposits or account balances

• Foreign currency exchange

• Other gross taxable income

• Income from activities:

   o Production/sale of work and services

   o Sale of rights

   o Sale of shares and securities

   o Quizzes, gambling and lotteries

   o Sale /rental of erotic materials

   o Erotic performances

        o Income in kind o Sale of intangible assets

        o Technical, management, consulting or other services

        o Interest and penalties for nonperformance and compensation for damages

        o Realized foreign currency exchange rate gain

        o Other similar income

 • Income from property:

         o Leases of movable and immovable property

         o Royalties

         o Dividends

         o Interest

• Income from sale of movable and immovable property

Deductible Expenses

• Salaries, wages, additional wages

• All types of inventories

• Social and health insurance premiums

• Amortization and depreciation

• Regular maintenance

• Bonus allocated for construction budgets

• Foreign currency exchange losses

• All types of inventories

• Salaries, wages and additional wages on which social and health insurance premiums and personal income tax are imposed

• Social and health insurance premiums

• Employee bonuses, incentives and allowances for housing, transport, meal and fuel

• Work and services performed by others

• Rents • Interest expense from loans

• Administrative expenses fixed and set by owners

• Taxes:

    o Excise

    o Immovable property

    o Transport vehicles

    o Land and natural resource fees and payments

• Loss reserve funds of financial institutions

• Mandatory insurance premiums

• Depreciation/amortization of non-current assets

• Regular maintenance

• Loan interest if loan borrowed to carry out primary and auxiliary production, work and services

• Realized foreign currency exchange losses

• Work and services performed by others

• Lease payments

• Interest portion of finance lease payments

• Subscriptions to professional publications

• Mandatory/voluntary insurance premiums

• Taxes:

     o Excise

     o Immovable property

     o Windfall profits

     o Customs duties

     o Transport vehicles

     o Land and natural resource fees and payments

• Accumulated loan risk funds of savings/loan cooperatives, other cooperatives, banks and non- banking financial institutions

• Advertising

• Employee training and retraining

• Seed, fertilizer, livestock and animal fodder

• Transportation

• Short-lived and low-value assets

• Labor safety expenses

• Communication, stationery, cleaning and security

• Mitigation of disaster damages in compliance with Disaster Management Law

• Normal wear and tear of inventory

• Environmental rehabilitation funds established in accordance with Minerals Law

Limited

• Marketing and training to 10% of net taxable income

• Immovable asset maintenance to 2% of book value

Deductible Expenses

• Interest payments to related parties if exceeding 30% of creditor capital

• Movable asset maintenance to 5% of book value • Voluntary insurance premiums to 15% of taxable income • Per diem to twice the civil servant norm • Interest on investor’s debt exceeding three times investment

Non-deductible Expenses

• Undocumented expenses

• Investment

• Capital repair expenses (capitalize and amortize)

• Bonuses, allowances

• Gifts and donations

• Reception expenses

• Subscriptions to periodicals

• Housing, transportation, meals and fuel allowances

• Normal wear and tear on inventories

• Interest on overdue loans

• Fines and compensation for damages to others

• Interest paid to interdependent legal entities

• For all taxpayers:

           o Expenses incurred in connection with exempt income

           o Undocumented expenses

           o Expenses subject to withholding when tax was not withheld

           o Finance lease payments

           o Fines and penalties

           o Interest payments to controlling resident individual

• For non-resident taxpayers:

           o Expenses incurred out of Mongolia

           o Management/administrative expenses not related to  producing income

Depreciation and Amortization

• Straight-line method in accordance with schedule

  o Buildings: 40 years

  o Machinery and equipment: 10 years

     o Special purpose machinery and equipment, including mining equipment: 5 years

     o Other assets: 10 years • Land and inventories not depreciable

• Straight-line method in accordance with schedule

       o Buildings: 40 years

       o Machinery and equipment: 10 years

       o Computers and software: 3 years

       o Other assets: 10 years

       o Intangible assets: 10 years or useful life

 • Depreciable value includes balance of maintenance expense over limitations

• Mining production and social infrastructure assets over useful life

 • Unused assets are assumed sold

• Includes assets under financial lease

• Interest during construction is capitalized

• Land and inventories not depreciable

Rates

• 15% on first 100 million MNT/ 30% on balance

• Dividends 15%

• Royalties 10%

• Lotteries, quizzes and games 40%

• Video/audio rental and sale 40%

• Disposal of immovable property 2% of gross

• Bank deposit interest 15%

• Non-resident legal entity’s Mongolia source income 20%

    o Dividends

    o Loan interest and fees

    o Royalties, rents

    o Technical and other services

• Foreign entity’s income transferred abroad 20%

• Religious organizations 20%

• 10% on first 3 billion MNT/ 25% on balance

• Dividends 10%

• Royalties 10%

• Quizzes, gambling and lotteries 40%

• Sale /rental of erotic materials 40%

• Erotic performances 40%

• Gift or disposal of immovable property 2% of gross

• Interest 10%

• Sale of rights 30%

• Foreign entity’s income transferred abroad 20%

• Non-resident Mongolian income 20%, including:

  o Dividends

      o Interest

      o Royalties, rents, leases

      o Payment for management and administrative expenses

      o Goods and services sold in Mongolia

Exempt Income

• Government bond interest

• Member/supporter dues and donations to NGOs.

• Social insurance and care funds

• Income of the Bank of Mongolia

• Income of public benefit NGOs

• Expenses of business entities for construction or maintenance of roads

• Foreign oil companies with production-sharing contracts

• Foreign investor’s reinvested dividends

• Government bond interest

• Oil production-sharing income for non-resident taxpayers

• Cooperative income for intermediary services

Tax Credits

• Production of cereals, potatoes and vegetables 50% exempt

• Proportionate credit based on the percentage of disabled employees to total number of employees

• Production of cereals, potatoes and vegetables, milk, fruits and berries and fodder plants 50% exempt

• 10% Investment tax credit with 3 year carryforward provided investment is:

      o Non-current asset

    o For purpose of starting new production or expanding or renovating existing production in priority sectors

    o Made subsequent to 1 January 2007

• Proportionate credit based on the percentage of disabled employees to total number of employees

• Foreign tax paid if country is party to a double taxation treaty with Mongolia

Loss Carryforward

Not discussed

• Tax statement loss carried forward to two subsequent years:

    o Annual amount used may not exceed 50% of taxable income in the tax year

    o Lost must be incurred subsequent to 1 January 2007

Tax Holidays: 10 years 100%, 5 years 50%

• Foreign invested companies:

    o Power and thermal plants

    o Transmission networks

    o Airway and engineering constructions

    o Telecommunications networks

    o Construction of energy sources and networks

    o Renovation of technology

• Income to the extent of entity’s investment in:

  o Energy sources and networks

    o Technology renovation

None

Tax Holidays: 5 years 100%, 5 years 50%

• Foreign invested companies:

     o Oil and coal

     o Metallurgy

     o Chemical production

     o Machinery

     o Electronics

     o Gas fuel activities

None

Tax Holidays: 3

• Entity with foreign investment that exports more than

None