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5.1. Tax Base for Resident Entities

Resident companies are taxed on their worldwide income earned from within and outside Mongolia.

Capital gains are considered as ordinary income and are subject to tax at the same rate as corporate tax (‘CIT’). Capital gains from immovable property are taxed at a lower rate. Capital losses are considered as deductible expenditure.

Dividend income received by a resident company is subject to withholding tax in Mongolia. Rental income received by resident companies is taxed as ordinary income.

Specific Rules Relating to the Indirect Transfer of Land and Mineral Rights

Effective 1 January 2018, Mongolia introduced new rules whereby income derived from the indirect transfer of land rights (including land use rights) and mineral rights is characterized as income from the transfer of rights (subject to tax at the rate of 30% on gross proceeds), rather than a gain on the transfer of shares (subject to tax at ordinary (lower) rates).

Under the new provisions, the transfer of an interest in a company holding land or mineral (use) rights, which entails a change in the “beneficial owner” of such rights is equated with a disposal of the corresponding right and is assessed to tax at 30% on gross proceeds (see below for tax base determination). The new provisions do not sufficiently clarify who is considered a “beneficial owner”, other than to mention that it is the person/entity which directly or indirectly participates in the management or control of the person holding the (use) rights, to the extent such person holds the greatest percentage of stock or voting rights in the (use) rights holder. The regulations do list a number of examples where the ultimate shareholder or other entities within the group structure would be deemed to be the beneficial owner.

The tax base is determined in different ways depending on whether the indirect transfer related to land or mineral (use) rights.

With respect to land (use) rights, the taxable base is determined as the higher of:

  • The transactional price between the parties to the extent at arm’s length; or
  • The standard value of the initial auction price as determined by the government agency involved in granting the land (use) rights.

With respect to mineral (use) rights, the tax base determination slightly differs depending on whether the rights relate to exploration or mining licenses.

With respect to exploration rights, the tax base is normally the transactional price agreed between the parties, unless that price 20% or more lower than the price determined under 2 indirect methods. If the transactional price meets the test, then the tax base is determined as the lower amount resulting from either (a) a comparable benchmark method, or (b) a cost-based method. The comparable benchmark method determined the price by comparison with comparable transactions information on which is available to the tax administration. The benchmark is based on various comparability criteria and each of those is allocated a grading from 1 to 10 (1 being the lowest degree of comparability). When the weighted average of the criteria is 7 or more, the price so reached is deemed to be the comparable benchmark price. This is the preferred method for related party transactions. The cost-based method determines the price be reference to the historic costs incurred with respect to the exploration license. This can be either the capitalized costs reported under IFRS 6 entry of the balance sheet, or the costs reported to the Mongolia Mineral resources Authority as increased by license fees and other costs, whichever is lower.

With respect to mining rights, the tax base is normally the transactional price agreed between the parties, unless the price is 20% or more, lower than the price obtained under 2 indirect methods. If the transactional price meets this test, then the transfer value is determined as the lower amount resulting from either (a) a comparable benchmark method, or (b) a net present value (NPV) method. The comparable benchmark method is relatively similar to the one used for exploration rights (but the criteria are adapted to the mining activity). The NPV value may be inferred from the feasibility study submitted to the Mongolia Mineral Resources Authority.