Mongolia is a model for a former Eastern Bloc state that has found a way to a stable democratic state order and market economy. In doing so, Mongolia has to face a multitude of challenges. On the one hand, there is great economic dependence on China, because almost all exports flow to the neighboring country. Here, the lack of a port that would open up access to global trade is painfully noticeable for the inland country. On the other hand, the natural conditions in the country itself are extreme. Breeding hot in summer, bitterly cold in winter, plus climate change, which exacerbates these extremes – and this in a country that is already extensively barren. Nevertheless, Mongolia has managed to shine with sometimes phenomenal growth rates. In addition, Mongolia is building a whole new city that could one day become its new capital. Foreign investors are welcome. Therefore, we wonder whether all this is also related to taxes in Mongolia.

1st Taxation in Mongolia – Introduction

Mongolia is very foreign to us because of its remoteness alone. A country that consists practically only of steppes, deserts and high mountains, where half the population lives in the capital and the others about one and a half million on a territory of four times the area of the Federal Republic. Do you actually need taxes for such a crazy state?

The answer is: yes, there are taxes in Mongolia. And we now want to take a closer look at these, are curious whether everything is different or whether taxes according to the Western model have also entered there. But even if, we are sure that there will be one or the other surprising insight about taxes in Mongolia.

2.Taxes in Mongolia: General information about the country

2.1.Mongolia – a country and its progenitor

Admit it: when you read the reference to Mongolia, Genghis Khan came to mind as the first association. His work, the result of his enormous power and his will to use it at his own discretion, still fascinates us today. Few succeeded in establishing a world empire. Bloody, certainly, but also with foresight he pursued his goals. This is more than astonishing, since he came from conditions that would not be associated with a world conqueror. In fact, he spent several years of his youth as a slave, so that his survival alone appears as a miracle. But this is exactly why he is praised in his homeland until today. Because he knew how to unite the Mongols. Anyone who thinks of Mongolia today must inevitably think of Genghis Khan and Pax Mongolica, founded by his work.

2.2.Mongolia – a country of extremes

Mongolia is located in Central Asia between Russia in the north and China in the south. Scenically, Mongolia is mainly characterized by grasslands and steppes. The mighty Gobi Desert in the southern center of the country also occupies vast areas. It is famous for its dinosaur finds, many of which can be seen in a dedicated museum in the capital. And then there are in the north and west mountain ranges of a high mountain character with many forests and small glaciers to mention. They are suffering from the climate warming that is already particularly noticeable in Mongolia. Nevertheless, the winters are still very cold – and the summers even hotter.

There are a few cities, of which the capital Ulaanbaatar is by far the largest and most important. Almost half of the Mongolian population is concentrated here. Originally, it was supposed to accommodate only 600,000 people. But the rural exodus has now swelled the city to more than double. The many associated consequences led to a bold plan: at a distance of about 30 km, a new city is to be built practically out of nothing in the next few years. Maidar City. This in turn attracts investors to the country.

2.3 Natural Resources of Mongolia.

Another superlative of Mongolia is its wealth of natural resources: coal, zinc, copper, also gold, silver and diamonds, as well as molybdenum, tungsten and uranium. And soon the mining of the rare earth metals, which are so much sought after today, will probably begin. Mining is and remains one of the most important economic factors in modern Mongolia and comprises a large part of the country’s exports. They overwhelmingly contribute to satisfying China’s hungry economy. In recent years, however, the expansion of energy production by solar and wind power plants has also been steadily increasing. Even here, Mongolia is richly gifted by nature.

But also the traditional cattle breeding continues to take place in modern Mongolia to a significant extent. In addition, there has been an intensification of previously marginal conventional agriculture in recent years. It is intended to provide the rapidly growing urban population with food.

Taxation in Mongolia: General information on tax law

Mongolia distinguishes in terms of tax liability according to the criterion of residence. A taxable person is resident in Germany if he has been resident in Mongolia for at least 183 days for a consecutive period of twelve months. Alternatively, one postulates that a natural person is resident and taxable in Mongolia if at least 50% of the taxable income comes from Mongolian sources. A tax liability may also exist if a person in a state function is working abroad. This applies in particular to diplomats. Anyone who does not meet any of these criteria and is still taxable in Mongolia, which corresponds to the limited tax liability in Germany, is subject to a different tax regime. More on that later.

Furthermore, Mongolia levies taxes on global income. Some double taxation agreements that Mongolia has concluded with Germany, Austria and Switzerland are relevant here. For this purpose, Mongolia primarily follows the principle of applying taxes paid abroad to its own (credit method).

The assessment period in Mongolia is the calendar year. There is a deadline for filing the tax return until 15 February of the following year. In addition, there is also an equivalent to the German wage tax in Mongolia.

4.Mongolia: the taxes in detail

4.1.Taxes in Mongolia: Income Tax

4.1.1. Types of income according to which income taxes are incurred in Mongolia

In Mongolia, the following types of income are distinguished: income from non-self-employment, income from trade, services and production (including agriculture and forestry), income from assets (capital income as well as income from renting and leasing within the meaning of German tax law) and separately income from the sale of assets. Income from self-employment also includes possible bonuses, gifts, salaries in kind and other monetary benefits. In addition, income from the following sources is also subject to income tax: income from the sale of real estate (see below), income from lotteries, gambling and similar sources as well as income that can be attributed to the provision of sports or artistic services.

4.1.2. Determination of taxable income

First of all, it is interesting that there is no basic allowance or comparable regulation in Mongolia. Thus, the first Mongolian Tugrik earned is already subject to taxation (MNT 10,000 corresponds to about EUR 2.73). What still remains deductible, however, are the contributions to social security, which thus also includes health care, pensions and insurance against unemployment and disability.

4.1.3. Income tax rates

Here the tax law of Mongolia differs by type of income. Income from self-employment, trade, services and production as well as rental and leasing of real estate is taxable up to a limit of MNT 120 million at a tax rate of 10 %. Income of this type between MNT 120 and 180 million is taxed at 15%. In addition, the tax rate is 20 %.

Income from other sources is subject to differentiated taxation in Mongolia. Capital income (in the broadest sense), in particular dividends, interest income or the sale of securities, is taxed at a flat rate of 10% in Mongolia. Profits from the sale of real estate, on the other hand, are taxed at a flat rate of 2%. Another tax category is income based on sports, artistic, literary, scientific and other intellectual property related services. A flat-rate rate of 5 % should be applied to this. In contrast to these very advantageous tax rates, revenues related to gambling, lotteries, betting and similar events account for a whopping 40% of the flat-rate tax. Such income is largely protected from taxation in Germany.

And then we also wanted to talk about taxpayers who do not have a residence in Mongolia. They pay a uniform 20% tax on all income earned in Mongolia.

4.2.Taxes in Mongolia: Corporate tax – and no business tax

4.2.1. Special tax regime for certain sectors

With regard to corporate tax, we must first of all reiterate that Mongolia is a very resource-rich country. What the oil and gas industry means for Norway’s state budget, for example, is the mining sector in Mongolia. It is therefore hardly surprising that Mongolia has introduced special tax regimes for companies in this sector. However, we want to refrain from this here and concentrate on the regular corporate tax.

While we have already touched on the taxation of mining companies, we would like to mention here briefly that there are a number of other, quite specific taxes that are applied in such cases, such as taxes on air or water pollution and land use.

4.2.2. No local taxes – no business tax either

Furthermore, we point out that the corporate tax is solely due to the state. An additional, locally collected corporation tax, as it is common in the USA, or even a trade tax according to the German model, are unknown in Mongolia.

4.2.3. Progressive Corporate Tax in Mongolia

Unlike in Germany, which levies corporate taxes, in particular corporate tax, via a flat rate, a progressive tax rate applies in Mongolia. For turnover up to MNT 300 million (except those derived from mining, oil production, processing or the manufacture of tobacco products or alcoholic beverages), Mongolia levies only 1% tax. For this they are obliged to submit semi-annual tax returns. The tax rate is otherwise 10% of the taxable income, provided it reaches a maximum of MNT 6 billion. In addition, income components are subject to a tax rate of 25%.

In the case of corporate taxation, however, you have to tax some increases in income separately. They are therefore exempt from taxation at the above-mentioned rates. These include dividends, royalties and interest as well as profits from the sale of certain rights granted by official parties (mining licenses, for example). This amounts to a flat rate of 10 % of corporate tax. However, if you invest in securities belonging to a local corporation that is not related to mining or the other exceptions just mentioned, you will instead pay only 5% in taxes on the resulting profits. The sale of real estate is subject to the same 2 % corporate tax rate as the private sector tax.

4.2.4. Tax treatment of losses

In Mongolia, loss restitution is excluded. For this, losses can be carried forward for up to four years. Losses can only be set up to a certain amount. They may not exceed 50 % of the taxable profit.

4.2.5. withholding taxes in Mongolia

A number of capital gains are subject to withholding of withholding taxes. In general, this applies to dividends, interest income and fees for granting rights (for example, royalties). The tax rate is 10%.

For beneficiaries who reside abroad, you generally have to expect a retention of 20%. This also applies to payments made for deliveries and services provided by suppliers based abroad. Exceptions are situations in which double taxation agreements provide for different regulations.

Furthermore, bonds issued by Mongolian banks to taxpayers resident abroad are subject to 5% withholding tax. As an investor, you also have to expect a 5% withholding tax if you receive dividends and other capital gains from investments in domestic companies traded freely on the capital market. However, the undertaking concerned may not have sources of raw materials, carry out exploration activities or have rights to extract such resources.

4.2.6. Transfer pricing arrangements

Mongolia has aligned its rules with the OECD proposals for the tax treatment of transfer prices between related companies. For both purely domestic and cross-border corporate structures, this means, among other things, that there is an approximation of the tax bases for different price calculations between affiliated and non-affiliated companies. This ensures taxation according to foreign standards. In such cases, transfer pricing documentation and country-by-country reporting are required.

4.3. VAT in Mongolia

Sales tax on all deliveries and services is 10% in Mongolia. This applies on the one hand to all deliveries and services carried out in Mongolia. On the other hand, there is also the requirement that supplies and services purchased from abroad are taxable under the reverse charge procedure.

The retention and payment of sales tax is only mandatory for companies with an income of MNT 50 million. This income is to be understood in relation to a consecutive period of 12 months. However, there is also the possibility in Mongolia to register a company voluntarily for VAT purposes. However, this is only possible from an income of MNT 10 million.

4.4.Excise duties in Mongolia

A tax on alcoholic beverages, tobacco products, fuels and vehicles used for passenger transport must be observed in Mongolia. There are also excise duties on slot machines and similar machines.

For alcoholic beverages, the amount of excise duty depends primarily on the alcohol content. Secondly, but also from the year of disposition. The excise duty on alcoholic beverages will gradually increase annually by 2029. Only the traditional Archi distillate is subject to lower taxes.

For imported cars, the amount of excise duty depends on the vehicle type, the year of construction and the motorization. The range of the levy is between MNT 750,000 and MNT 65.975,000.

4.5. Property Acquisition in Mongolia and its Taxation

We have deliberately broadly defined the heading of this subchapter because the acquisition of land in Mongolia is only allowed to adult locals. For foreigners, the purchase of real estate is thus excluded, but they can still acquire, use and sell rights of use.

Otherwise, the sale of real estate in Mongolia is subject to income taxation (see income tax and corporate income tax). A direct equivalent to the German property transfer tax is unknown in Mongolia. Instead, however, a stamp duty may apply.

4.6. Stamp duty in Mongolia

Several dozen operations are subject to stamp duty in Mongolia. This includes, among other things, certain official registrations, notarial services or court records. The amount of the stamp duty depends on the type of operation in question.

4.7. Property tax in Mongolia

Just as in Germany, local authorities determine the collection of a kind of property tax. This varies according to the location, size, use and assessment of an evaluation committee, which also decides on the value of the property and thus determines the assessment basis. One such assessment, which is particularly relevant at least in the capital, is the general demand in the local real estate market. The tax base then represents between 0.6 and 2 % of taxes. Land in the free trade zones is excluded from the tax.

Taxes in Mongolia: Property Tax, Inheritance and Gift Tax

Except for property tax, there are no taxes on assets in Mongolia. This also applies to the transfer of property by way of inheritance or donation.

4.9. Double Taxation Agreement

As mentioned above, Mongolia has concluded a number of double taxation treaties in its international integration efforts. In addition to the previously mentioned countries, these include Belgium, France, Italy and the United Kingdom. It goes without saying that Mongolia has also concluded double taxation agreements with its two important neighbouring countries.

4.10. Taxes in Mongolia: Tax incentives

Even without having the status of a tax haven, Mongolia offers a variety of tax incentives, of which we present only a small selection here. However, the old acquaintances are often excluded: mining, petrochemicals (including extraction of oil and natural gas), tobacco industry and producers of alcoholic beverages. In this way, Mongolia tries to locate other industries in the country in parallel with the currently most productive sources of income and promotes them accordingly.

4.10.1. General tax incentives

Tax incentives include, for example, a 50% reduction on corporate tax for companies engaged in the production of food and feed in agriculture. Here you can save taxes as a potato farmer in Mongolia. A 90% tax rebate is even possible if a company generates less than MNT 1.5 billion in sales (except for the above exceptions).

Furthermore, there is a tax rebate for companies that hire employees who are at least 50% professionally restricted by disability. The tax rebate corresponds to the percentage of employees to whom this condition applies. A similar rule applies if someone, privately or as an entrepreneur/company, donates at least MNT 10 million to a non-profit NGO founded by people with disabilities. The donation is then counted towards the income.

Another special feature is tax incentives related to the overpopulated capital. Here, the Mongolian Treasury grants a deduction of costs incurred by an employer for the transport of its employees by public transport (except for the above-mentioned exceptional sectors). However, this excludes direct cash payments to employees linked to this purpose. What is interesting is that the deduction granted amounts to 150 % of the actual costs incurred. Also related to the capital is a deduction of 150 % of the removal costs if a company moves its production facilities or warehouses outside the city limits (except for the above exceptions).

4.10.2. Special tax incentives for foreign investors

In addition, Mongolia has created incentives, especially for foreign investors to save taxes. However, this only applies if new technologies are established here. For this purpose, Mongolian authorities issue funding certificates. They serve to stabilise taxes and are structured in different ways in their duration. On the one hand, it depends on the industry. Heavy industry, the mining complex and the infrastructure sector are an exception, where higher hurdles apply. The tobacco industry and producers of alcoholic beverages are excluded from any support. On the other hand, support also depends on the level of investment and the region to which the investment is to be directed.

One of the prerequisites is that environmental reports must be provided if necessary. Other conditions are that new, permanent jobs are created and that the investments have to be made within a certain period of time. This period increases with the amount of the investment.

The duration of funding varies between five and 18 years. A one-off extension of 50 % of the previous period may also be considered. With such a grant certificate, companies can plan their taxes in advance because they are now subject to a stable tax regime. However, if regular taxation is more advantageous, a change is possible.

4.10.2. Free trade areas

In addition to the general tax incentives, Mongolia also pays less tax in the two currently existing free trade zones. For example, companies that invest at least $500,000 in critical infrastructure projects in the free trade zones (roads and rails, water and energy supplies, sewage treatment and much more) can expect a tax rebate of 50% of the investment amount. This also applies to investments over more than USD 300,000 in the construction of hotels and warehouses as well as production facilities in the free trade zones. Companies that establish themselves in free trade zones can carry forward their losses for up to five years from the date of commissioning. Those who set up in a free trade area with advanced or otherwise innovative technology can even expect a complete tax rebate in the first five years.

In addition, there is no VAT, excise or customs duty for deliveries to a free trade zone. We have already mentioned the tax exemption from property tax in these areas.

Taxes in Mongolia – a summary

In any case, it can be said that despite the great role that traditions play in Mongolian society, the attention to the new, innovative is at least as important. Especially the young population, which in Mongolia, in contrast to Germany or China, is growing rather than shrinking, is particularly susceptible to a change towards modernity. In addition, a relatively large number of people in Mongolia are capable of the German language. So those who focus on innovation as well as investment in an emerging market and are happy about particularly favorable taxes are in good hands in Mongolia.