LAW OF MONGOLIA

22 March, 2019 Ulaanbaatar city

BUSINESS ENTITY INCOME TAX LAW

/Revised edition/

CHAPTER ONE

General Provisions

Article 1.Purpose of the Law

1.1.The purpose of this Law is to regulate the relations with respect to the imposition of income tax on business entity, payment thereof to the state budget, and reporting.

Article 2.Legislation on business entity income tax

2.1.Business entity income tax (hereinafter referred to as 'income tax') legislation consists of the General Taxation Law, this Law, and other relevant legislative acts adopted in compliance with them.

Article 3.Scope of application

3.1.This Law shall regulate the relations with respect to the imposition of income tax on taxpayers who are located in and outside of Mongolia.

Article 4.Definitions of the legal terms

The following terms used in this Law shall have the following meaning:

4.1.1.the term "Business entity" shall refer to a company, a partnership, a cooperative, a state-owned or a locally-owned economic enterprise and a similar economic entity that is subject to corporate income tax and registered with the State Registry, and a foreign or a domestic non-profit legal entity that earns income through the sale of goods, works, and services;

4.1.2.the term "Intangible asset" shall refer to a non-material asset specified in Article 84.5 of the Civil Law;

4.1.3.the term "Actual foreign currency exchange gain/loss" shall refer to a gain or a loss arising from a transaction of buying or selling foreign currencies and a transaction of the settlement of receivables and payables denominated in foreign currencies;

4.1.4.the term "Income generated in a foreign country" shall refer to an income, other than those specified in subparagraphs 4.1.6 and 4.1.7 of this Law, earned by a taxpayer or a representative office as specified in paragraph 5.3 of this Law;

4.1.5.the term "Expenses for ceremonial and entertaining events" shall refer to transportation costs, entertainment expenses, hotel and restaurant expenses and translator's fees spent in the course of receiving guests and delegates for the purpose of establishing business relationships and expanding business cooperation within the frameworks of economic activities;

4.1.6.the term "Income earned in Mongolia" shall refer to an income earned by a taxpayer in Mongolia as specified in paragraph 7.4 of this Law;

4.1.7.the term "Income sourced from Mongolia" shall include the following incomes generated by a taxpayer:

4.1.7.a. income earned by a non-resident taxpayer for works and services provided directly or by electronic means and income received from a taxpayer or a representative offices located in Mongolia as a result of sale of goods;

4.1.7.b. income earned by a foreign business entity from arts, culture, sports and other activities organized in Mongolia as referred to in subparagraph 5.5.2 of this Law;

4.1.7.c. dividend income paid by a taxpayer residing in Mongolia to a taxpayer not residing in Mongolia;

4.1.7.d. interest income paid or transferred by national or local administrative authorities or by a taxpayer or a representative office residing Mongolia to a taxpayer not residing in Mongolia as specified in paragraph 9.4 of this Law;

4.1.7.e. income earned from selling, transferring, or leasing a property, that is possessed, used, or owned by a non-resident taxpayer, and related rights in Mongolia;

4.1.7.f. income from royalties, from renting, borrowing and granting a right to use movable and immovable property, intangible assets from financial lease interest, and from technical, management, consulting and other services, paid by a taxpayer residing in Mongolia to a non-resident taxpayer;

4.1.7.g. income transferred by the representative office to a taxpayer not residing in Mongolia, but operating in Mongolia through its representative office;

4.1.7.h. income from selling and transferring properties and the rights related to the properties that are possessed, used and owned by the representative office of a taxpayer not residing in Mongolia;

4.1.7.i. income from selling and renting movable, immovable and intangible properties used by the representative office of a non-resident taxpayer;

4.1.7.k. other incomes similar to those specified in subparagraphs 4.1.7.a-4.1.7.i of this Law.

4.1.8.the term "Withholder" has the meaning as defined in subparagraph 6.1.19 of the General Taxation Law;

4.1.9.the term "Immovable property" is defined in Articles 84.3 and 86.2 of the Civil Law;

4.1.10.the term "Exploration expense" means documented expenses incurred directly as a result of exploration activities of mineral resources and radioactive minerals specified in Article 4.1.6 of the Minerals Law and Article 4.1.8 of the Petroleum Law;

4.1.11.the term "Related persons" is defined in Article 27 of the General Taxation Law;

4.1.12.the term "License holder" refers to a person who holds the license for exploring and mining minerals, radioactive minerals, and oil and the right for using and possessing land according to the conditions and requirements prescribed by the law.

Article 5.Business entity as an income taxpayer

5.1.Any business entity that earns taxable income for the current tax year or is bound to pay tax by the law, notwithstanding the absence of taxable income, shall be a taxpayer.

5.2.Taxpayers shall be classified as resident and non-resident taxpayers.

5.3.Resident taxpayers in Mongolia shall consist of the following business entities:

5.3.1.an entity incorporated in accordance with the laws of Mongolia;

5.3.2.a foreign business entity with its governing body located in Mongolia;

5.4.The foreign business entity, with its governing body residing in Mongolia, referred to in subparagraph 5.3.2 of this Law shall be a foreign business entity that meets three or more of the following criteria:

5.4.1.more than 50 percent of shareholders or shareholders who exercise their rights and obligations as shareholders directly or indirectly through their representatives should be residing in Mongolia;

5.4.2.more than 50 percent of shareholders' meetings for the last consecutive four years preceding the current tax year should have convened in Mongolia;

5.4.3.the accounting and financial documents should be kept in Mongolia;

5.4.4.not less than 25 per cent of the members of the Board of Directors or the members who exercise their rights and obligations as members of the Board of Directors directly or indirectly through their representatives should be residing in Mongolia;

5.4.5.not less than 60 percent of sales income of the company should be earned in Mongolia or be sourced from Mongolia.

5.5.Taxpayers not residing in Mongolia shall comprise the following business entities:

5.5.1.a foreign business entity operating in Mongolia through its representative office;

5.5.2.a foreign business entity earning income in Mongolia and sourcing income from Mongolia in a form other than specified in subparagraph 5.5.1 of this Law.

Article 6.Representative office

6.1.A unit of a taxpayer, specified in subparagraph 5.5.1 of this Law, operating in Mongolia on a full or partial scale shall be referred to as a representative office.

6.2.The following units shall be deemed as representative offices as specified in paragraph 6.1 of this Law:

6.2.1.units of management;

6.2.2.branches and departments;

6.2.3.units responsible for training, seminars and exhibitions;

6.2.4.units responsible for warehousing, sale, and services;

6.2.5.units responsible for mines, oil or gas boreholes, and mining of minerals;

6.2.6.plants

6.2.7.other departments, units and places specified in paragraph 6.1 of this Law.

6.3.Units undertaking activities with regard to construction sites, buildings, assembling and installation facilities, and other related construction and controlling works for a period of 90 days or more during the course of consecutive 12 months shall be deemed as representative offices.

6.4.Units providing technical, consulting, management, controlling and other services to taxpayers residing in Mongolia, on its own or through hired skills, for a period 183 days or more during the course of consecutive 12 months shall be deemed as representative offices.

6.5.The time periods specified in paragraphs 6.3 and 6.4 of this Law shall be the total duration spent for the performance of same or related activities and services.

6.6.Units conducting the following activities in Mongolia on behalf of a taxpayer not residing in Mongolia shall be considered as representative offices:

6.6.1.the storage, sale and supply of goods and products;

6.6.2.the conclusion of contracts in person or the arrangement for concluding contracts on behalf of a non-resident taxpayer without altering the main conditions of the contracts.

6.7.Any contract featuring any of the following conditions shall be considered as a contract specified in subparagraph 6.6.2 of this Law:

6.7.1.to be established in the name of a non-resident taxpayer;

6.7.2.to transfer properties or the rights to use or possess such properties that a non-resident taxpayer owns or, if doesn't own, has the rights to use or possess;

6.7.3.to provide services offered by a taxpayer not residing in Mongolia.

6.8.Any non-resident taxpayer receiving insurance premiums, other than reinsurance, or offering a risk insurance in Mongolia through other parties shall be considered as having a representative office in Mongolia, notwithstanding provisions 6.1, 6.2, 6.3, 6.4, 6.5, 6.6 and 6.7 of this Law.

6.9.The term "Representative office" used in the International agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and properties, which was ratified by the State Great Khural, shall be considered as identical to the term "Representative Office" referred to in this Law.

6.10.The procedure for the registration, deregistration, tax payment and reporting of representative offices shall be approved by the head of the State central agency in charge of taxation matters.

CHAPTER TWO

TAXABLE INCOME

Article 7.Taxable income

7.1.A taxpayer specified in paragraph 5.3 of this Law shall be taxed on its income earned in Mongolia, sourced from Mongolia, and generated in a foreign country for the current tax year.

7.2.A taxpayer specified in subparagraph 5.5.1 of this Law shall be taxed on its income earned in and sourced from Mongolia in connection with the activities of its representative office for the current tax year.

7.3.A taxpayer specified in subparagraph 5.5.2 of this Law shall be subject to tax on income earned in Mongolia and sourced from Mongolia for the current tax year.

7.4.The following incomes earned by a taxpayer shall be subject to tax:

7.4.1.income from operations;

7.4.2.income from properties;

7.4.3.income from sale and transfer of property;

7.4.4.other incomes.

7.5.Taxable income shall be determined by deducting the deductible income from gross income.

Article 8.Income from operations

8.1.The following incomes shall be subject to tax:

8.1.1.income from the sale of goods, works and services;

8.1.2.income from riddles, gambling games, and lottery activities;

8.1.3.income from technical, management, consulting and other services;

8.1.4.income from goods, works, and services received free of charge;

8.1.5.other similar incomes specified in subparagraphs 8.1.1, 8.1.2, 8.1.3 and 8.1.4 of this Law.

8.2."Income from technical services" specified in paragraphs 6.4 and 8.1.3 of this Law shall comprise the incomes proceeding from the activities and services related to the introduction of new technologies, preparation of documents for the assessment of the norms for labor and technical safety, consumption of materials and raw material consumption in the process of production, works and services, conduct of social and economic surveys, provision of audit services, assembling and installation of equipment, provision of maintenance, analysis of samples, training and practice of engineers and technicians, and professional development

8.3."Income from management services" defined in paragraphs 6.4 and 8.1.3 of this Law comprises incomes derived as a result of negotiating and contracting with the business entity's own experts to mobilize them for the purpose of facilitating the efficient and normal functioning of business activities /production, works and services/.

8.4."Income from consulting services" specified in paragraphs 6.4 and 8.1.3 of this Law shall include incomes accruing from the services rendered for providing professional and methodological assistance for the management, marketing, markets, investment environment and production stages and processing documents.

8.5.Income attributed a taxpayer conducting operations to generate income from properties and from the sale or transfer of properties, which is considered as the income from operations according to the international accounting standards, shall be considered as the income specified in subparagraph 8.1.1 of this Law.

Article 9.Income from properties

9.1.The following income from properties shall be subject to tax:

9.1.1.income from lease of movable and immovable property;

9.1.2.income from royalties;

9.1.3.income from dividends;

9.1.4.income from interests.

9.2.The following fees shall be imposed on income from royalties as stipulated in subparagraph 9.1.2 of this Law:

9.2.1.fee for the use and the right for the use of copyrighted works in accordance with the Law on Copyright and Related Rights;

9.2.2.fee for the use and right for the use of inventions, products or useful models as specified in the Patent Law;

9.2.3.fee for the use and related right for the use of trademarks as stipulated in the Law on Trademark and Geographical Indications;

9.2.4.fee for the transfer of technology as provided in the Law on Transfer of Technology;

9.2.5.fee for the use and related right for the use of information related to production, trade and scientific experiments;

9.2.6.fee for the use and related right use of equipment for production, trade and scientific experiments;

9.2.7.fee for the use and related right for use of other rights set forth in subparagraphs 9.2.1, 9.2.2, 9.2.3, 9.2.4, 9.2.2 and 9.2.6 of this Law.

9.3.Income from dividends set forth in subparagraph 9.1.3 of this Law shall include income earned from share ownership, monetary and non-monetary income earned from partnership or cooperation agreements, profit share and other incomes considered as dividends in accordance with the relevant laws of Mongolia.

9.4.Income from interest specified in subparagraph 9.1.4 of this Law shall include incomes received from lenders in connection with all types of debt, payables, current and savings deposits, bank guarantees, loans, credits, bonds, debt instruments and their incentives, regardless of whether they are secured by pledge or not or whether the right for an interest in debtor's assets is granted or nor, and other incomes deemed by the law as interest incomes.

Article 10.Income from the sale and transfer of property

10.1.Income from the sale and transfer of property shall include the following incomes:

10.1.1.income from the sale of immovable property;

10.1.2.income from the sale and transfer of rights granted by governmental organizations;

10.1.3.income from the sale of shares, securities and other financial instruments;

10.1.4.income from the sale of intangible assets and movable property other than those specified in subparagraphs 10.1.2 and 10.1.3 of this Law.

10.2.Income from the sale of intangible property specified in subparagraph 10.1.4 of this Law shall consist of income from the sale and transfer of the right to own, use and possess intangible assets other than those referred to in subparagraphs 10.1.2 and 10.1.3 of this Law.

Article 11.Other incomes

11.1.The following incomes shall be included in the incomes specified in subparagraph 7.4.4 of this Law:

11.1.1.interest, penalties / fines, compensation of damages received from a person failing to fulfill his / her obligations;

11.1.2.income from riddles, gambling games and lotteries;

11.1.3.profit transferred from a representative office to its parent company in the current tax year;

11.1.4.actual income from foreign exchange rate difference;

11.1.5.monetary assets refunded in accordance with Article 9.11 of the Law on Environmental Impact Assessment and Articles 11.1.4 and 12.5 of the Petroleum Law;

11.1.6.insurance reimbursement.

Article 12.Recognition of taxable income

12.1.A taxpayer shall recognize income in the following circumstances:

12.1.1.when goods are sent or shipped;

12.1.2.a percentage of works performed;

12.1.3.when income from services are received or conditions specified in an agreement are met;

12.1.4.every other income that has been realized and earned.

12.2.Taxable income shall be recognized at the date of receipt of goods, works or services when a taxpayer exchanges goods, works and services.

CHAPTER THREE

EXPENSES DEDUCTIBLE FROM TAXABLE INCOME

Article 13.Requirements for the expenses deductible from taxable income

13.1.Expenses meeting all the following conditions at the simultaneously shall be deducted from taxable income:

13.1.1.expenses should pertain to the given tax return period;

13.1.2.expenses should be directly related to the operations of the taxpayer for earning taxable income;

13.1.3.expenses should be realistic and be confirmed by the documents and records specified in Article 13 of the Law on Accounting;

13.1.4.costs of the following goods, works and services should be verified by payment receipts and Custom's certificates of taxation and payment for imported goods numbered with unique numbers as stipulated in Article 28.5 of the General Taxation Law:

13.1.4.a. costs of works and services provided by a taxpayer other than that specified in subparagraph 5.5.2 of this Law;

13.1.4.b. expenses related to the purchase of movable, immovable property and intangible assets.

13.1.5.the concerned taxpayer running the business should have paid or have reported to pay the expenses.

13.2.Expenses meeting the requirements set forth in paragraph 13.1 of this Law shall be deducted from taxable income in accordance with the following terms and conditions:

13.2.1.the relevant taxes, fees and charges should be reported to be paid to the budget;

13.2.2.expenses for business trips should not be more than twice the same expenses of civil servants;

13.2.3.the fund created for the prevention of contingent loss, which could occur the loans due to the banking and nonbanking financial institutions are paid, should not include the fund created for ensuring normal loan balance;

13.2.4.expenses incurred to eliminate damages caused by natural disaster should be confirmed by the relevant organization's conclusion according to the Law on Disaster Protection;

13.2.5.expenses for entertainment and ceremonial events should not exceed 5 percent of the total salary expenses paid to employees working under labor agreement and contract in that particular tax year as specified in the Labor Law;

13.2.6.the total amount of voluntary insurance premiums of persons other than the insurer should not exceed 15 percent of the taxable income for the given tax year as specified in paragraph 4.1.2 of the Law on Insurance.

13.2.7.the total amount of voluntary insurance premiums of persons related to the insurer shall not exceed 15 percent of the taxable income of that particular tax year as specified in paragraph 4.1.2 of the Law on Insurance;

13.2.8.the cost for routine maintenance shall include the cost of spare parts, and it shall not exceed 2 percent of the residual value of fixed assets and 5 percent of the residual value of other properties and the cost exceeding these limitations shall be considered as the cost of a major overhaul;

13.2.9.social and health insurance and personal income tax should be imposed on salaries, wages, bonuses and other similar incomes;

13.2.10.indirect personal income should be imposed with a personal income tax as specified in Article 11 of the Law on Personal Income Tax;

13.2.11.interest expenses should be determined as specified in Article 14 of this Law;

13.2.12.in case a taxable income is paid out, the relevant income tax should be withheld and, accordingly, reported.

13.3.Expenses related to the possession and acquisition of a mining license shall be deducted from operating expenses in same amount on an annual basis till the expiry of the license.

13.4.The amount of funds to be paid by the license holder and contractor for the purpose of environmental rehabilitation and mine closure expenses shall be deducted from operating expenses in same amount on an annual basis till the expiry of the license as specified in the Minerals Law, Petroleum Law and Nuclear Energy Law.

13.5.Minerals, radioactive minerals, oil exploration and mining license holders shall calculate expenses deductible from taxable income for each report period in accordance with paragraphs 26.9, 26.10, 26.11, 26.12 and 26.13 of this Law.

Article 14.Interest expense deductible from taxable income

14.1.Interest expenses incurred in connection with the issuance of income to others as specified in subparagraph 9.1.4 of this Law shall be deductible from taxable income.

14.2.The amount of deductible expenses set forth in paragraph 14.1 of this Law with regard to the total transaction between related persons shall be limited to 30 percent of the total sales revenue less incurred costs other than interest expenses and depreciation and amortization for the reported period.

14.3.Notwithstanding the provisions of 14.2 of this Law, interest expenses paid on the investor's loan exceeding the tripled amount of previously made investment by the investor to the taxpayer shall not be deductible from taxable income and shall be imposed with tax as an investor's dividend.

14.4.The term "Previously made investment" used in paragraph 14.3 of this Law shall include investments made by the investor for the acquisition of common and preferred shares and equity investments.

14.5.The restrictions specified in paragraph 14.2 of this Law shall not apply to an entity licensed to conduct business specified in subparagraphs 6.1.1 and 6.1.2 of the Banking Law and subparagraph 7.1.1 of the Law on Non-banking Financial Activities.

14.6.Interest expenses of a taxpayer on a loan received from an individual shareholder residing in Mongolia shall not be deductible from the taxpayer's taxable income.

14.7.The provisions of paragraphs 14.1, 14.2, 14.3, 14.4 and 14.5 of this Law shall also apply to representative offices.

Article 15.Other expenses deductible from taxable income

15.1.The following expenses that meet the requirements specified in Article 13 of this Law shall be deductible from taxable income:

15.1.1.normal wear and tear of goods and materials;

15.1.2.health and social insurance premiums;

15.1.3.taxes, fees and charges reported to be paid to the budget other than that specified in subparagraph 16.1.8 of this Law;

15.1.4.expenses incurred for creating a learning environment for vocational training and production center, providing workshops with equipment and repairing the workshops;

15.1.5.expenses incurred by practicing teachers specified in Articles 11.5 and 18 of the Law on Professional Education and Training;

15.1.6.financial support provided to vocational education and training institutions for the customized preparation of own specialists;

15.1.7.donation up to 10 million tugriks for the purpose of supporting a non-governmental organization founded by a citizen with disabilities of Mongolia;

15.1.8.donation up to 10 million tugriks to support the sport support fund, sports associations and clubs activities;

/This sub-paragraph was amended by the law of 13 November, 2019/

15.1.9.donations and funds provided for the promotion of vocational education and training;

15.1.10.donations for the reduction of pollution;

15.1.11.funds reserved for preventing contingent loss when loans due to banking and non-banking financial institutions are paid back;

15.1.12.funds reserved for a loan risk fund for savings and credit cooperatives and for preventing possible risk of other cooperatives operating in other areas;

15.1.13.special funds and state funds, founded by the relevant government organization, reflected on the annual environmental management plans of mining license holders and their contractors in accordance the Law on Environmental Impact Assessment, the Minerals Law, the Petroleum Law and the Law on Nuclear Energy, and monetary assets transferred to the account specified in paragraph 11.2.9 of the Petroleum Law;

15.1.14.expenses incurred by the Fund for seniors within the limits set forth in Article 14.7 of the Law on the Elderly.

15.2.The Government shall approve the amount of wear and tear specified in Article 15.1.1 of this Law.

Article 16.Expenses not deductible from taxable income

16.1.The following expenses shall not be deductible from taxable income:

16.1.1.expenses that do not meet the conditions and limits stated in paragraphs 13.1 and 13.2 of this Law;

16.1.2.principal payment of tenant's leased asset;

16.1.3.payments, interest, and penalties made to others due to non-performance of obligations;

16.1.4.recreation and other similar expenses for employees, clients and individuals;

16.1.5.loss of assets sold to a related person;

16.1.6.interest paid by a representative office to the parent company, payment for the use and lease of movable and immovable property, royalties, and fee for technical, management, consulting and other services;

16.1.7.expenses incurred in connection with the earning of income exempted from tax as specified in this Law;

16.1.8.the capital city tax and the value-added tax paid by a withholder to the state budget and the withholding tax on income earned by other persons in accordance with this Law;

16.1.9.unrealized loss due to foreign exchange rate differences;

16.1.10.increased difference in the revaluation of goods;

16.1.11.loan closed by a loan risk fund of banking and non-banking financial institutions and savings and credit cooperatives;

16.1.12.expenses for donations and assistance other than specified in paragraphs 15.1.6, 15.1.7, 15.1.8, 15.1.9 and 15.1.10 of this Law.

Article 17.Depreciation and amortization

17.1.Depreciation and amortization of properties to be used by a taxpayer for a period of one year or more shall be calculated as follows:

No	Properties groups	Useful life /years/
		Holders of minerals, radioactive minerals, and oil exploration and mining licenses	Others
1	Buildings, facilities and land improvements	40	25
2	Vehicles, machineries, mechanisms, production equipment	10
3	Computers, accessories and software	2
4	Intangible assets with indefinite useful life /including minerals exploration and mining licenses/	For the validity term
5	Other assets	Сонсох: x