In 2016, matters related to Free Trade Zones (FTZ) came under the power of the Deputy Minister. There are three FTZ in Mongolia: Zamiin-Uud, Altanbulag and Tsagaannuur. The Law on FTZ was revised in 2015 to enabled and promoted the cooperation between private entities and public authorities in developing FTZs.
Altanbulag Free Zone in Selenge province covers 500 hectares of land. Since the establishment of Mongolian FTZs, MNT 35 billion has been allocated by State Budget and 77 per cent of the budget was invested to the infrastructures of Altanbulag Free Zone. At the moment only Altanbulag has drawn investment from private entities, which totals MNT 6.2 billion.
Zamiin-Uud Free Zone in Dornogobi province covers 900 hectares of land. In 2010, Development of Zamiin Uud infrastructure project started with soft loan of the Government of China which totals USD 58.8 million. The project performance is 95 per cent. As of this day, 23.6 hectares of land are in possession of 13 private entities for the purposes of trade, service, hotel, manufacture, storage, logistics and gas station.
Tsagaannuur Free Zone in Bayan-Ulgii province covers 708.4 hectares. 115 hectares are in possession of 5 private entities.
The Deputy Minister Khurelsukh Ukhnaa has stated that the Free zones are in need of accelerated foreign and domestic investment and noted that the Parliament and the Government should start establishing joint FTZ areas with bordering countries. Deputy Minister Office and Ministry of Foreign Relations are working on research and assessment and negotiating with Chinese authorities about a potential new joint FTZ.
The Immovable Property Tax Law was adopted in 2000 by the Mongolian Parliament and has been effective since 2001, over 16 years. Under the law, tax is imposed on all kinds of immovable properties which cannot be used for their original purpose when they are separated from the land. All persons or legal entities, who own immovable property in the territory of Mongolia, are considered taxpayers.
Local governments at the provincial level, and in Ulaanbaatar, are responsible for imposing a tax on immovable property within their respective locality. The tax level may be .6 – 1.0 of the value of the property as calculated considering the location, intended use, size, and overall demand of the property in question.
For tax purposes, the value of immovable property excluding the underlying land is determined, firstly, by the valuation as registered with immovable property state registry. If there is no such registration, the value is determined by the valuation of insurance on the property. And if there is no registration or insurance valuation, the value will be established as the value that is written down in financial records of the property owner in accordance with the law.
According to the law, the following immovable property types are exempt from immovable property tax:
- immovable property of legal persons financed by state and local budget (state owned or funded enterprises);
- residential houses;
- buildings and developments for public use;
- management of industrial and technological parks, unit production, structures within technological parks and other immovable properties; and
- buildings and facilities constructed and registered in a designated tax free zone.
A Mongolian company or other legal entity which owns taxable immovable property will pay equal amounts of tax on the immovable property before the 15th of last month of each quarter for their annual tax liability. An individual citizen of Mongolia, or a foreign citizen who owns immovable property, must pay a once annual tax on immovable property before the 15th of February.
We have encountered many clients which confuse the immovable property tax with the tax on income from the sale of immovable property, but these are not the same. The tax on income from sale of immovable property is a onetime tax assessed upon transfer of real estate, and will be equal to 2% of the transaction cost. In contrast the Immovable property tax is owed each year for the duration of ownership of the property.
Mongolia Minister of Finance B. Choijilsuren presented to the Speaker of Parliament M. Enkhbold a set of planned amendments to the 2017 state budget. These amendments have been designed to better ensure the government’s ability to meet its obligations under the International Monetary Fund’s extended fund facility program from which the government will receive substantial loans.
The amendments are intended to stabilize the national budget and the fiscal outlook financial environment, by reductions in budget deficits, and imposing discipline.
The primary changes in the new budget include:
- Increasing taxes on alcoholic beverages and imposing tariffs on imported cigarettes;
- Increasing taxes on gasoline and diesel fuel;
- Increasing taxes on imported vehicles, in accordance with engine capacity;
- Dividing personal income taxes into three brackets and increasing personal income tax for people with higher incomes;
- Charging a ten percent tax on interest earned from savings accounts;
- Raising social insurance fees;
Of these, the biggest and the one that caught the attention of our China lawyers is the changes proposed for the personal income tax. The exact income levels which will be cut off points between the three tax tiers is not yet known, however it is likely that many expatriate employees in Mongolia may be affected by higher taxes on their income.
In addition to the above, the amended budget will impose several new measures intended to reduce the government’s overall operational sending levels and bring expenditures in line with government revenues.
- Increase the efficiency of tenders being carried out in the medical sector;
- Raise the retirement age every two years;
- Promote the Meat and Milk Campaign to develop Mongolian meat and dairy industry;
- Provide the state’s monthly welfare allowance of 20,000 MNT for children and other state assistance only to targeted groups;
- Repeal existing laws that put pressure on the state budget.
The government will aim to limit deficit spending to 10.6% of overall GDP, with revenue expected to be 23.1 percent of GDP, and overall spending to be 33.7% of GDP.
Of the above measures, LehmanLaw Mongolia is pleased to see efforts to promote the Mongolia meat and dairy industry included. Mongolia’s large expanse of green pasture land, clean water and fresh air should provide excellent opportunities for entrepreneurs and foreign investors seeking to establish meat and dairy production operations in the country. Exports of such products to China should find a willing market, as Chinese meat and dairy consumption is expected to continue rising trends.
The other good news is the general commitment to eliminate old laws that cause unnecessary financial strain on the government. This review process is necessary and is expected to help the government identify new areas where spending can be reduced by smart changes to the law. This is the kind of reform needed to stabilize the Mongolian economy and prepare for long term growth.
One of the new drafts scheduled to be considered by Parliament during its next session later this year is a new Law on Investigating Infringement.
Currently in Mongolia, regulatory infringements are addressed by a range of different laws, each addressing specific subject matter. These laws range from the Customs law, Taxation laws, Competition law, Mineral law, Law on State inspection and supervision. In the current state of things, there are several overlapping areas of regulation, sometimes resulting on conflicting provisions. There are also gaps where specific sectors are without relevant regulations. The different laws also treat procedures and process of investigations of infringements differently, which as resulted in concerns about whether constitutional rights are appropriately upheld in each case. The new draft law to be discussed will be designed to cure such faults by protecting individual rights which establishing a uniform standard of official process and powers when resolving suspected regulatory infringements.
The draft to be proposed differentiates regulatory infringement from criminal offences and will adopt a systematic approach to unifying over 230 laws which pertain to various types of regulatory infringement.
Currently the various laws grant 26 different classes of official, ranging from police officer, to tax inspectors, state inspectors, prosecutors and others) ability to investigate suspected infringement and impose penalties. This new law will consolidate those procedures seek to apply uniform procedures.
Under the draft to be proposed all procedures for resolving infringements should take up to 30 days. Up to two extensions of 15 days each will be available if authorized by higher office where additional investigative measures are required.
Individuals or organizations which are the subject of a decision following the investigation of an infringement will be obligated to comply with the terms of the decision within 14 days. In the event there is no compliance, the official Court enforcement agency will have responsibility to enforce the decision.
Individuals or organizations challenging the results of an investigator may appeal the final decision to the prosecutor’s office, and will also have the opportunity to appeal the decision of the prosecutor to a court.
Canadian Minister of International Trade Francois-Philippe Champagne met March 12, 2017 with Mongolia Mining Minister Ts.Dashdorj, to issue a joint announcement that the Mongolia-Canada Foreign Investment Promotion and Protection Agreement (FIPA) has entered into force.
The Global Affairs Department of the Canadian government is quoated as saying, “This agreement sets out a framework of legally binding rights and obligations that will protect Canadian investors in Mongolia. The strong reciprocal protections in the FIPA will help Canadian and Mongolian companies deepen commercial ties with confidence and spur job creation.”
Canada is estimated to have invested over 6.4 billion USD in Mongolia in 2015, one of the larest individual country contributions. Most of this Canadia investment in Mongolia is in Mining and related sectors. It is hoped that FIPA will encourage diversification in investments in areas such as agriculture and infrastructure.
According to the agreement each nation will accord the other “Most Favored Nation” status.
We are happy to see Canada double down on economic engagement with Mongolia. Canada’s efforts include working with Mongolia to develop capacity in natural resources management, official transparency and accountability, and environmental sustainability.
The benefits Mongolia gains from these policy improvements will be felt not only by Canadian investors, but for all foreign investors in Mongolia, along with local Mongolian companies and individuals.
Mongolia may be poised for a new phase of economic growth according to Nikkei Asian Review. After an initial mining boom in 2011 and 2012, with growth reaching up to 17% of GDP in 2011, The Mongolian economy slowed. Low commodities prices led to reduced economic growth.
That may be set to change. According to the article, commodities prices increased toward the end of 2016, setting Mongolia up for a new phase of growth; if the right policies can be found to cultivate growing industries.
In addition to the Mining industry, the article gives examples of two Mongolian entrepreneurs who are producing and marketing new diabetes testing devices. The article also points to initiatives to increase renewable energy production capacity in Mongolia.
In the past, Mongolia’s windfall from mining resulted in poor planning and waste. Recent reforms by the new government have encouraged the International Monetary Fund to step in with new funding to ease Mongolia’s foreign debt burden.
If the trend of smart government continues, and at LehmanLaw Mongolia we think it will, the country is well placed for continued future growth. The key will be to diversify the economy away from reliance on the mining sector and to promote entrepreneurship and small business. The recent tax break on small business is a step in the right direction.
The Mongolia Ministry of Food, Agriculture and Light Industry hosted a training and discussion event on January 09 2017 with presenters offering insights into a new powdered milk processing plant. The new plant comes right on time as Mongolia’s Meat and Milk Campaign started January 01, 2017 in hopes of increasing access to high quality meat and dairy products for all Mongolians.
Prime Minister J. Erdenebat met with diary entrepreneurs, local farmers, and researchers to discuss the meat and dairy industry in Mongolia.
The new facility will have the capacity to produce 600 liters worth of powdered milk in a single 8 hour day. The Prime Minister suggested that such plants should increase, hoping to stabilize prices for dairy products by establishing state of the art facilities around Mongolia. This would help to provide job security for the nation’s diary farmers who will be sure to have easy access to serve local demand.
With the needs of Mongolia’s population met, an increase in dairy farming and factories would power important exports of key dairy products. Such exports may be especially lucrative with China just south of the border with an increasingly wealthy population craving high quality natural and organic meat and diary products.
LehmanLaw Mongolia is knowledgeable about the Mongolia diary industry, and the legal issues encountered when starting up a new agricultural operation in Mongolia. Give us a call for an initial consultation to see how we can help guide you through Mongolian laws to take advantage of the unique opportunities of the Mongolian dairy boom.
As we posted previously, the general corporate income tax rate for an economic entity incorporated in Mongolia is ten percent (10%) for the first 0-3.0 billion; and a 300 million MNT base tax, plus twenty-five percent (25%) tax on all income exceeding 3.0 billion MNT.
However, Parliament recently approved amendments to the Law on Corporate Income Tax. The amendment aimed at supporting “small and medium-sized enterprises” (SMEs) in particular sections by offering a 90% tax reduction for a period of several years.
The 90% tax reduction will be available to SMEs with less than 1.5 billion MNT in sales operating in the following four sectors:
- the food production industry;
- the clothing and textiles industry;
- the production of construction materials; and
- the agricultural and livestock industries and its supplementary operations.
The SMEs will be eligible to pay a 1% tax on business conducted from January 1, 2017 to January 1, 2021 (That’s 4 years at a 1% corporate income tax rate!). The government believes that this will reduce the tax burden for SMEs, create a favorable environment for increasing employment, result in increased investment, encourage entrepreneurship, and increase the number of SMEs.
Now is the time to start your new operation in Mongolia!
Mongolia is a country with vast open land, and few people. While the economy has been slow in recent years, the country has a huge amount of untapped potential. Now could be an excellent time to consider starting a new unique business opportunity in China.
LehmanLaw Mongolia is pleased to introduce our clients to the Business Counsel of Mongolia, and its support for the Doing Business in Mongolia project.
The Business Council of Mongolia (BCM) strives to make real effective contributions to bettering the environment for businesses large and small in Mongolia. BCM fosters international trade and healthy business relations by providing a network for its members and Mongolian businesses. BCM also works closely with the Mongolian Government private sector, embassies, NGOs, special interest groups and business associations to advance these goals. About 370 individuals act as volunteers on the BCM’s working groups which help to make recommendations on key areas for effective advocacy.
The Doing Business in Mongolia project aims to identify and promote new opportunities in Mongolia and well as help businesses struggling with common issues and challenges regarding operating their business in Mongolia. The volume will include 12 detailed and insightful interviews exceptional Mongolian business leaders.
As we posted previously, the newly adopted Mongolia Value-Added Tax (VAT) law has come into effect since January 1, 2016.
According to the VAT law, “Any citizen and legal person, who is engaged in the import and export of goods as well as the sale and manufacturing of any goods, performance of work and rendering of services in the territory of Mongolia, shall be value-added taxpayers.” VAT shall be applicable for the following goods, works and services where operational income value reaches 50 or more million tugrugs:
- all types of goods, works and services sold within the territory of Mongolia;
- all types of goods, works and services imported from abroad to Mongolia; and
- all types of goods, works and services exported from Mongolia;
Furthermore, the VAT shall apply to the representative office of a foreign legal entity whose revenue of sold goods, performed works and rendered services in the territory of Mongolia, has reached 50 million tugrugs or more.
In almost all cases, the value-added tax shall be imposed at the rate of 10 percent of the taxable amount of imported, manufactured or sold goods, performed works and rendered services. However, some certain types of goods, work and services can be subject to zero (“0”) percent VAT. The payment of VAT must be within the first ten days of the following month.
The newly adopted law also creates an incentive system with the possibility of recovering up to 20 percent of paid taxes if certain conditions are met. Initial such tax returns are expected to refund in the first quarter of this year.
A conference with our Mongolian Tax Law specialists can help you determine whether your company may be able to take advantage of the 0% VAT, or the VAT recovery.