Tag Archives: Property

Foreign Investors in Mongolia: Know the Immovable Property Tax

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.

Basics of Mongolia Land Law

Land in Mongolia is categorized in accordance with the unified land territory of Mongolia and, unless otherwise granted for ownership to Mongolian citizens in limited cases, is owned by the State and leased in the form of either possession or use rights.  In almost all cases, other than those for limited household use or small farming plots, the acquisition of land rights is subject to a tender process.

The unified land territory of Mongolia is classified based on the general purpose of its use and the need for its use as follows:

  • Agricultural land;
  • Land of cities, villages, and other urban settlements;
  • Land under roads and networks;
  • Land with forest resources;
  • Land with water resources; and
  • Land for special needs.

Under Mongolian law, there are three (3) types of rights related to land, such as Land Ownership, Land Possession and Land Use. 

Both the Constitution and the Civil Code define “landowner” as the State unless otherwise dictated by legislation allowing private ownership. The Constitution states that only Mongolian citizens may Own land. The Land Law specifically states that “land, excluding pastureland, land for common tenure and land for the state special needs, may be given for Ownership to citizens of Mongolia only.” Furthermore, the most specific legislation regarding Mongolian ownership of land, the Land Ownership Law, prohibits the transfer of the Owned land to foreign citizens through sale, trade, gift or pledge.  However, the Land Ownership Law provides that landowners may transfer to others for Use or Possession their land with the relevant Soum or District Governor’s consent.

Mongolian citizens of 18 years and over, companies and organizations may Possess or Use land in compliance with the Land Law and “Land Possession Certificate(s)” shall be given only to Mongolian citizens, companies and organizations.  There are three steps toward acquiring land Possession by a Mongolian: 1) the Governor must pass a resolution accepting the Mongolian’s request to possess land; 2) after successfully passing of the resolution, a Land Possession Agreement is created between the Government authority and the Mongolian requesting land possession; and 3) when the agreement is successfully executed, a Land Possession Certificate is issued.

 With the permission from the corresponding Governor, the land Possessor has the right to grant whole or partial Use Rights of the land to others. This granting of Use of the land to others may be on the basis of land lease agreements or other similar agreements. The Land Law allows foreign legal entities, international organizations, foreign citizens, stateless persons and business entity with foreign investment only to Use land for a certain period of time.

Ever Wanted to Buy Land in Mongolia?

If there is anything Mongolia has plenty of it is land! As of January of this year, Mongolia has revised regulations for land auctions. The auction regulations cover land ownership, possession or usage, all terms of art under Mongolia law indicating a certain allocation of property rights.

Under Mongolian law, only the Mongolian state or Mongolian individuals are able to formally own land and hold all rights of use and disposal. Mongolian individuals and companies may also have rights to “possess” land, which is a kind of more limited right to land within the context of an agreement with the state. Foreigners generally may hold rights to “use” land.

The law prescribes certain conditions in which a land auction is required. When required, an auction may be initiated  via an invitation to bid published at least 30 days prior to the date the auction is to be held. Interested persons much be registered before the auction is held. Before the recent update to the regulations the invitation to bid was required to be published via a public media format. The updates now also allow publication to be posted to the website of the organizer. The updates also allow for a completely online auction format.

The starting price of the auction is in most cases set by the local Governor, and participating parties are required to pay 10 percent of the initial auction price as a deposit. The deposit is returned in full within 5 days after the auction, to all but the winning participant.

Other highlights of the updated regulation include a new mechanism for dispute resolution. In previous regulations, the Supervisor of the Auction Commission would make a decision on disputes which arose during the auction or in connection with the process, and the only way to challenge the decision was before court. The new regulation only requires a preliminary decision on the issue from the local Governor, after which a suit may be filed at court.

Purchasing a Mongolian Company: Measure Twice Cut Once

 A client approached us recently with a request to perform due diligence into a Mongolian company recently purchased by the client. The client, a foreign company, said they had some problems with their old local agent (not a lawyer) and wanted a local lawyer to verify the legal status and ownership of the company, as well as a property owned by the company.

 Our Mongolian lawyers perform due diligence on local and foreign companies on a regular basis. We proceeded to work through the due diligence checklist, confirming the company’s status with the various local government agencies, and confirming ownership of the property. We found that the current foreign shareholder of the company had formerly been a minority shareholder with a Mongolian national being the majority shareholder of the company. The foreign shareholder had purchased the Mongolian nationals shares earlier in the year. Nothing surprising here.

 When our lawyers took a look at the property held by the company we were surprised. The company held Land Possession Rights” (LPR), which by law may only be held by a Mongolian national, or a company with Mongolian ownership. As a company invested by a foreign national the client’s company was not allowed to hold LPR. By law it could only hold Land Use Rights (LUR). For both LPR and LUR the ultimate owner of the land is the state. The property rights held by LUR holder are more limited than those accorded to a holder of LPR.

 We informed the client of the situation, and speculated that the LPR were purchased by the company at an earlier time before the foreign shareholder had purchased the shares of the Mongolian national. Subsequently, the relevant government bureaus were not informed of the share transfer or the change in the status of the company.

 We advised the client to report the situation to the local government as quickly as possible. Legal penalties in such a situation are not clear, and it is typically far better to be open and honest about such compliance issues, rather than continue to cover up an illegal situation.

 All of this may have been avoided if a Mongolian Attorney would have been consulted first.