Indirect Transfer of Mineral Licenses – Taxable Starting from January 1, 2018
The tax treatment of offshore/onshore indirect transfers i.e. sale of shares of a Mongolian company holding mineral license(s) – has emerged as a significant issue in recent years in Mongolia.
The report prepared by the staff of the International Monetary Fund on “Safeguarding domestic Revenue-A Mongolia DTA[1] Model” from 2012 (“IMF Report”), as part of technical assistance to the Mongolian Government, points to the absence of taxing mechanisms for an “indirect transfer of mineral licenses” under Mongolian laws and notes the following:
- Mongolia is only able to safeguard its taxing rights on an indirect sale of exploration and mining licenses in a limited number of DTAs;
- Mongolia should include a provision in its DTAs that reserves its right to tax capital gains on the sale of shares that derive more than 50 percent of their value from immovable property situated in Mongolia”.
New Regime
With effect commencing from 1 January 2018, an indirect transfer of mineral licenses will be subject to tax pursuant to the amendments to the Minerals Law, Law on Registration Legal Entities and the Business Entity Income Tax Law (“BEITL”) from November 10, 2017 (“Amendments”), which is believed to be a direct outcome of recommendations made to the Mongolian Government by various multinational and aid institutions over the years.
The Amendments provide:
- that the sale of shares of a Mongolian company, holding a mineral license, in whole, or in part, by a “beneficial holder” shall be subject to income tax in Mongolia;
- that any such transfer of mineral license shall be deemed “sale of right” pursuant to Article 17.2.7 of the BEITL, as such, shall be subject to tax at the rate of 30%;
- that any tax evasion, misreporting of income, or failure to provide documents to be used for the valuation (of shares/ and underlining assets i.e. mineral license)) shall serve as the ground for termination of a mineral license.
Transfer-Pricing and Re-assessment of Taxes
Under the current regime, the taxes to be paid in connection with the transfer of mineral licenses are separately reviewed, and if deemed necessary, re-assessed, based on Article 48 of the General Taxation Law and Article 11 of BEITL by the designated department of the General Taxation Office.
Only after the completion of such review, do the tax authorities allow the transfer a mineral license. When conducting its valuation of mineral licenses, the tax authorities take into consideration all investments put into the project, the total amount of license fees paid, and in case of mining licenses, the value of equipment and ancillary facilities to the mine, etc.
We note that there is no detailed methodology for transfer pricing in the Mongolian tax laws which allow for a restatement of income when goods are sold/transferred for a value less than the market price. Although the concept of the market price is somewhat obscure, especially in the case of mineral exploration licenses, the above procedure has been consistently followed by the tax authorities since 2011 and involved considerable discretion on the side of the tax authorities.
The Amendments provide that the detailed methodology for the valuation of shares (along with underlying assets) and assessment of taxes shall be adopted by the Ministry of Finance.
Therefore, it is anticipated that the Ministry of Finance will adopt detailed rules pertaining to the determination of arm’s-length pricing of the shares in question, simultaneously with the Amendments entering into the effect.
Effect of Double Taxation Treaties
Mongolia is a signatory to 25 double taxation treaties. Most tax treaties Mongolia has entered into contain typical UN and OECD model tax convention wording which provides that that with respect to the sale of shares that capital gains tax is to be paid only in the country of residence of the seller, except where the gain is “derived from the alienation of shares deriving more than 50 percent of their value directly or indirectly from immovable property (definition of “immovable property” normally includes “mineral licenses”) situated in the other Contracting State may be taxed in that other State” (i.e. Mongolia). Other treaties omit the “except” entirely, which seems to provide for capital gains to be paid in other treaty party jurisdiction only even in respect of companies where the value is derived from mineral licenses.
Shortcomings and Conclusion
The Amendments do not provide for an exemption for the transfer of shares as part of intragroup restructuring and sale of shares through trading on stock exchanges. These shortcomings will need to be rectified by the Parliament in a timely manner as they may adversely affect the investment image of the country.
Given the above developments, investors should consider obtaining thorough tax advice and conduct double taxation treaty analysis before structuring the corporate holdings of their mining projects in Mongolia.
[1] DTA refers to “Double Taxation Agreement” Read More
New Regulations: Tax on Transfer of Land Possession and Use Rights, Registry of Ultimate Beneficial Owners
On 9 November 2017, the State Great Hural (Parliament) of Mongolia adopted amendments to the General Taxation Law, Corporate Income Tax Law, Personal Income Tax Law, Legal Entity Registration Law, and Land Law.
Tax on Transfer of Land Possession and Use Rights
Until recently, there has been no precedent for imposing taxes on the transfer of land rights and the transfer of shares of companies that hold land rights.
On 9 November 2017, the State Great Hural (Parliament) of Mongolia adopted amendments to the Legal Entity Registration Law, Land Law, Corporate Income Tax Law, and Personal Income Tax Law and legislated for the first time that any direct and indirect transfer of land possession and use rights by individuals and legal entities will be subject to tax. These new regulations will become effective from 1 January 2018.
We summarize the key elements of the new regulations as follows:
- Business entities will be subject to income tax at the rate of 30 percent on taxable income derived from a direct transfer of land possession and use rights whereas individuals will have to pay 10 percent income tax on the same income.
- Any transfer of shares by the Ultimate Owner of a company that holds land possession and use rights will be subject to a 30 percent tax. In such cases, the value of the land right will be proportioned to the number of shares transferred by the Ultimate Owner.
- The Ministry of Finance will approve a detailed methodology for determining taxable income from direct and indirect transfers of land possession and use rights.
- Income derived from transferring land possession and use rights between family members free of charge will be exempt from personal income tax.
- Holders of land possession and use rights must pay the applicable taxes prior to the transfer and must submit a bank receipt evidencing the tax payment along with an application for the transfer of land rights.
- If land right holders fail to declare and pay applicable taxes, the land authority will terminate the land rights and claim for repayment of damages.
- Companies that hold land possession and use rights must withhold or deduct the applicable taxes and pay such to the State budget within 7 business days after the relevant transaction was made.
We expect that the methodology to be approved by the Finance Minister will provide for more detailed rules and clarifications on determining taxable income and withholding taxes.
New Requirement to Register Ultimate Beneficial Owners
Companies that hold land possession and use rights must provide information about their Ultimate Owners with their registered tax offices within 1 June 2018.
The term “Ultimate Owner” includes persons who directly or indirectly owns the largest number of shares or voting rights. Where another legal entity is a shareholder (rather than an individual), disclosure of beneficial ownership further up the chain of legal entities is required until the ultimate owner is identified.
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New Mining Law Draft Incoming
Minister of Mining and Heavy Industry Ts.Dashdorj and Minister of Justice and Internal Affairs S.Byambatsogt have approved a concept for a new Mining Law draft in January 2017. A new working group was established at the Ministry of Mining and Heavy Industry to draft the new Mining Law, which would form the basis of the mining legislation and considered to be one of the most important legal approaches to the geological and mining industry.
The new Mining Law covers the gap that the current legislations that regulating mining where the issues related to the investment, prospecting, mining, processing of minerals, rehabilitation, occupational safety as well as the mine closure are left uncovered. The existing Minerals Law, adopted on 08 July 2006 and amended numerous times, focuses more on regulating licensing and cadastral activities. However, the current Minerals Law will remain effective and will not be replaced by the proposed Mining Law, whereas, current Law on Common Minerals will be completely replaced by the Mining Law.
Scope of the new Mining Law draft
The new Mining Law now being drafted aims to regulate all aspects of the mining lifecycle starting from the establishment to closure of mine including geological survey, exploration, conducting a feasibility study, mining, processing and sale of minerals, protection of the environment, health and safety of the miners themselves. It covers 145 articles.
There is a widely-held hope that the new Mining Law will bring positive changes that clarify the roles and responsibilities of government authorities and license holders and will help to regain the foreign and domestic investment.
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Draft Law on Investment Banking has been submitted
On December 28, 2016, several parliament members including Javkhlan.B, submitted the bill of law on Investment Banking (the “Draft Law”) to the Parliament of Mongolia. However, the Draft Law was not included in the agenda of the matters to be discussed in the spring session of the parliament, the Draft Law had put to be discussed in the economic standing committee of the parliament and general discussion of the parliament session within April 2017.
Main points of the Draft Law are:
- only foreign banks can establish an investment bank;
- the foreign bank that intends to incorporate a bank in Mongolia is required to establish its representative office and carry out its operation at least one year before opening the bank.
- operation by investment banking is limited by certain banking and financial activities that are specifically permitted by law, such as, to issue long-term debt, to conduct transactions related to its borrower’s account, to issue guarantee and warranty, to buy and sell loans and securities, underwriting, etc.
- the minimum share capital of the investment bank is MNT500 billion (approx. USD200 million);
- the minimum amount for a single loan and guarantee or warranty is MNT100 billion (approx. USD40 million)
- one of the independent directors of the board of investment bank must be a Mongolian citizen;
- Mongol Bank must consider any potential adverse effect to the national security in issuing its permission to establish an investment bank;
- Mongol Bank will issue its decision on permission within 90 days;
- The matters not specifically regulated by Investment Banking Law shall be governed by the Banking Law (2010) and other applicable laws.
The restrictions stated in the Draft Law are only applicable to the bank fully-owned by a foreign bank, and it appears that restrictions will not apply if a foreign bank owns the share interest less than 100% in such bank.
We assume that financial experts in the area and foreign banks which already established their representative office in Mongolia will deliver their opinion on the Draft Law.
Our opinion is that, without enacting the separate law, it is preferable to regulate the operation and licensing of the foreign bank’s branches or fully owned subsidiaries through the amendment of the existing financial and banking laws and regulations. Therefore, it is insignificant, if the definite global terminology “investment banking” is used as an instrument to regulate the operation and licensing procedures of foreign banks. If it is deemed necessary to enact the separate act by the legislators, it would be appropriate to formulate the law by modifying and rephrasing it, without collision and conjunction with the other laws and regulations.
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