Tax amendments regarding indirect transfer of mining licenses and land rights

In connection with the approval of state budget for year 2018, the Parliament of Mongolia adopted certain amendments to the General Tax Law, the Corporate Income Tax Law, the Personal Income Tax Law, the Minerals Law, the Land Law and the Legal Entities Registration Law on 9 and 10 November 2017. Pursuant to these amendments, share transfer transactions carried out by the ultimate shareholder[1] of a legal entity holding a minerals license or a land possession or use right would, under Mongolian laws, trigger a taxable event on the transferring ultimate shareholder level.

Pursuant to the amendments made into Article 8.2 of the Corporate Income Tax Law, income arising from the change of ultimate holder of i) a minerals license or ii) a land possession or land use right by way of transfer of shares or participation rights held by the ultimate shareholder of a legal entity holding such license or right will be regarded as income from sale of licenses/rights which is subject to a 30% tax rate under Article 17.2.7 of the Corporate Income Tax Law. The amendments further provide that the taxable income arising under Article 8.2 of the Corporate Income Tax Law shall be determined on a pro rata basis of shares or participation rights transferred by the ultimate shareholder in the shareholding or participation percentage of such ultimate shareholder of the legal entity holding a minerals license or land possession right or land use right and the value of the minerals license or land right. Thus, it suggests that the taxable income shall be determined on the basis of value of minerals license or land right instead of the sale price of the shares being transferred.

According to the newly amended Article 16.14 of the Corporate Income Tax Law, the Minister of Finance shall adopt a guideline for determining the value of minerals license and taxable income earned through such indirect sale of licenses. As for the land rights, the value of land rights must be no less than the initial bidding price of such land right, in accordance with the amended Article 38.6 of the Land Law. As provided under the amended Article 21.7 of the Corporate Income Tax Law, the entity holding a minerals license or a land possession or land use right must withhold the tax imposed on the income under Article 16.14 of Corporate Income Tax Law and transfer to the relevant budget fund within 7 business days after the transaction is made.

Moreover, under the amendments of the General Tax Law, legal entities holding minerals licenses or land possession or use rights are required to register their ultimate shareholders with the relevant tax authority, and notify the tax authority of any change of such ultimate shareholder within 10 days after the relevant decision is made.

Under the Procedural Implementation Law of the General Tax Law which will come into force on 1 January 2018, the existing legal entities holding minerals licenses are required to register their ultimate shareholders with the relevant tax authority and the Legal Entities Registration Office before 1 June 2018. As for legal entities holding land possession or land use rights, they must register their ultimate shareholders with the relevant tax authority (but not with the Legal Entities Registration Office) before 1 June 2018. Below is the table showing the registration requirements of the ultimate shareholder under the Procedural Implementation Law of the General Tax Law:


Legal entities holding:

Authorities to register with

Deadline

1

Minerals license

  • Relevant tax authority; and
  • Legal Entities Registration Office.

1 June 2018

2

Land possession right or land use right

  • Relevant tax authority

1 June 2018

In addition, under the amendments to the Legal Entities Registration Law, the legal entities holding minerals licenses are required to register any change of their ultimate shareholders with the Legal Entities Registration Office. The Legal Entities Registration Office will register such change of the ultimate shareholder on the basis of a reference issued by tax authority that the relevant taxes have been paid.

We understand that these amendments aim at imposing tax on indirect transfer of minerals license and the land right by way of transferring the shares of the company holding such license or right. At a first glimpse, the amendments made to the Corporate Income Tax Law suggest that the transferring ultimate shareholder may be required to pay two different taxes on the single taxable event (transfer of shares): i) tax to be paid on the sale of shares which is subject to a 10% rate and tax to be paid on the (indirect) sale of rights at a rate of 30%. However, the tax base for these two taxes will be different since the value of the minerals license or land right will be the main variable to calculate the taxable income for sale of rights whereas the sale price will be used for determining the tax base for sale of shares, unless the sale price is equal to the value of relevant minerals license or land right.

Nevertheless, since the amendments have just been officially published, the procedural implementation aspects are to be further observed.



[1] Ultimate shareholder is defined under the amended Article 3.1.11 of the Legal Entities Registration Law as any of following entities that directs the control, management and assets of a legal entity directly or indirectly through shares or participation rights in one or more linked legal entities:

(a)entity holding the majority of voting rights of a legal entity;

(b)entity holding the majority of shares or market value of a legal entity; and

(c)equivalent of the above.


BATTUSHIG.B, Partner (battushig@gtsadvocates.mn, tel+976 331020)

ENKHSARUUL.J, Associate (enkhsaruul@gtsadvocates.mn, tel+976 331020)


gtsadvocates: 11 12 2017