Corporate - Group taxationLast reviewed - 31 January 2023
There are no rules permitting grouping for tax purposes in Mongolia.
Transfer pricing provisions are addressed in the CIT Law and the GTL of Mongolia.
From 2020, comprehensive transfer pricing rules are introduced to align with requirements, developed by the Organisation for Economic Co-operation and Development (OECD). These rules apply to both domestic and cross-border transactions.
The GTL provides an updated definition of 'related parties', which is referable in all tax relationships and broadly involves persons who can influence terms of transactions and their economic outcome between each other directly or indirectly, by involvement in assets, control, and managerial activities. This general definition includes also specific examples of related parties, but it is not exhaustive.
If conditions of the controlled transactions (transactions between the related parties) are different from conditions of independent transactions (transactions between the unrelated parties) and the tax base has been reduced because of these differences, the tax base shall be increased by the differences of such reduced amount, and relevant reassessed tax shall be levied. Transfer pricing rules apply to all related party transactions, including domestic and cross-border transactions.
Beginning from 2020, the Mongolian tax authorities also introduced rules strengthening the reporting requirements for transactions between related parties. Under these reporting requirements, in particular, all foreign invested and affected domestic entities will need to submit the transactional transfer pricing report, the local file, and master file alongside the annual CIT return. In addition, the qualifying entities will need to submit the country-by-country (CbC) report.
New amendments imposed severe administrative penalties for the failure of transfer pricing documentation requirements, and these administrative penalties are equal to 2% to 4% of a transaction value, apart from penalties and fines resulting from transfer pricing adjustments.
A thin capitalisation rule applies to direct shareholders, and interest paid in excess of the 3:1 debt-to-equity ratio is not deductible and is treated as a dividend. This is applied on an investor-by-investor basis as opposed to the company as a whole; no restriction applies to interest that is not paid to an investor. In addition, deductible interest expense incurred on a loan received from related parties is limited to 30% of the earnings before interest, taxes, depreciation, and amortisation (EBITDA).
Controlled foreign companies (CFCs)
The CFC rules are introduced from 2020, which define as a CFC a foreign entity in which a related party (i.e. a Mongolian tax resident, an individual permanently residing in Mongolia) holds 50% or more of the number of shares or voting rights of a foreign entity during any period of the current tax year directly or through one or more legal entities in the chain.
For taxation purposes, a CFC is treated as a Mongolian tax resident, but these rules shall not apply to a CFC that is established for IPO purposes.