Mongolia

There are no rules permitting grouping for tax purposes in Mongolia.

Transfer pricing

Transfer pricing provisions in Mongolia are governed by the Corporate Income Tax (CIT) Law and the General Tax Law (GTL). Starting from 2020, Mongolia introduced comprehensive transfer pricing rules designed to align with the guidelines 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.

Thin capitalisation

The CIT Law includes the following rules of the thin capitalization:

• Deductible interest expense incurred on a loan received from the related parties shall be limited to 30% of the EBIDTA (sales revenue minus interest expense, depreciation and amortization);
• Debt-to- ‘previously invested capital’ ratio of 3:1 applies to a loan received from investors. Interest paid in excess of this ratio is not deductible and is treated as a dividend. “… previously invested capital” is defined as the investments made by the investor to the company in the form of purchasing or paying up the common stock, preferred stock, or interest contribution;
• For the loan received from a resident taxpayer shareholder individual, interest expense shall not be deductible at all.

Controlled foreign companies (CFCs)

The CFC rules were 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.