Permanent EstablishmentsIssue No. MTIN201500125 March 2015

Developments in Mongolia

Executive summary

The Mongolian tax authority (MTA) has recently started enforcing the taxation of PermanentEstablishments (PE), including branch offices of foreign companies in Mongolia. The scope ofa PE should include a place of business in Mongolia such as a branch, factory, plant, place oftrading and place of services, as well as oil and natural gas wells or mines that extract naturalresources. A tax registration of branch offices of foreign corporations is now effectivelyrequired in Mongolia, separate from any requirements surrounding legal registration.

Foreign corporations are required to register their taxable presence within 30 days after therespective activity or project has triggered existence of a PE. Failure to comply with thisrequirement may result in penalties or fines. In order to report a correct tax base attributableto a PE in Mongolia, a profit allocation analysis should be performed and documented. Inaddition, a VAT registration is also available for a PE in Mongolia, where certain registrationthresholds are met.

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Detailed discussion

Developments on PE taxation practice in Mongolia

The MTA’s practice of PE taxation in Mongolia has beenactively developing during the last year, although a legalframework for it was set in local tax legislation back in 2007.Under domestic tax legislation1 PE is defined as a place ofbusiness in Mongolia, such as branch, factory, plant, place oftrade and place of services, as well as oil and natural gaswells or mines that extract natural resources (subject tocertain restrictions under applicable tax treaties).

In June 2013 the MTA made one more step forward in PEtaxation development by issuing a guideline on registrationrequirements for PE, according to which non-residentsshould register their taxable presences with the MTA where aPE is triggered under domestic laws and regulations2.

Upon registration, a certificate of ‘Permanent Establishment’is issued by the MTA (‘PE registration certificate’). Aregistered PE can open a bank account under its own nameand can chop/stamp on its own name and behalf.

Branch office registration in Mongolia

Historically, most foreign investors used limited liabilitycompanies (LLC) as their investment vehicle to performcommercial activities in Mongolia. The establishment ofrepresentative offices, however, is also possible under theMongolian law, provided that no commercial activities will beperformed by the representative office. The MTA hasrecently started focusing on investigations of activities ofrepresentative offices in Ulan Bator, due to perceivedinvolvement in income generating business activities byrepresentative offices.

The legal registration of a branch office of a foreigncorporation with the state registering authorities is still notpracticable in Mongolia due to lack of further implementingrules (guidelines) based on which the state authorities couldregister the branch (even though branches are recognizedunder the revised Mongolian Company Laws).

Separate to legal registration process, however, within thetaxation framework for PEs in Mongolia, the MTA can nowperform a tax registration of branches of foreign entitieswithout having the branches registered legally with the stateauthorities in Mongolia (unless branches perform strictly orheavily regulated activities, such as branch of bank or otherregulated financial institutions). This may be of a specialinterest for foreign investors who are not willing to have alegal registration in Mongolia (e.g. for conducting short ormedium term business activities, or project based activities),but should be aware of the revised tax registration and filingrequirements for PEs in Mongolia.

PE registration requirements

A PE should be registered within 30 days after the respectiveactivity or start of a project that has triggered existence of aPE3. The MTA should issue a PE registration certificate within3 business days of the application day4. The list of documentsto be submitted to the MTA for PE registration include thefollowing:► application letter,► document confirming PE address in Mongolia, copies of

registration documents of foreign corporation in itsjurisdiction e.g. incorporation certificate,

► overview of the project background,► copy of service agreements, if any, and► documents confirming appointment of a director of a PE5.

VAT Registration of PEs

A PE is considered a tax payer for VAT purposes in Mongolia;therefore, the general VAT rules should apply to the PE6.Failure to register for VAT purposes, having met theregistration threshold, may result in a heavy penalties andfines.

Profit allocation to a PE taxed locally

According to article 3.1.3 of the Corporate Income Tax Lawof Mongolia, where a foreign enterprise, carries out businessthrough a PE in Mongolia, a respective financial result shouldbe attributed to that PE. The MTA also requires preparationof documentation that justifies profits allocated to PE (takinginto account risks assumed and assets used by the PE and aheadquarter).

Currently there are no specific guidelines or rules in Mongoliafor PE profit allocation. It is expected that such guidelines willbe issued by the State authorities, but there is no cleartiming set on this regard. Given that there are no clear rulesin place yet, the MTA is likely to follow internationally-accepted approaches, e.g. OECD7 approach for PE incomeallocation.

1 Article 5.2 of the Corporate Income Tax Law (2006)2 Registration requirement was introduced with the amendments to

the Taxpayer Registration Guideline MTA Commissioner Order#435 dated on 12 June 2013.

3 Section 5.2 of Taxpayer Registration Guideline, MTACommissioner Order #435

4 Section 5.2 of Taxpayer Registration Guideline, MTACommissioner Order #435

5 Section 5.2 of Taxpayer Registration Guideline, MTACommissioner Order #435

6 Article 5.2 of the VAT law7 Organization for Economic Cooperation and Development

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Actions needed

In light of a changing environment in Mongolia relating to theregistration and taxation of PEs, the following action pointsshould be considered by foreign investors and localcompanies in Mongolia:► Foreign companies which have existing projects with

Mongolia (or will have projects in Mongolia) should reviewtheir existing and planned activities to check if theiractivities lead to the creation of a PE in Mongolia.

► Representative offices of foreign companies in Mongoliashould also review their current activities to ensure thatthey are not involved in any income-generating activitieswhich might trigger PE existences due to increasedinterest of the MTA in business activities byrepresentative offices.

► Local companies which procure services from foreigncompanies for PE-triggering projects, should also reviewtheir activities to mitigate risks related to withholding taxand reverse-charge VAT on payment to non-residents whohave not registered their taxable presence in Mongolia.

► Lastly, profits of PE in Mongolia should be properlyallocated and documented. This requires a detailedconsideration of the functions performed, risks borne andassets utilized by the PE in Mongolia.

EY experience

EY has already assisted clients in registering PEs with MTA forincome tax purpose as well as assisted on VAT registrations ofPE.

Contact usMartin RichterPartnerInternational Tax ServicesTransfer Pricing+852 2629 3938martin.richter@hk.ey.com

David M. AllgaierInternational Tax ServicesFinancial Services Tax+86 21 2228 3136david.allgaier@cn.ey.com

Khishignemekh RegzedmaaSenior ManagerInternational Tax service+976 11 314032khishignemekh.regzedmaa@mn.ey.com

Kira TaimovaManagerInternational Tax ServicesTransfer Pricing+852 2846 9986kira.taimova@hk.ey.com

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