Applicable Tax Rates on Share Transfers

This article provides a brief overview of the Mongolian tax rules applicable to share transfers and the tax obligations that arise for both individuals and legal entities.

When a shareholder sells, exchanges, or otherwise transfers shares held by them to another person, such transaction constitutes a form of economic activity that gives rise to a taxable event under the law. In other words, a change in shareholding involves the transfer of property rights to another person, and the income derived from such transfer may therefore be subject to tax. Specifically:

1. Personal income tax

When an individual transfers shares owned by them to another person, the resulting income is classified as “income from the sale or transfer of assets” under the law.[1] If the transfer generates a gain (that is, an amount exceeding the acquisition cost), tax is imposed on the amount remaining after deducting the purchase price of the shares and other documented expenses incurred in acquiring those shares.[2] Under the Law of Mongolia on Personal Income Tax, income derived from the sale or transfer of assets is subject to tax at a rate of 10%.[3]

2. Corporate income tax

Where a legal entity earns income from the transfer of shares it owns, such income is also classified as “income from the sale or transfer of assets” under the law. For example, this applies where a company sells shares in its subsidiary and earns income from such sale. Under the Law of Mongolia on Corporate Income Tax, taxable income is determined by deducting from the sale or transfer price of the shares the amount of commissions or charges paid in acquiring those shares, to the extent supported by documentary evidence.[4][5]

In addition, where the ultimate owner of a legal entity holding a mining license or land possession right earns income through the sale or transfer of such right by changing its shares or equity interest, such income is deemed to be the income of the right-holding entity from the “sale or transfer of a right granted by a state authority.” Under the General Tax Law, an “ultimate owner” means a person who, directly or through one or more consecutive related legal entities, holds 30% or more of the shares, equity interest, or voting rights in an entity holding a mining, petroleum, radioactive mineral license, or land possession or land use right, exercises voting rights through representation, or is entitled to receive dividends.[5-1] The taxable income is finally determined by deducting documented expenses from the value of the relevant right or license calculated in accordance with the procedure prescribed by law, and then apportioning that value in proportion to the share attributable to the relevant right-holder’s shares. A 10% tax is then imposed on that taxable income.[6][7][8][9]

In such case, if the ultimate owner that is a taxpayer in Mongolia sells or transfers its shares, equity interest, or voting rights, tax is imposed only on the higher of: (i) the income from the sale or transfer of such shares, equity interest, or voting rights; or (ii) the income from the sale or transfer of the right calculated in accordance with the law. The lower amount is exempt from tax.[10]

However, if the ultimate owner of a holder of a license for a strategically important mineral deposit transfers, in whole or in part, land possession or land use rights, or exploration or mining licenses for minerals, radioactive minerals, or petroleum to another person through gift or inheritance of shares, equity interest, or voting rights in the legal entity, such transfer is subject to tax at a rate of 30%.[11]

Under the law, where the ultimate owner does not change the total amount or percentage of the shares, equity interest, or voting rights that it beneficially owns in relation to the right-holder, a transfer of shares among legal entities within the same continuous ownership chain between the right-holder and the ultimate owner—or a restructuring through merger, consolidation, division, or formation of a new legal entity—will not be regarded as a sale or transfer of rights.[12] In practical terms, this means that internal corporate restructuring is not treated as a taxable transaction: if the company’s ultimate owner remains unchanged and the total shares and voting rights remain the same, internal share transfers, mergers, consolidations, or divisions within the group will not be treated as a “sale or transfer of rights,” and no tax will be imposed.

Further, if the shares of the right-holder itself, its ultimate owner, or any legal entity within the continuous ownership chain between the right-holder and the ultimate owner are publicly traded on a domestic or foreign stock exchange, the law provides that income from the sale or transfer of rights corresponding to up to 20% of the shares, equity interest, or voting rights publicly traded by the right-holder and its ultimate owner during a continuous 12-month period shall be exempt from tax.[13]

Accordingly, when individuals or legal entities transfer shares they own, it is important to understand the type of income involved, the applicable tax rate, and the related reporting obligations, and to maintain proper records and filings in compliance with tax legislation in order to avoid legal and financial risks.

Sources:

[1] Article 10.1.4, Law of Mongolia on Personal Income Tax

[2] Article 17.1.3, Law of Mongolia on Personal Income Tax

[3] Article 21.2.4, Law of Mongolia on Personal Income Tax

[4] Article 10.1.3, Law of Mongolia on Corporate Income Tax

[5] Article 18.3, Law of Mongolia on Corporate Income Tax

[5-1] Article 30.1, Law of Mongolia on Corporate Income Tax; Article 6.1.48, General Tax Law

[6] Article 30.2, Law of Mongolia on Corporate Income Tax

[7] Articles 30.3, 30.3.1–30.3.2, Law of Mongolia on Corporate Income Tax

[8] Article 30.4, Law of Mongolia on Corporate Income Tax

[9] Article 30.10.2, Law of Mongolia on Corporate Income Tax

[10] Article 30.10.1, Law of Mongolia on Corporate Income Tax

[11] Article 30.7, Law of Mongolia on Corporate Income Tax

[12] Article 30.8, Law of Mongolia on Corporate Income Tax[13] Article 30.9, Law of Mongolia on Corporate Income Tax

Disclaimer: This article is intended for general informational purposes only and have been prepared in accordance with the laws in effect at the time of writing. For legal advice, please consult a professional attorney.