Mongolia Real Estate Report 2018

Welcome to our main page of our overview of Mongolia. We will take you through Mongolia’s history, political settings, economics, legal systems, and relevant tax laws. Lastly, we will introduce a little bit of how life goes in Mongolia, the importance of the mining industry, oil refining in the Gobi Desert, and environmental policies in China. Our annual Real Estate Report for 2018 has just been finished, and if you want to know more on Mongolia, we can share it with you. Let’s start with the country’s historical context.

Mongolian Historical Overview

The territory of modern day Mongolia has been occupied by human inhabitants since the Paleolithic era. Archeological evidence indicates agricultural practices arrived as early as 5,000 BC. With the introduction of the horse in the third millennium BC, prehistoric Mongolia underwent a major revolution. Horse-dependent pastoral nomadism rapidly became the primary mode of existence in the region and has remained so in the modern era.

Chinggis Khan is known as the founding father of Mongolia since he conquered and united the Mongols in 1206. Though brutal on the battlefield, he was an admired leader in the civil realm, promoting trade, technology, and religious tolerance, contributing to a period of political stability. Chinggis and his warriors eventually came to rule over an empire that at its peak extended from modern-day Iraq to the Korean peninsula. Chinggis and his descendants rarely receive credit for their non-military accomplishments. During a period of his empire marked by religious and economic flourishing, merchants could safely travel the Silk Road from Baghdad to Beijing without fear of pillage or robbery.

Mongol Empire

Chinggis Khan’s grandson, Khubilai Khan, conquered China and established the Yuan Dynasty. Shortly after the collapse of the Yuan Dynasty in the 14th century, the Mongols retreated to Mongolia. From the 16th century, Tibetan Buddhism spread across Mongolia, thanks to the Manchurian Qing Dynasty. Shortly after, Mongolia came under the domination of the Qing Dynasty in 1691.

After the collapse of the Qing Dynasty in 1911, Mongolia declared independence under Bogd Khaan. Until the 1921 revolution, the de facto independence of Mongolia was not firmly established but the Soviet Union’s growing influence led to the 1924 declaration of the Mongolian People’s Republic.

Mongolia under Soviet rule in the early 20th century

For close to seventy years, the country was dominated by Moscow. Before Soviet rule, many Mongolian people were illiterate nomadic herders, and a large part of the male labour force was composed of monks, contributing little to the economy. In 1931, a centrally planned system saw the construction of the Trans-Mongolian Railway, the improvement of communication systems and substantial growth in domestic and foreign trade. Banking and finance sectors were developed, and industrial centers were built in Baganuur, Choibalsan, Darkhan and Erdenet.

The 1989 Democratic Revolution led a peaceful shift to a market economy and marked the end of Soviet rule. No military conflicts took place and no blood was shed. Historically, the literacy rate and gender equality have been two strong determinants of success in transitioning to a free market-oriented democracy- and Mongolia’s level of education was very high. Mongolia entered a new political era with its considerable human, social and intellectual capital intact - a fact that would prove useful during the challenging years to come.

Protests outside parliament circa 1990.

Mongolian Politics

Mongolia is a parliamentary republic with elections for the executive and legislature held every four years. The majority party in the unicameral system selects the prime minister, and the president is elected directly by the public. The Ikh Khural, or Parliament of Mongolia, is made up of 76 members. Mongolia’s largest political parties have relatively similar political platforms and ideology, meaning parliament rarely suffers paralysis. The main political parties of Mongolia are the Mongolian People’s Party (MPP), the Mongolian People’s Revolutionary Party (MPRP) and the Democratic Party (DP).

The 2008 parliamentary elections were followed by accusations of corruption, which led to violence and protests. As a result, the MPRP’s (current MPP) official headquarters were burnt down. Just months after the political crisis, the government completed negotiations on an agreement with Rio Tinto to develop the mine at Oyu Tolgoi. The 2012 parliamentary elections passed without incident and saw the DP take control of the Ikh Khural. The 2013 presidential elections saw DP candidate and incumbent Tsakhiagiin Elbegdorj win with 50.23% of the vote. As the election cycle came to a head, heated populist political rhetoric was employed in order to win votes. Much of this rhetoric was directed towards the Foreign Direct Investment (FDI)-powered flagship Oyu Tolgoi mine. Since the election, Mongolia changed its tune and attempted to appease foreign investors by revoking the controversial Strategic Entities Foreign Investment Law (SEFIL). Great progress was made in fostering relations with major international investors, and encouraging the development of the mining sector.

Mongolia held its most recent parliamentary election on June 29 2016, in which the MPP emerged as clear victor winning 65 of the 76 seats by a landslide, and only giving up nine seats to the incumbent DP, one seat to the MPRP, and one seat to an independent candidate. The MPP now controls parliament as well as the government of Mongolia. Presidential elections were held in June 2017, and led to the election of the Democratic Party candidate, Khaltmaagiin Battulga. Battulga won the second round with just over 50% of the vote and 55% of votes cast for any candidate.

Mongolian Legal System

At the time of its transition from Soviet satellite to free- market democracy, experts from several multilateral organizations helped Mongolia reform its legal system and establish a continental legal tradition. The court system is organized into three levels and is overseen by the Supreme Court. The legal system is generally favorable to foreign investors with foreigners enjoying exactly the same immovable property rights as Mongolian citizens.

In addition, the local currency (MNT) is fully convertible and there are no capital controls. However, only Mongolian citizens can obtain freehold ownership rights to land. Land tenure is divided into three classes. The first class, land ownership, is only available to individual Mongolian citizens. Land possession rights are temporary ownership rights and can be held by local legal entities. Foreign entities need to obtain approval from the government for land possession rights which takes about six months for approval. Land usage gives a party the right to undertake concrete activity on the land. Mongolia employs a ‘floating freehold’ system with regards to immovable property. This provides foreign investors and locals alike, with a strong and inalienable freehold right to immovable property. As of today, there is not a single recorded case of the government successfully exercising its power to expropriate real estate from a Mongolian or foreign citizen.

The present-day legal system is part of the continental (Romano-Germanic) legal tradition. Following the collapse of the Soviet Union, Mongolia enlisted the help of several multilateral organizations to provide technical and financial support as the country transitioned to capitalism. The core of Mongolian law is the constitution enacted in 1992. The functioning law of Mongolia is comprised of the provisions and laws of the constitution, other regulatory legal acts, international treaties, and prior commitments of Mongolia, as well as regulatory resolutions of Constitutional Court (Tsets) and the Supreme Court. International treaties ratified by Mongolia have equal weight as domestic laws, however, treaties and other legal documents that contradict the constitution are not adhered to.

The court system is organized into three branches: civil, administrative and criminal. Each branch has representative units and judges at the urban district or rural soum (a sub- provincial administrative unit roughly equivalent to a county in the U.S.) level. A superior appellate court unit for each branch exists in each province and in the capital city. The system is overseen by the Supreme Court, which handles high-profile cases passed on from lower units as well as human rights cases referred to it by the Prosecutor General or the Constitutional Court of Mongolia. The Supreme Court interprets all Mongolian laws, except the constitution, which is the province of the Constitutional Court. The judges of the Supreme Court and other courts are appointed by the President of Mongolia. The Court’s General Council nominates the Supreme Court judges and all judges should be approved by the State Great Khural. The Supreme Court selects one of its members to be Chief Judge and the appointment is made for a six-year term.

The Arbitration Law of 2003 regulates arbitration disputes. Many Mongolian contracts use international arbitration as the method for the resolution of disputes. Mongolia signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which mandates arbitration awards made within the territory of Mongolia are enforceable in Mongolia and other countries that are parties to the New York Convention. The Mongolian National Chamber of Commerce and Industry, which is the Arbitration Bureau in Mongolia, is sometimes regarded as politically influenced and unfamiliar with commercial practices, leading to a preference for international arbitration.

Mongolia has signed the Washington Convention on the Settlement of Investment Disputes between the States and Nationals of Other States in 1996, which provides for the settlement of international investment disputes. It was also signatory to the Seoul Convention on Investment Insurance in 1999 and became a member of the Multilateral Investment Guarantee Agency (MIGA) the same year, which ensures the eligibility of foreign investors for risk insurance through MIGA. Additionally, Mongolia signed the Encouraging and Mutual Protection of Investment Agreements with 39 other countries as well as the Exemption of Double Taxation Agreement, negotiated between 34 countries. In total, Mongolia has joined 24 international treaties to date.

Unlike many developing Asian markets, Mongolia does not enforce any form of capital controls. Foreign investors are free to inject or remove capital from the country at will. The currency is fully convertible and the exchange rate is freely floating. In 2009, Mongolia enacted legislation mandating local transactions be expressed and settled only in the local currency, with an exception for entities granted specific waivers from the BOM or Financial Regulatory Commission.

There is a wide range of laws which may affect the real estate industry. The major laws related to real estate in Mongolia are:

Constitution
Civil Code
General Law on Taxation
Law on Personal Income Tax
Law on Immovable Property Tax
Law on Investment
Land Law
Law on Land Fees
Housing Law
Law on Property Ownership Right and Other Related Property Rights
Law on Allocation of Land to Mongolian Citizens for Ownership
Law on Home Ownership Association and Floating Freehold Title
Law on Urban Planning
Company Law

A full review of all aspects of Mongolia’s legal system is obviously beyond the scope of this publication, therefore the remainder of this section will focus specifically on those aspects of the legal system most relevant to the real estate sector.

Taxes in Mongolia

Especially for Overseas Property Investment

Mongolia’s tax system is relatively straightforward and transparent. The income tax rate is 10-25% for individuals and corporations. The withholding tax rate is 2% of gross proceeds from immovable property sales, and the immovable property tax rate is set at 0.6-1.0% (but not applicable to residential apartments). VAT is imposed on goods and services sold in the territory of Mongolia, however, residential properties fall under the exemptions under the VAT laws in Mongolia. Mongolia has signed double taxation treaties with 26 countries, and when compared with many other countries outlined in this section, Mongolia’s system of taxation remains favorable.

Some taxes related to the real estate sector in Mongolia include:

Personal Income Tax – Income tax is 10-25% and is levied on direct and indirect employment income, as well as rental income from property or other taxable income. Individuals who reside in Mongolia for more than 183 days a year are counted as resident taxpayers and are required to pay tax on their global income. Individuals who do not reside in Mongolia, or visit the country less than 183 days a year, are classified as non-resident taxpayers and are required to pay tax on the portion of their income that comes from activities in Mongolia.
Corporate Income Tax – Corporate tax is not flat but mildly progressive. Mongolian corporation and foreign invested companies with headquarters in Mongolia are charged a tax of 10% on their first MN₮3 billion (roughly US$1.3 million) of income and 25% on all income in excess of the MN₮3 billion threshold. Companies with income deriving from dividends or interest income transferred out of Mongolia are taxed at 20%.
Withholding Tax – Gross income from sales of immoveable property is charged a flat tax rate of 2%.
Immovable Property Tax – Annual property tax is set at 0.6% - 1.0%, depending on the location of the asset value as registered at the state immoveable property office. There is a tax exemption for residential apartments, properties financed by state and local budgets, and buildings of public use.
Value Added Tax (VAT) – VAT is charged on an ad valorem basis on all sales and purchases at a flat rate of 10%. Read more detailed information on each type of tax here.

Mongolia has already signed Double Taxation Agreements (DTAs) with 26 countries. In 2012, Mongolia cancelled DTAs with four countries, including the UAE, Kuwait, Luxembourg and the Netherlands. According to the General Department of Taxation, the list of countries that have entered into an agreement with the government of Mongolia are Austria, Belarus, Belgium, Bulgaria, Canada, China, Czech Republic, France, Germany, Hungary, India, Indonesia, Italy, Kazakhstan, Democratic People’s Republic of Korea, Republic of Korea, Kyrgyzstan, Malaysia, Poland, Russia, Singapore, Switzerland, Turkey, Ukraine, United Kingdom, and Vietnam.

Mongolian Real Estate Report 2018