China-Mongolia DTA: What Are the Key Elements?

It is important for businesses of both countries to understand and avail the benefits derived from the double tax avoidance agreement signed between China and Mongolia to ease their tax burden.

In recent years, the comprehensive strategic partnership between Mongolia and China has developed rapidly, leading to accelerated investment and trade activities between the two countries.

From the 5,800 legal entities with Chinese investment registered in Mongolia, 1,690 have stable operations and pay taxes.

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In this situation, it’s important for businesses of both countries to understand and avail the avoidance agreement (DTA) signed between China and Mongolia to ease their tax burden.

Upon the establishment of the modern tax administration of Mongolia in 1991, China was the first country to sign “The Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income” with the Government of Mongolia (China-Mongolia DTA).

In this article, we briefly introduce the key elements of the DTA established between Mongolia and China.

Key elements of the China-Mongolia DTA

Personal scope

The China-Mongolia DTA applies to persons who are residents of one or both of the Contracting States, i.e., Mongolia and China.

Residents refer to any person who, under the laws of that State, is liable to pay local taxes by reason of their domicile, residence, place of head office, or any other criterion of a similar nature.

Taxes covered

The China-Mongolia DTA applies to taxes on income imposed on behalf of each Contracting State, irrespective of the manner in which they are levied.

Taxes on income refer to to all types of taxes imposed on income and components of income, including income taxes on sales of movable and immovable property and income taxes on increases in property valuation.

In case the business entity of a Contracting State operates via a local representative office, only corporate income on revenue generated by the representative office can be taxed.

The existing taxes (at the time of signature) to which the China-Mongolia DTA shall apply in Mongolia are:

• Individual income tax;
• Income tax for enterprises with foreign investment;
• Income tax concerning foreign enterprises; and
• Local income tax.

The existing taxes (at the time of signature) to which the China-Mongolia DTA shall apply in Mongolia are:

• Individual income tax;
• Income tax for enterprises with foreign investment and foreign enterprises; and
• Local income tax.

To be noted, this China-Mongolia DTA shall also apply to any identical or substantially similar taxes which are imposed after the date of signature in addition to, or in place of, the abovementioned taxes. The competent authorities of China and Mongolia shall notify each other of any substantial changes which have been made in their respective taxation laws within a reasonable period of time after such changes. For example, China unified the income tax for domestic enterprises and foreign invested enterprises in 2008.

Income from immovable property

Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other Contracting State.

The term “immovable property” is defined by the law of the Contracting State in which the property in question is situated. It includes property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources, and other natural resources. However, ships, aircraft, and land vehicles shall not be regarded as immovable property.

Business profits

The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State, but only so much of them as is attributable to that permanent establishment.

The term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes a place of management, a branch, an office, a factory, a workshop, any place of extraction of natural resources, as well as a building site/construction/assembly/installation project/supervisory activity that continue for a period of more than 18 months and the furnishing of services that continue for the same project or a connected project for a period or periods aggregating more than 18 months.

Dividends

Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State.

However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax should not exceed five percent of the gross amount of the dividends.

Interest

Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.

However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends – the tax should not exceed 10 percent of the gross amount of the dividends.

Royalties

Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.

However, such royalties may also be taxed in the Contracting State in which it arises and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax should not exceed 10 percent of the gross amount of the dividends.

This applies to payments of any kind received as a consideration for the use of or copyright of literary, artistic, or scientific work, including cinematograph films and films or tapes for radio or television broadcasting.

Capital gains

The below capital gains derived by a resident of a Contracting State may be taxed in that other Contracting State:

• Gains from the sale of immovables situated in the other Contracting state;
• Gains from the sale of business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services;
• Gains from the sale of ships, aircraft, or land vehicles operated in international traffic or movable property pertaining to the operation of such ships, aircraft or land vehicles (taxable only in that Contracting State in which the place of head office of the enterprise is situated);
• Gains from the sale of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State; and
• Gains from the sale of other shares representing a participation of at least 25 percent in a company which is a resident of a Contracting State.

Gains from the sale of any property other than the abovementioned shall be taxable only in the Contracting State of which the seller is a resident.

Shipping, air, and land transport

Profits from the operation of ships, aircraft, or land vehicles in international traffic shall be taxable only in the Contracting State in which the place of head office of the enterprise is situated.

If the place of head office of a shipping enterprise is aboard a ship, then it shall be deemed to be situated in the Contracting State in which the home harbor of the ship is situated, or if there is no such home harbor, in the Contracting State of which the operator of the ship is a resident.

Methods for elimination of double taxation

In Mongolia, double taxation shall be eliminated as follows:

1. Where a resident of Mongolia derives income from China, the amount of tax on that income payable in China in accordance with the provisions of the China-Mongolia DTA, may be credited against the Mongolian tax imposed on that resident. The amount of credit, however, shall not exceed the amount of the Mongolian tax on that income computed in accordance with the taxation laws and regulations of Mongolia.
2. Where the income derived from China is a dividend paid by a company which is a resident of China to a company which is a resident of Mongolia and which owns not less than 10 percent of the shares of the company paying the dividend, the credit shall take into account the tax paid to China by the company paying the dividend in respect of its income.

In China, double taxation shall be eliminated as follows:

1. Where a resident of China derives income from Mongolia the amount of tax on that income payable in Mongolia in accordance with the provisions of the China-Mongolia DTA, may be credited against the Chinese tax imposed on that resident. The amount of credit, however, shall not exceed the amount of the Chinese tax on that income computed in accordance with the taxation laws and regulations of China.
2. Where the income derived from Mongolia is a dividend paid by a company which is a resident of Mongolia to a company which is a resident of China and which owns not less than 10 percent of the shares of the company paying the dividend, the credit shall take into account the tax paid to Mongolia by the company paying the dividend in respect of its income.

For full version of the China-Mongolia DTA, please click here.

Other cooperation between China and Mongolia

Within the framework of the “Comprehensive Partnership Strategy of Mongolia”, the Mongolian Tax Administration joined the Belt and Road Initiative Tax Administration Cooperation Mechanism – established as part of China’s “Belt and Road Initiative” to unite the tax administrations of countries located along the Silk Road. This enabled Mongolia to engage in bilateral and regional information-sharing on taxpayers.

Also, on January 17, 2018, an association of Chinese-funded companies in Mongolia was formed under the “Belt and Road Initiative”, uniting the local branches of the Bank of China, Air China, Industrial and Commercial Bank of China, Petro China, China Nonferrous Metal Mining, China United Cement Corporation, China Tiesiju Civil Engineering Group, and China National Tobacco Corporation in the country.

The main goal of the association is to support the relations between Mongolia and China by elevating the cooperation between Chinese business entities in Mongolia to an advanced level, allowing for resource-sharing between member organizations, and leveraging shared benefits, according to the Ministry of Foreign Affairs of China.

(Khandsuren Orgodol/Khanda works for DBiAA, one of Dezan Shira & Associates’ Asian Alliance Partners. She may be reached at admin@dbiaa.org.)

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