This article highlights some of the key legal issues commonly associated with the exploration and extraction of mineral resources in Mongolia. These issues form part of any due diligence exercise conducted by an investor proposing to acquire mining assets or an interest in a mining project.

This article looks at mining investment, the legal system applicable to mining, various mining laws, mineral ownership in, different types of mining tenements available, rights of miners to access land against landowners' rights, imposition of royalties and other taxes by the various levels of government, and rules and restrictions concerning foreign investment in Mongolia.

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Overview

1. What are the recent developments in the exploration and extraction of mineral resources in your jurisdiction?

The mining sector is one of the key drivers of export revenue for Mongolia and is often referred to as the "engine of the economy". With an abundance of mineral resources and largely unexplored territory, Mongolia is potentially an attractive destination for foreign investors interested in exploration and mine development. The country has significant reserves of coal, copper, gold, silver, iron ore, tungsten, uranium and rare earth metals.

Given the importance of the minerals sector, Mongolia has been making on-going efforts to modify its legal environment and to align it more closely with global standards. In November 2017, the Mongolian Parliament amended certain articles of the Minerals Law, enacted on 8 July 2006 (Minerals Law). The amendments changed the mechanism for obtaining new exploration licences, moving to an open tendering system. The amendments also modified the procedures involved in applying for and granting a licence.

On 9 and 10 November 2017, Parliament enacted several laws impacting on the tax treatment for the transfer of mineral licences and land rights. Under the amendments to the Minerals Law, a party transferring its mineral licence must submit information regarding the price and other related information to the Mineral Resources and Petroleum Authority (MRPAM). The former Law of Mongolia on Corporate Income Tax, enacted on 16 June 2006 (2006 CIT Law) was amended to include the “beneficial holder” term which was later changed to “beneficial owner” in 2018 (as defined under the Law of Mongolia on Combatting against Money Laundering and Terrorism Financing dated 31 May 2013).

On 22 March 2019, Parliament revised the taxation laws including the General Taxation Law (GTL) and Corporate Income Tax Law (CIT Law), each of which became effective from 1 January 2020. The definition of beneficial holder has been separately introduced in the GTL as a person (that is, an individual, legal entity or organisation) that:

Holds more than 30% of the shares or participation rights, or exercises more than 30% of the voting rights.

Is entitled to receive dividends from a legal entity holding exploration or mining licenses for minerals, petroleum, radioactive minerals, or land possession and use rights (either directly itself or indirectly through one or more levels of an ownership chain).

Transactions involving a full or partial disposal of shares, voting and participation rights by a beneficial holder (whether onshore or offshore) in a Mongolian legal entity holding exploration or mining licences for minerals, radioactive minerals and petroleum, and land possession and use rights is considered as a "sale of rights" and is subject to income tax at the rate of 10% of the value of the mineral licence in lieu of the previous 30% rate. The income earned by the beneficial holder from its sale of shares is deemed to be taxable income of the Mongolian legal entity from sale of rights, rather than withholding tax (unlike under the 2006 CIT Law).

The sale of shares by non-beneficial holders is subject to a 10% income tax based on the value of the sale price of the shares. Any tax evasion, misreporting of income from the sale of rights, failure to provide documents to be used for valuation or failure to notify changes of beneficial owner can provide grounds for the authorities to terminate the mineral licence.

On 26 March 2019, Parliament enacted an amendment to increase the minimum royalty payment for gold from 2.5% to 5% of the sales value (see Question 11).

On 30 October 2019, the Constitutional Court of Mongolia (Constitutional Court) made a final ruling on Article 47 of the Minerals Law relating to a concern around a double-charging of royalty payments. On 22 November 2019, the Parliament re-amended Article 47 of the Minerals Law (Latest Amendment) to eliminate the conflicting wording in the 2019 March Amendment in relation to potential double-charging of royalties, first from the mining licence holders, and then from entities that do not hold mining licences but purchase minerals from the mining license holders and resell to third parties directly or upon processing. The Latest Amendment entered into force on 25 November 2019. The rates of, and procedures applied to, royalty payments have not been affected by the Latest Amendment.

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