The old Mongolian proverb rings true across generations: “Busy hands bring wealth”. Unfortunately, for a growing number of business owners across the country, this wisdom has curdled into bitter irony. They toil, they strive, they put in the hours, and still find themselves sinking deeper into financial quicksand. At the heart of their plight lies a punishing cycle that has ensnared companies nationwide. When businesses fall behind on tax and social insurance obligations, government authorities respond by freezing their bank accounts and seizing their assets. Revenue continues to trickle in, but owners cannot touch a single tugrug. They watch helplessly as their operational lifeline runs dry, unable to pay wages, settle debts, or even chip away at the very obligations that triggered the freeze in the first place. It is, by any measure, a catch-22 of staggering proportions.
What follows the freeze is perhaps more troubling still. Businesses describe receiving calls from tax and social insurance officials who, rather than offering a path forward, engage in what amounts to backdoor bargaining. “When and how much will you pay?” the officials reportedly ask. “Give us a clear commitment, and we’ll unfreeze your account.” For entrepreneurs already stretched to breaking point, these conversations feel less like problem-solving and more like having a boot pressed firmly on their throat. Few stories illustrate this predicament more starkly than that of LKG Engineering, a construction firm that has weathered 16 years in one of the country’s most volatile industries. Today, it teeters on the edge of collapse.
“We are staring down the barrel of bankruptcy,” confessed a company representative, speaking with a weariness that comes from fighting a losing battle. The numbers tell a grim tale: over 200 million MNT owed in social insurance contributions and another 310 million MNT in value-added tax arrears. LKG Engineering is no faceless corporation, it is a family affair, founded by brothers and staffed by relatives who once believed that honest work would see them through. That faith has been tested to its limits. The representative laid bare the arithmetic that has bled the company dry. Social insurance alone claims 24 percent of earnings, or 12.5 percent from the employer’s pocket, 11.5 percent withheld from workers. Layer on personal income tax and value-added tax, and a staggering 44 percent of every tugrug earned vanishes into government coffers before the company sees a cent of profit. “One in every four MNT we make goes straight to contributions. Add the rest, and nearly half our revenue disappears before we can reinvest a single coin,” the representative noted.
The crushing tax burden might have been manageable in better times. But Mongolia’s construction sector has seen better times come and go. A speculative bubble inflated property prices beyond what ordinary buyers could stomach, and now the market has gone cold. Across Ulaanbaatar, apartment blocks stand half-empty, monuments to overconfidence and miscalculation. With sales drying up, cash flow has become a trickle. Subcontractors wait months for payment. Workers’ wages arrive late, if they arrive at all. When forced to choose between paying staff and paying the taxman, most owners opt to keep their people fed. The debt to the state compounds, interest accrues, and eventually the dreaded freeze arrives.
Moreover, in Bayangol District, small business owners are feeling the pinch of rising costs and heavy tax burdens. For many, staying afloat has become a daily struggle. In particular, D.Otgonbayar, who runs a landscaping and service company, employs about 50 to 60 seasonal workers. He admits that while their daily pay ranges between 80,000 and 100,000 MNT, most are hired on a temporary or contract basis and remain unfamiliar with how to declare or pay taxes. “When we tell them to set aside 10,000 MNT from their daily wages for taxes, many get upset. They also refuse to pay social insurance at the minimum rate. To keep them from quitting, we’ve been paying full wages without deductions. Now we’re 98 million MNT in debt, and 65 million MNT of that is for social insurance, and our account has been frozen,” D.Otgonbayar explained. He accepts part of the blame for this debt, saying the root of the problem lies in the system itself. “Both employers and employees shy away from paying because the tax rates are simply too high. People don’t see any benefit from their contributions. Many feel the government services are poor and the quality of life gets worse every day while the gap between rich and poor keeps widening,” he said.
J.Tuvshin, who manages a small furniture factory in the same district, also tells a similar story. “We’re neck-deep in debt to the tax office, the social insurance fund, and even non-bank lenders. It’s barely manageable,” he said. His company employs 10 people, each earning about 3 million MNT a month. “Our monthly payroll comes to 30 million MNT, but over 10 million MNT of that goes straight to taxes and social insurance. When we don’t have enough cash flow, we end up postponing tax payments just to cover salaries. Skyrocketing prices for raw materials and transportation have further eaten into profits. Taxes are calculated on sales, not net profit, which makes things even harder. On top of that, we still have to pay VAT. To stay competitive, we tried offering customers the option to buy furniture with or without VAT. The tax authorities ordered us to include VAT in all sales and warned of penalties for any violations. At this point, running a small or medium-sized enterprise in Mongolia feels impossible,” J.Tuvshin shared.
‘Account closure may be required again under the law’
Across the country, small and medium-sized enterprises remain the lifeblood of the economy but for many, surviving under mounting tax debts and frozen accounts has become a daunting challenge. Ask any small business owner in the service sector, and their story is likely to echo the same refrain, such as unpaid taxes, overdue social insurance contributions and bank accounts locked by the authorities. The question that now hangs in the air is how to break this vicious cycle, how to ensure that businesses can meet their obligations while continuing to operate without being suffocated by debt.
An official from the Mongolian Tax Authority’s Public Relations Center explained that tax inspectors are legally empowered to freeze a company’s accounts, seize assets and demand settlement of outstanding taxes. “If the debts and payments are cleared, those measures are lifted. However, following an order from the Prime Minister earlier this month, the accounts of 12,153 enterprises were unfrozen for a period of one to two months to allow them to pay off their debts. These companies owed a collective 3.7 trillion MNT. Between April 7 and 21, 1,578 of them have already paid 43.6 billion MNT in tax. If they fail to meet their obligations within the given period, their accounts will be closed again. That’s the law,” the official said.
According to official data, Mongolia has around 265,000 registered enterprises, but only about 117,000 are currently active, or roughly 40 percent. By the end of 2025, some 16,000 companies had their accounts sealed due to unpaid taxes. On April 7, under the Prime Minister’s directive, bank accounts of more than 12,000 tax-indebted firms and an additional 6,000 with overdue social insurance payments were reopened temporarily. Collectively, they owe about 3.7 trillion MNT to the tax authority and several trillion more to the social insurance fund. In short, only one in two registered businesses is still operating, and nearly one in 10 remains trapped in debt. The Government’s recent measure to reopen these accounts has offered a brief window of relief and a chance for recovery, which is part of a broader effort under the “Liberate” initiative to ease bureaucratic hurdles and support struggling enterprises. Whether this breathing space will be enough to bring lasting stability to the small business sector remains to be seen. For now, owners can only hope that this reprieve marks the first step toward genuine economic revival rather than just a temporary pause before the next wave of hardship.
No tax amnesty
For many small and medium-sized businesses, the weight of taxes has become unbearable. Owners across industries say they are being brought to their knees by rising VAT and mineral resource taxes. Few companies, they claim, can pay their dues in full without slipping into debt. In principle, everyone who earns income from companies and organizations to individual citizens is required to pay taxes. However, the growing mountain of unpaid dues reflects a broader failure to keep pace with economic reality.
According to A.Munkhzaya, a consultant at the financial and tax advisory firm Bodit Credit, “While wages and pensions have gone up and sales have increased, real profits have not. Inflation, a volatile exchange rate, and import dependence have eroded earnings. Unless tax amounts and thresholds are adjusted to reflect net profits, businesses won’t grow. A company that made 5 billion MNT five years ago might now record 7 to 8 billion MNT simply because of exchange-rate differences, but its actual profit hasn’t changed, and it’s taxed all the same,” she said.
She added that inconsistencies in how VAT is applied and exemptions are granted create even more obstacles. As long as the tax environment and rates remain as they are, no amount of “preferential loans” will truly support business growth, A.Munkhzaya informed.
Economist and financial analyst Ch.Batsuuri offers a more nuanced view. He argues that rising tax and social insurance debts do not necessarily mean businesses are losing money or being crushed by taxation. “Our tax rates are not higher than the global average. But monitoring and transparency have improved, reducing the scope for hiding income and creating the perception that debt is growing. In many cases, the issue isn’t excessive taxation but tighter enforcement and clearer oversight,” he explained.
To provide relief, the Government is considering raising the threshold for small and medium-sized enterprises eligible for the 90 percent tax refund from 1.5 billion to 2.5 billion MNT, and expanding the simplified one percent VAT regime to cover businesses with annual revenue up to 400 million MNT. Plans to implement these reforms next year are included in the latest tax package proposals.
Still, most experts agree that closing bank accounts should be a measure of last resort. “Businesses won’t solve their problems simply by reopening accounts or declaring amnesty. Success depends on managing finances wisely and enforcing fair, balanced tax policies,” A.Munkhzaya warned.
Officials at the Ministry of Finance share a similar concern. A representative emphasized that while most taxpayers meet their obligations, blanket amnesty could encourage negligence and undermine trust in the system. The official noted that previous amnesty measures had even contributed to Mongolia’s inclusion on the Financial Action Task Force’s “Gray List,” as they risked legitimizing untraceable or illicit funds. Given that risk, the Government is steering away from one-off pardons and instead focusing on structural changes to ensure fairer taxation, lower burdens, and a healthier relationship between the state and the business community. The upcoming reforms may well mark the first real step toward that goal.
