LEGAL ALERT: AMENDMENTS TO THE LAW OF MONGOLIA ON INVESTMENT
On the plenary session of the State Great Khural (the Parliament) dated October 7, 2021, the draft law on amending the Investment Law submitted by MP Kh.Gankhuyag was discussed and 51.9 percent of the members who participated at the plenary session voted in favor and transferred to the Standing Committee on Economic Affairs to prepare for the first discussion.
Preconditions for drafting the Law on amending the Investment Law
In the Article 5 of the Constitution of Mongolia, it is stated that Mongolia’s economy is based on different forms of property following both universal trends of world economic development and national specifics, and the State regulates the economy of the country with a view to ensure the nation’s economic security, the development of all modes of production, and social development of the population.
Mongolia first adopted the Law on Foreign Investment in 1993 as part of the objectives of encouraging foreign investment, protecting investor rights and property and regulating foreign investment-related relations. As a result, between 1990 and middle of 2012, about 12,118 foreign companies from 112 countries were registered and around $14 billion foreign investment was made in Mongolia. Thereof, 74 percent of these investments were in geology and mining sectors, creating economic structure that is dependent on the mining sector alone and resulting low competitiveness, investment, and development in other industries.
Further, since the end of 2012, foreign investment has declined due to the global economic situation and the lack of domestic legal regulations supporting investment, the Parliament of Mongolia revised the Investment law in 2013, to protect the legal rights and interests of investors in the territory of Mongolia, establish a common guarantee on investment law, promote investment, stabilize the tax environment, and regulate other investment related relations that may determine the rights and responsibilities of government organizations and investors.
Within the current legal framework, minimum amount of investment is set for foreign investors. A foreign investor is required to choose its status as a business entity with foreign investment or a representative office prior to starting its business in Mongolia. Additionally, at least 25 percent of the foreign investment company must be owned by a foreign investor through an investment of no less than USD 100,000. The MP considered that the threshold is unnecessary for establishing a business entity with foreign investment. However, it is more suitable to specifically establish the minimum amount of investment in Mongolia in the case where an investor and their family apply for a residence permit.
The requirement for a minimum amount of foreign investment could be a challenge for investors who are interested in deciding whether to continue to increase the amount of investment after low initial investment. As for representative offices, they are not permitted to run business activities despite there being no restrictions regarding investment.
Mongolia is open to foreign direct investment at the regulatory level, yet it has received relatively low investment compared to other benchmark countries. Openness to investment alone is not enough to attract foreign direct investment and the challenges associated with the investment environment, governance and rule of law are decisive for the economic impact of private sector investment, including foreign investment. The barriers to initial investment describe the challenges of the investment environment in the country as a whole, including issues ranging from entrepreneurship to good governance and regulatory quality.
Foreign direct investment inflows into Mongolia reached $ 2.5 billion in 2020 which is down percent from a year earlier. In terms of economic sector, mining, quarrying, wholesale and retail trade and other services account for the majority. The high level of foreign direct investment in 2011 and 2012 was due to signing of the Oyu Tolgoi agreement. In order to increase investor confidence, the Government has established an Investor Protection and Support Council under the Prime Minister of Mongolia, which allows investors to protect their rights and address issues to the Government. In 2017 Public-Private Consultative Committee was established. These structures have received and resolved a large number of investor complaints and grievances, which presumably restored investor confidence and increased investment. Mongolia has acceded to the Washington Convention on the Settlement of Investment Disputes to promote and protect investment and established Agreements on Mutual Protection and Promotion of Investments with 43 countries.
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This legal information was prepared by Umguulliin GRATA International Mongolia LLP, the Mongolian office of GRATA International, an international law firm that has its branches in 20 countries around the world. The material contained in this alert is provided for general information purposes only and does not contain a comprehensive analysis of each item described. Prior to undertaking (or not undertaking) any action, readers should seek professional advice specific to their situation. No liability is accepted for acts or omissions taken in reliance upon the contents of this alert.