GILS Corporate law: Mongolia

MONGOLIA

(1) Forms of doing business and Establishment

1.1. What are the options for establishing a company's presence in a country (branch, representative office, subsidiary, etc.), and what are their key advantages and limitations?

In Mongolia, a foreign company can establish its presence through a subsidiary or a representative office (RO). The subsidiary may be established in the form of a Limited Liability Company (LLC). The LLC may, then, go public and change its form as a joint-stock company. 

Key advantages: 

• JSC: It is one of the company forms recognized under the Company Law of Mongolia. JSCs can carry out any business activities that are not prohibited by laws and are eligible for any business permits. It can raise funds by issuing additional shares and other securities publicly or privately. Shareholders are free to dispose of the shares in their ownership regardless of the other shareholders’ votes. On the contrary, the shareholders can also enter into an agreement to restrict the right to dispose of their shares.
• LLC: Another form recognized under the Company Law is an LLC. As the same as JSCs, it can carry out any business activities that are not prohibited by laws and are eligible for any business permits. LLCs can issue shares and securities convertible into shares only in private. Other securities may be issued both to the public or private. Generally, the shareholders must offer their shares to other shareholders in the first place. However, the preemptive right may be transferred to other shareholders wholly or partially under an agreement.
• RO: It carries out legal representation activities such as protection of the head company’s legitimate interests and making transactions on its behalf. Its activities are restricted to the charter adopted by its head company. 

Limitations: 

• JSC: As a listed entity whose share is publicly traded, JSCs are overseen by regulatory entities including the Mongolian Stock Exchange, the Financial Regulatory Commission, etc., and are subject to rules and regulations adopted by them. Primarily, JSCs must adhere to the corporate governance principles (e.g. to meet the minimum number a board of directors, establish board committees, periodical reporting and transparency obligations, time-limited obligations such as convening of the General Shareholders Meeting, etc.).
• LLC: The maximum number of shareholders is 50. Unless otherwise limited by its charter, it can operate for an indefinite period of time. Each foreign investor must invest at least USD 100 000 as registered capital of the company per the Law on Investment.
• RO: The term of the office is usually 2 years and is extended from time to time. It cannot carry out any business activities generating income. Eligible operations include promotion of their head companies’ business and market research, etc.

1.2. What is the process for creating a legal entity or another form of presence in the country, including the laws to follow, legal entities to be considered, documents required, stages and terms for registration? 

Applicable legislations: A legal entity is established in accordance with the Company Law of Mongolia and the Law on State Registration of Legal Entities. 

Types of legal entities: Please refer to the answer 1.1 above. 

Required documents for registration of the legal presence in Mongolia: 

• LLC:

1. application forms; 

2. name confirmation sheet;

3. shareholder resolution on the establishment of an LLC in Mongolia; 

4. charter of the new LLC; 

5. power of attorney to the Consultant; 

6. passport copy of the executive director, in the case of a foreign national; 

7. evidence of investment (account statement from both overseas bank and local bank, a reference letter from the local bank); 

8. lease agreement in mongolian and a copy of state registration certificate; 

9. receipt of payment of stamp duties and service fees; 

10. UBO related documents, if the founder is a foreign legal entity (state registration certificate, charter, etc., whichever shows the ownership structure of the parent company). 

• RO:

1. application forms; 

2. state registration certificate of the head office and certified translation into mongolian; 

3. profile/brief introduction of the head office and certified translation into mongolian; 

4. charter of the head office and certified translation into mongolian; 

5. resolution of the head office (shareholder) on establishment of the RO and appointment of a director and Certified translation into Mongolian; 

6. charter of the RO (2 copies in Mongolian, 1 copy in the original language); 

7. copy of passport of the RO’s Director, in case of a foreign national; 

8. lease agreement (in mongolian) and a copy of state registration certificate; 

9. power of attorney, if required. 

Registration procedure: 

• LLC:

1. A name verification sheet shall be obtained from the Authority for State Registration of Legal Entities of Mongolia (“Registration Authority”).

2. Temporary bank accounts shall be opened under the name verified as above.

3. The foreign investment shall be transferred to the temporary account.

4. Founding documents including the resolution on the establishment, charter of the new LLC, and other required documents shall be drafted and formalised (signed and sealed by a competent body, and apostilled). The documents shall be executed in bilingual, or a separate Mongolian translation will be done.

5. Ready-to-go documents are delivered to Mongolia and submitted to the Registration Authority.

6. A corporate seal is ordered on the basis of the registration certificate of the new LLC.

• RO:

1. Founding documents including the resolution on the establishment, charter of the RO, and other required documents shall be drafted and formalised (signed and sealed by a competent body, and apostilled). The documents shall be executed in bilingual, or a separate Mongolian translation will be done.

2. Ready-to-go documents are delivered to Mongolia and submitted to the Registration Authority.

3. A corporate seal is ordered on the basis of the registration certificate of the RO.

Terms for registration: LLCs are registered within 5 business days, and ROs within 3 business days, provided that all documents are complete and accurate. Unless otherwise stated in the charter of the LLC, it shall be registered for an indefinite period of time. While the RO is registered for a period of 2 years which can be extended from time to time.

1.3. What additional authorizations/approvals are required to create a legal entity or start operations, and how do they vary depending on the type of business (if any)? 

RO: There are not any specific authorizations or approvals required to establish a RO. 

Foreign-invested LLC: Under the Law on Foreign Investment, if a foreign state-owned legal entity intends to acquire 33% or more percentage of the total shares issued by Mongolian legal entities operating in the following strategic sectors shall get permission from the Ministry of Economy and Development prior to becoming the shareholder or investor: 

1. mining; 

2. bank and finance; 

3. the media and communications. 

1.4. What are the most common types of Legal Entities in your country and the differences between them in terms of taxation, liability, and management?

   1.4.1. What are the shareholder structures of these types of legal entities? 

   1.4.2. What is the Shareholders’ responsibility in these types of legal entities? 

   1.4.3. What is the responsibility of the representatives in these types of legal entities? 

   1.4.4. Briefly, what are the characteristics of the other types of Legal Entities? 

The most common type of legal entity in Mongolia is an LLC. There are not any major differences in terms of taxation. 

1. Shareholder structures. 

2. Shareholders’ responsibility. 

• A company shall be liable with its assets including properties and property rights owned by it. The company and its shareholders shall not be liable for each other’s liabilities. The shareholders are liable only to the extent of their shares owned.
• Shareholders holding more than 10% of the company shares individually or collectively with affiliated persons, or persons authorised to determine the company’s activities in other ways shall be liable to the company for property damages caused due to their wrongful actions with their own properties.
• Shareholders shall have dual liability for the company’s debts with all of their personal properties and property rights unless their personal properties and property rights are clearly demarcated from the properties and property rights invested in the company. 

3. Responsibility of the representatives. 

Under the Company Law, persons directly or indirectly involved in the company’s official making process and conclusion of contracts and transactions, such as the Board of Directors, members of the executive management team, Chief Executive Officer, head of the financial department, chief accountant, chief specialist, secretary of the Board of directors, etc., are considered as authorised officers of a company. They are subject to the following legal obligations, including: 

• to operate and exercise their power within the restrictions under the law and the company’s charter and other procedures;
• to uphold the best interests of the company in its operations and strictly adhere to its obligations under the law and the company charter;
• to take reasonable resolutions/decisions in the best interests of the company;
• to avoid conflict of interests when taking resolutions/decisions and notify the company, if any;
• to refrain from accepting any gifts or incentives from external parties while performing their responsibilities;
• to refrain from disclosing the company’s confidential information to others or using it for one’s own benefit.

The authorised officers shall be liable with their personal properties to the company, shareholders, and creditors for damages caused due to the following unlawful actions or omissions, including: 

• use of the company’s name for one’s own interest;
• deliberately giving false information to shareholders and creditors;
• fail to give information to shareholders;
• fail to store or archive corporate documents mandated to be maintained under the law;
• fail to give or give late the required information to persons authorised to demand so.

These liabilities are applicable to the responsible person regardless of whether has he/she been imposed liabilities under other laws (the Criminal Code, the Law on Infringement). 

4. Characteristics of the other types of Legal Entities. 

The major difference between JSC and LLC includes (i) supervision by regulatory authorities; (ii) reporting and transparency obligations for JSCs; and (i) flexibility to regulate certain issues under their internal rules and regulations for LLC, including (i) whether or not establish a Board of Directors; (ii) which body would resolve issues regarding (a) the price of shares and securities, (b) the market price of common stocks to be bought back; (iii) the condition to buyback of more than 5 percent of its common stocks; (iv) the procedure to convene shareholders’ meeting; (v) the procedure to select and appoint members of the Board of Directors or in its absence the executive management; (vi) additional items to be included in financial statements. 

1.5. What are the operating costs associated with the maintenance of a legal entity or presence in the country? 

The following are the basic costs associated with the maintenance of a legal entity: 

• office lease, utilities, and maintenance cost;
• employees’ remuneration, employer’s share of social and health insurance premium;
• contractors’ fees (accounting, legal services, etc.), if any;
• other costs as may be incurred depending upon specific needs of the company.

(2) General taxation issues 

2.1. What tax obligations are associated with doing business in the country? 

Annual taxable income: According to the Law on Corporate Income Tax, income tax shall be imposed on a taxpayer’s taxable income in a given year. The following incomes shall be subject to tax under Article 8 of the Law on Corporate Income Tax: 

• income from the sale of goods, works and services;
• income from riddles, gambling games, and lottery activities;
• income from technical, management, consulting, and other services;
• income from goods, works, and services received free of charge;(other similar incomes specified above);
• income from letting use or rental of movable and immovable properties;
• interest and forfeiture (penalty, undue loss) payments from a contractual defaulting party, and reimbursements accepted for damages;
• actual income from foreign exchange rate differences;
• income from sales and transfer of shares, securities, and other financial instruments;
• income from sales of intangible assets and movable properties except rights granted by state bodies (i.e. business permits) and shares, securities, and other financial instruments.

Tax rate: As stipulated by Article 20.1 of the Law on Corporate Income Tax, a taxable income earned (income from the sale of goods, works, and services) in the amount of MNT 0-6 billion for the given year shall be imposed with a 10% tax and taxable income over of MNT 6 billion for the given year shall be imposed with a tax equal to MNT 600 million plus 25% for taxable income over MNT 6 billion. 

However, taxpayers earning up to MNT 300 million in taxable income and operating outside of the following 3 areas, are subject to a 1% tax rate on taxable income regardless of the above rate: 

• exploration, mining, exploitation, transportation, and sale of minerals and radioactive minerals;
• planting of tobacco plants, producing and importing alcohol and tobacco;
• manufacturing of petroleum products, importing and wholesale and retail trading of all types of fuel, and exploring, mining, and selling of oil.

Other: Income described in the chart below is deducted when determining the amount of annual taxable income and is taxed at different rates on a gross basis:

2.2. What tax and customs incentives are available in a country? 

TAX 

Taxpayers earning up to MNT 300 million in taxable income and operating outside of the following 3 areas are subject to a 1% tax rate on taxable income: 

• exploration, mining, exploitation, transportation, and sale of minerals and radioactive minerals;
• planting of tobacco plants, producing and importing alcohol and tobacco;
• manufacturing of petroleum products, importing and wholesale and retail trading of all types of fuel, and exploring, mining, and selling of oil.

Taxpayers earning up to MNT 1.5 billion in taxable income and operating outside of the above 3 areas are entitled to a 90% tax reduction. If the entity is subject to 1% of tax as specified above, this tax reduction shall not apply. 

The following types of income are exempted from taxation: 

• incomes subject to the general tax rate and dividend generated from sales of products belonging to a taxpayer who is operating in Mongolia under a production sharing agreement in the petroleum sector, as well as income transferred abroad that is generated from the sales of such products;
• operational income of educational and health institutions;
• interest income pertaining to the pledge of intellectual property rights;
• operational income of investment.

The following types of income are subject to tax reduction: 

• 50% tax reduction in rural areas located 500 km (or more) away from the capital city, or a 90% of tax reduction in rural areas located 1000 km (or more) away from the capital city for operational income earned from that area by an entity operating there and registered with the administrative unit of that area. In this case, such an entity must interact with the relevant local tax office and have created job positions (verified by social insurance premium payment);
• income earned by business entities having more than 25 employees out of which 2/3 accounts for disabled persons;
• tax applicable to income earned from sales of innovative products, works, and services newly manufactured by a start-up company for five years from the date of state registration;
• tax applicable to income that is earned in the free zone and is equal to 50% of the investment by an entity that invested USD 500 000 or more in infrastructures such as energy and heat sources, pipelines, clean water supply, sewerage, roads, railways, airports, and telecommunication for the free zone;
• tax applicable to income that is earned in the free zone and is equal to 50% of the investment by an entity that invested USD 300 000 or more in the establishment of warehouses, loading and unloading facilities, hotels, tourism complexes, import substitution, and export product factories;
• tax applicable to the income of citizens, enterprises, and organisations that finance projects to improve the quality of natural water and restore rivers and streams in order to increase the water resources of a certain territory and create a reliable water supply;
• 50 percent tax on the income of the enterprise that produces or cultivates the following products only:

                 - cereals, potatoes, vegetables; 

                 - milk; 

                 - fruits and berries; 

                 - fodder and fodder plants; 

                 - meat and meat products produced in intensive poultry farming. 

• the tax on the income of the main activity of the heat and electricity generation project implemented by taxpayers after January 1, 2023, will be reduced by 90% for 3 years and 50% for the following 3 years, starting from the next accounting period after the beginning of earning income;
• operational income of tour operators;
• tax on the sales income earned from tourism products and services of tourism services entities (start-ups) for 3 years from the date of state registration;
• 90% tax reduction on operational income from the production of main and auxiliary equipment for generators with a capacity of more than 5 megawatts of electricity or more than 1.5 megawatts of thermal energy; etc.

The above incentives are not applicable to the following sectors: 

• exploration, mining, exploitation, transportation, and sale of minerals and radioactive minerals;
• planting of tobacco plants, producing, sales, and importing of alcohol and tobacco;
• importing or re-sales of petroleum products; 
• providing talk services; construction of energy sources and networks, energy production, sale and distribution;
• civil aviation services;
• construction and maintenance of highways and road facilities.

CUSTOMS 

According to the Law of Mongolia on Customs Tariffs and Customs Duties, customs tariffs on imported goods are classified into general, most favoured nation, and preferential tariffs, where the general tariff is double the most favoured nation tariff. Preferential tariffs are determined by international agreements. 

Exemption. 

The following goods, among other things, are exempted from customs duty: 

• gas fuel, its tanks, equipment, special-purpose machines, equipment, and facilities;
• civil aircraft, engines, and ground trainers, their parts, components, sub-assemblies, spare parts, equipment, and related tools;
• raw materials, materials, and reagents that are not produced domestically and are necessary for the production of new goods and products for domestic and foreign markets through innovation projects;
• special purpose machinery, mechanisms, equipment, facilities, raw materials, materials, chemicals and explosives, and spare parts imported by the contractor and subcontractors for activities related to oil and unconventional oil during the entire period of exploration and during the first 5 years of operation;
• renewable energy research and production equipment, its accessories and spare parts; etc.

2.3. What are the accounting and reporting requirements for different types of presence, and how often must they be submitted? 

Accounting and reporting requirements. 

Fiscal year: 

According to the Law of Mongolia on Accounting, the fiscal year of the financial statement commences on January 1 and ends on December 31 of that year. 

Filing period: 

Financial statements: Foreign investors are undertaken to keep accounting in accordance with international standards under the Law on Investment. Thus, entities obliged to adhere to international standards shall file their financial statements semi-annually within July 20 and annually within February 10 of the following year. 

Corporate income taxation report: If the taxable income of the previous year is MNT 6 billion (approx. USD 1 780 415) or more, the taxpayer shall submit to the tax authority the quarterly tax returns for the given tax year by the 20th day of the first month of the following quarter and the annual tax report by the 10th day of February of the next year. 

Social insurance premium payment report: Under the Law on Social Insurance, the social insurance premium payment report shall be submitted by the 5th of the following month. 

Value-added tax report: Withholding taxpayers (if the sales income reaches MNT 50 million or more, the taxpayer shall be registered as a withholding taxpayer) shall transfer the tax for the goods, works, and services sold and submit the respective report by the 10th of the following month under the Law on Value Added Tax. 

Language and currency: 

According to the Law of Mongolia on Accounting, any entities operating in the territory of Mongolia shall keep their accounting records in Mongolian language, as well as register and report their work and transactions in national currency or MNT. 

Accounting policy: 

Management of entities shall approve and implement accounting policy documents in accordance with accounting laws, standards, rules, regulations, and instructions. The person who keeps the accounting records, prepares and reports the financial statements shall be a professional or certified accountant. 

Archive requirements: 

Accounting records and financial statements shall be kept for at least 10 years. 

2.4. What is the taxation of dividends for foreign investors? 

Dividends transferred to non-resident taxpayers shall be subject to 20% withholding tax, unless otherwise stipulated by a double taxation agreement between Mongolia and the resident country of that nonresident taxpayer.

2.5. What strategies exist for minimising tax liability when conducting international business?

The general withholding tax rate for incomes generated in Mongolia and transferred to non-resident taxpayers is 20%. This rate may vary usually between 0 to 10 percent under the Double Tax Agreements of Mongolia with 26 countries. Therefore, it is preferable that foreign investors establish a presence in Mongolia from one of those 26 countries. 

(3) Regulatory and miscellaneous 

3.1. What are the general data protection and privacy requirements in the country, and how do they affect company operations? 

Under the Law of Mongolia Personal Data Protection, personal data (sensitive information of a person and the name of the person’s parents, his/her name, date of birth, place of birth, address of residence, location, civil registration number, information on assets, education, membership, electronic identifiers, other information that directly or indirectly identifies or is identifiable of that person) may be collected, processed and used only upon the following grounds: 

• with the consent of the data subject;
• on the grounds specified by law;
• in cases provided by law, to exercise his/her rights and fulfil his/her duties in the employment relations;
• to conclude contracts and ensure the implementation of concluded contracts;
• the information is disclosed to the public in accordance with the law;
• to create historical, scientific, artistic, and literary works, open data, and statistics making it impossible to identify a person.

The law prohibits the transfer of information to foreign individuals, legal entities, or international organisations, except as provided in international treaties to which Mongolia is a party, or with the consent of the data subject.

Further under the Labor Code of Mongolia, employers are prohibited from collecting and using the following information about employees: 

• information related to personal secrets;
• membership in political parties, public organisations, and trade unions. 

Information required from employees may be collected, processed and used to carry out job interviews and communicate with them in the course of employment relations in accordance with an internal procedure. The procedure and its amendments must be placed in an area clearly visible to all employees. The employer must present the necessity and purpose in advance of obtaining an employee’s information from third parties.

3.2. What labour law features should be considered when hiring local and foreign employees? 

Priority to seek local employees. 

Employers must seek the necessary employees within the labour market of Mongolia in the first place. For this purpose, information about the necessary vacancies and job requirements should be submitted to the employment agency of the respective province and district, and a request to hire an employee should be made. Afterward, job advertisements will be posted in the employment register and database, and employees will be sought in Mongolia within 14 business days. It is notable to avoid exaggerating the qualifications and skills required to perform the job, as well as refusing to hire a qualified candidate from Mongolia who meets the job requirements. After due completion of this process, the employer may invite foreign employees. 

Employment contract. 

Term: Employment contracts shall be concluded for an indefinite term, except for the below cases: 

• working as an apprentice;
• working in a probationary period (3+3 months);
• undertaking seasonal jobs;
• working instead of an employee whose position is being retained;
• working in a temporary workplace;
• undertaking the work or duties limited by time frame due to funding or scope of the work. 

Mandatory clauses: An employment contract shall include the following mandatory conditions: 

1. the job title and duties as outlined in the job description; 

2. the workplace location; 

3. the remuneration amount; and 

4. working conditions. 

In addition to the above, a “serious breach” that would result in immediate termination of the employment must be exclusively outlined in the contract.

3.3. What are the requirements for currency regulation and currency control? 

According to the Law of Mongolia on Conducting Settlement in National Currency, the price of goods works, and services must be expressed and conducted in Mongolian togrog (MNT) in the territory of Mongolia unless with an official permit by the MongolBank (the Central Bank of Mongolia). In other words, Mongolian legal entities and individuals must conduct transactions with one another using MNT.

Transactions in the amount of MNT 20 million (app USD 5 924) or more all at once or in instalments over a 24-hour period may be notified to the Financial Information Unit (“FIU”) of Mongolia by commercial banks. If deemed justifiable, the FIU may suspend the transaction and take further actions including the collection of relevant information and transfer of the case to a competent authority if the transaction was determined to be dedicated to money laundering and terrorist financing, or otherwise, cancel the suspension of the transaction (the Law of Mongolia on Anti-Money Laundering and Combating Financing of Terrorism). 

3.4. What corporate law features should be considered when planning mergers, acquisitions, and company restructuring in the country? 

Buyback of shares: The reorganisation of a company can have a significant impact on the position and interests of shareholders. If the company is reorganised by means of reorganisation (merger, acquisition, separation, division, or transformation), the shareholder who voted against the decision has the right to demand buyback of his shares from the company. The shares of the shareholder who has not exercised this right, his/her shares will be converted according to the reorganisation decision/resolution and the shareholders of the reorganised company will enjoy the above rights.

Permit to reorganise a dominant entity: In the case of reorganisation of a dominant entity; or acquisition of more than 20% of common shares or 15% of preferred shares of one’s competing entity that sells the same goods and products; or consolidation or unison with related parties, the company shall obtain a permit from the Authority for Fair Competition and Consumer Rights (AFCCR) as per the Law of Mongolia on Competition. The AFCCR shall review and issue an opinion on whether the reorganisation or acquisition would restrict competition within 30 days.

Notification to creditors and clients: Within 15 working days after the decision to reorganise the company is issued, the reorganised company shall notify the creditors and other clients in writing of the reorganisation. In the case of a joint-stock company, it must notify the Financial Regulatory Commission of Mongolia and a securities trading organisation of the decision/resolution within 3 business days. The reorganisation of the joint-stock company shall be registered to the State Registration Authority on the basis of permission from the Financial Regulatory Commission.

3.5. What are the most efficient mechanics for dispute resolution?

Negotiation: The foremost efficient method is that the parties amicably negotiate on mutually beneficial solutions before proceeding to any third-party involved mechanisms, thereby saving money and time. 

Mediation: Besides the conventional court proceeding, parties are free to agree on alternative dispute resolution mechanisms such as mediation and arbitration. Mediation is less formal than arbitration. Once the parties reach an agreement and conclude a mediation settlement agreement, it shall be binding upon the parties and enforceable under the court judgement enforcement procedure. 

Court/Arbitration: If the mediation is unsuccessful, arbitration or court is the last resort of dispute resolution. However, parties cannot establish both of these mechanisms as they are equally competent except for the exclusive jurisdiction of the Mongolian court over claims regarding immovable property, inheritance, and alimony. Thus, the dispute resolution method should be explicitly stipulated in the contract. Depending on the nature of the dispute and the parties’ preference, either can be the option. If time is the priority, arbitration is more convenient than court proceedings. Arbitration may be costly in some cases.

 

Author:

Buyanjargal Tungalag.