In our most recent blog post we introduced the concept of the corporate guarantee in Mongolia, its basic function in a commercial transaction, and some unique aspects of such guarantees under Mongolian law.
Today, I wanted to briefly summarize the basic roles and responsibilities taken on by the Guarantor and as well as the Obligee.
Firstly, remember that the Obligee has a positive obligation to report to the Guarantor if and when the Obligor has failed to perform its duties. An Obligee will lose its right to claim against the Guarantor if the Obligee doesn’t properly perform this notification. The Obligee should also provide further information relating to the circumstances of the failure of Obligor as requested by the Guarantor.
As for the Guarantor, it is entitled to claim all rights and defenses as to non-payment which the original Obligor would be entitled to. The Guarantor will keep such rights and defenses even where the Obligor has taken action to relinquish or waive such rights.
If the Obligor is a natural person, in case such individual dies, the estate is primarily responsible for meeting the original obligations utilizing the funds and resources at its disposal. The Guarantor is only required to pay any amounts which cannot be covered through the estate.
The Guarantor of course has the ability to challenge a claim raised by Obligee if there are legitimate concerns.
As to potential liabilities of the Guarantor, beyond the obvious chance that the Guarantor may be made to pay in the event the Obligor doesn’t, the Guarantor may be required to pay any expenses in relation to early contract termination, or legal fees and expenses relating to any judicial proceedings required to adjudicate claims made by various parties. The guarantee contract may also specify that the Guarantor is required to pay for any damages or loss caused to the Obligee by the Obligor’s failure to meet its end of the agreement. The Guarantor will also be made to pay for any interest accrued do to the non-payment. Where Guarantors are more than one individual persons, they will each be jointly liable for the Guarantee regardless of any specific agreement between them.
There are many moving parts and considerations which we cannot address fully and effectively in this blog post. If you may require a corporate guarantee in Mongolia, you should seek assistance from a Mongolian lawyer.
One of the firm’s Mongolian lawyers was asked recently to assist a longstanding client to confirm the legality of a corporate guarantee in connection with one of this client’s commodities trading transactions. The corporate guarantee is common in varies business transactions in Mongolia.
This particular client had some questions about the corporate guarantee, based on the client’s experience using similar instruments in the UK. A corporate guarantee in Mongolia has some special features, so it is worth taking a look at what makes a Mongolian corporate guarantee unique, and what the main laws are governing this vital business tool.
Under a typical guarantee contract the Guarantor undertakes to guarantee to an Obligee to accept a specific obligation in case of the failure of the Obligor to fulfill that obligation. The Guarantor’s obligation is normally limited by the Obligor’s obligation to the Obligee under the guarantee contract, and the Guarantor will not be responsible for obligations of the Obligor relating to separate agreements concluded after the date the guarantee is issued.
The guarantee contract itself may specify future obligations that come due at a certain time in the future, or conditional obligations which only arise in the event of the occurrence of a certain defined situation.
The guarantee contract must be concluded in writing. This is a formal requirement which is stated in the law. It’s always better to specify a limit to the Guarantor’s potential liabilities in case of the failure of the Obligor to meet its own obligations.
If the guarantee contract is to be valid for a period over 5 years, or by its terms is valid for an indefinite period, Mongolian law requires the Guarantor to notify the Obligee and Obligor at least three months in advance of any termination of the guarantee contract by the Guarantor;
If the guarantee contract is terminated on any party’s initiative, the Guarantor is legally required to fulfill its obligations arising before the termination of the contract.
Our next post will review some specific obligations of the parties to the guarantee contract under Mongolian law.
There are many reasons a company or organization may decide to liquidate. Some liquidations are compulsory, in which case the process occurs as the result of a court order. Other liquidations are voluntary, in which case the people running the organization decide to cease operations. Either way there are formal steps in which you should closely follow. One of one of the key aspects of any company liquidation is termination of employment. Here is a quick guide to termination of employment in process of company liquidation in Mongolia.
When terminating employees’ contracts, the employer must perform certain steps:
- formalize the termination of employment;
- complete all necessary payments to employees;
- complete the handover of work and duties by employees, if necessary provide employees with letter of reference;
- make corresponding entries to health and social insurance books, handover books to employees.
When liquidation process is formally initiated this establishes clear legal ground by which a company or organization may lawfully lay off employees. In compliance with Labor law of Mongolia, firstly, the employer must give notice of termination of all employees due to liquidation of the company to the employees’ representatives at least 45 days prior to the employment termination date. Once employees have been notified, the employer is required to issue a formal decision of employment termination and provide it to each terminated employee. This is the formalization of termination of employment. In such decision employer must specify the grounds for termination of employment, dismissal date, time period for employees to handover work and duties and complete all outstanding payments (salary, holiday payment, health and social security payments, etc.), amount of severance pay. In the case where employees’ contracts are terminated upon liquidation of a company or organization, employer needs to pay severance pay in an amount equal to at least the employee’s average salary for one month. The amount of severance pay may be negotiated between employer and employees’ representatives prior to issuing a decision, and typically this negotiation is required in any Mongolian company liquidation.
However, just because liquidation is underway, this doesn’t suggest that all employee contracts should be terminated immediately. In fact, it is often the case and preferred that some employees are kept on to help and support the liquidation process. For example, accountants may contribute by managing the liquidation balance sheet, to ensure the payment to all creditors, assist with final tax inspections, and other proceedings. Therefore it would make sense to keep such employees to support the liquidation process instead of terminating them immediately.
Following our recent post on foreign exchange trading in Mongolia, we had several inquiries regarding trade of crypto-currencies, such as Bitcoin. While there are no specific regulations in Mongolia addressing use or trade of crypto-currency, both Foreign Exchange and electronic payment and remittance services are allowed under the current regulatory framework, with only a permit required.
A Bitcoin trading (or mining) operation can be established in Mongolia relatively easily. One will only need to establish a Mongolian corporation. Then application must be made to the Financial Regulatory Commission of Mongolia for the appropriate permit.
Parliament has recently passed a bill to amend the Mongolia Criminal Code. The Amendments will create new liabilities for adviser’s of corporate CEOs, whose actions result in offenses such as money laundering, terrorism, bribery, environmental abuse, actions that threaten the nation’s economic security, or the abuse of state property.
Under previous law, only the CEO his or herself could be held liable in such cases. The amendments will hold those around the CEO, who advised or pressured a certain course of action to also take responsibility.
These changes will apply not only to private corporations, but also to state owned enterprises. It is interesting to note that while the Criminal Code previously contained over 80 items imposing certain legal liabilities on legal entities such as companies, the amended Code now has less than 30.
This is in general expected to make it easier to establish and operate a new company in Mongolia. The intention of the law appears to be to make it easier for companies to do business by providing more free dome of operation, while at the same time increasing liability for offenses at the top levels.
As we have discussed in the past, the Law on Capital City Tax was approved by the Parliament and new law has come into valid since October 1, 2015. Regulations dealing with procedures to register a tax payer, removal from registration and receipt of information was also approved in order to implement the law.
According to the law, the Capital City Tax is imposed on entities providing four special services including bars, restaurants, hotels and resorts. Other type of entities are exempt from the Capital City Tax.
However, retailers of all types of alcoholic beverages (including vodka, wine, whiskey, cognac, champagne, beer and airag /horse milk/ etc) and cigarettes (cigar, pipe and tobacco), which are operating on the premises of the Capital City are also considered tax withholders under the law.
The tax rate can be determined around 0-1.0 percent by the Citizens Representative Khural of Capital City based on the location and concentration of the population of particular area in Ulaanbaatar. Thus, the Resolution No 29/19 of Citizens Representative Khural of Capital City, September 29, 2015, set the Capital City Tax at 1 percent for above mentioned services and products in Capital City.
As for improving the Capital City Tax and taxation system, the Mayor of Ulaanbaatar, S. Batbold, and Head of the General Taxation Department L. Zorig signed recently a memorandum of understanding (MOU) in 2017.
Under this document The General Taxation Department will collaborate with the Mayor’s Office to monitor the implementation of tax laws and regulations, and continue the implementation of the law on Capital City Tax and the VAT.
The Parliament of Mongolia nullified the Law on Sanitation adopted on May 07, 1998 and passed the Law on Hygiene on Feb 04, 2016. The laws warrant the Constitutional right of a citizen to live in healthy and safe environment.
According to the new law, organizations and employers shall have the following duties:
- to demand employees and customers to comply with hygiene legislations;
- to impose a penalty on employee who is in breach of hygiene legislations;
- to comply with the order issued by a competent official or an authority with respect to standards and legislation on hygiene and to take all necessary actions to eliminate the offences and to respond;
- to comply with the norms and requirements of labor safety and hygiene during all stages of activities;
- to keep the public road and square free of garbage, puddle, snow or ice, to broaden green area and to keep stairs, walls and fences intact;
- to prevent infectious and non-infectious diseases, occupational disease, industrial accident and injuries;
- to include the employees to medical exam and screening;
- to employ a personnel who is in charge of labor safety and hygiene in accordance with rules adapted by State Central administrative authority in charge of Health and Labor related matters if the organization and legal entity in production and service business employs 50 people or more. If the organization in manufacturing and service business employs 50 people or less, it may employ the personnel on the basis of a contract;
- to approve annual expenses to spend on hygiene safety;
Also the organization and the employer is required to cooperate with the relevant professional NGOs in organizing hygiene trainings and shall support by providing accommodation and other expenses related to the training.
According to the law, following activities shall be prohibited:
- to take any actions and activities that has adverse impacts to human health and environment;
- to sell open food and operate production and service on public streets, squares, points or places where such activities were prohibited by the competent authorities;
If the organizations or persons do not comply with the law authorities shall impose the following administrative sanctions i.e. fine if the violation does not constitute a criminal offence.
As we posted previously, the newly adopted Mongolia Value-Added Tax (VAT) law has come into effect since January 1, 2016.
According to the VAT law, “Any citizen and legal person, who is engaged in the import and export of goods as well as the sale and manufacturing of any goods, performance of work and rendering of services in the territory of Mongolia, shall be value-added taxpayers.” VAT shall be applicable for the following goods, works and services where operational income value reaches 50 or more million tugrugs:
- all types of goods, works and services sold within the territory of Mongolia;
- all types of goods, works and services imported from abroad to Mongolia; and
- all types of goods, works and services exported from Mongolia;
Furthermore, the VAT shall apply to the representative office of a foreign legal entity whose revenue of sold goods, performed works and rendered services in the territory of Mongolia, has reached 50 million tugrugs or more.
In almost all cases, the value-added tax shall be imposed at the rate of 10 percent of the taxable amount of imported, manufactured or sold goods, performed works and rendered services. However, some certain types of goods, work and services can be subject to zero (“0”) percent VAT. The payment of VAT must be within the first ten days of the following month.
The newly adopted law also creates an incentive system with the possibility of recovering up to 20 percent of paid taxes if certain conditions are met. Initial such tax returns are expected to refund in the first quarter of this year.
A conference with our Mongolian Tax Law specialists can help you determine whether your company may be able to take advantage of the 0% VAT, or the VAT recovery.
Mongolia resident economic entities are taxable on aggregate annual income earned worldwide. Non-resident economic entities carrying out business activities in Mongolia are taxable on the income earned within the territory of Mongolia and otherwise from Mongolian sources.
According to the Law on Corporate Income Tax enacted in 2006, taxable corporate income includes income from activities, properties and sale of property.
The general tax rate for an economic entity incorporated in Mongolia is ten percent (10%) for the first 0-3.0 billion MNT and 300 million MNT, plus twenty-five percent (25%) for all income exceeding 3.0 billion MNT.
Dividend income, royalty income and interest income are taxed at ten percent (10%), income from the sale of a right at thirty percent (30%) and income from the sale of immovable property at two percent (2%).
A representative office of a foreign economic entity that transfers its own profit overseas is taxed at twenty percent (20%). Similarly, the following income of a taxpayer who does not reside in Mongolia but generates income in Mongolia shall be taxed at twenty percent (20%):
- dividend income received from an economic entity that is registered and operates in Mongolia;
- loan interest and payment for issuing a guarantee;
- royalty income and interest on a finance lease, payment for administrative expenses, rent, management expenses and lease, and income from the lease of tangible and intangible assets; and
- income from goods sold, work performed and services provided in the territory of Mongolia.
Payment of corporate income tax is on a quarterly basis with the payment for the first three quarters to be paid between the 1st and the 20th of the first month for the following quarter, and for the fourth quarter between January 1st and February 10th of the following year.
LehmanLaw Mongolia employs Mongolian Tax Attorneys and Accountants and can take care of all your Mongolia taxation needs!
A new draft law to amend to the company law was submitted to the Mongolia Parliament recently. The purpose of the proposed amendments is to improve the regulation of liability limited companies with majority state ownership. There have been problems which have occurred with corporate governance of such majority state owned companies, in areas such as shareholder and board meetings and selecting members of the Board and executive management.
The amendment aims to improve legislation concerning proposals to call regular and irregular meetings of shareholders of these companies and improve the effectiveness of the regular Board of Directors meeting so as to aid is role as decision maker and to ensure normal operations of these companies.
The draft amendment includes the regulations clarifying procedures for to the call of regular and irregular meetings of shareholders of and the effectiveness of Board of Directors meetings.
Once the draft law enacted, rights, obligations and liabilities associated with the liability limited companies dominated by state ownership shall be clear and no additional funding from state budget shall be required for enforcement of this law. We see this as a positive step to encourage independent decision making among leadership of key state owned enterprises, which are the primary vehicles by which Mongolia facilities and draws profits from several of its major mining operations.