Tag Archives: Company Law

How to De-Register a Company in Mongolia?

Get ready for an exciting journey through the process of company liquidation in Mongolia! Whether it’s initiated by a decision of the shareholders or an order of the court, the process is filled with twists and turns.

If the shareholders decide to liquidate the company, the Board of Directors (or the executive body in its absence) will prepare a draft Shareholders Resolution of Liquidation. This resolution must include the appointment of a liquidation commission, authorization of its powers, a timeline for liquidation, and a procedure for distributing the company’s remaining property among shareholders after creditors’ claims are satisfied. The resolution must be approved by an overwhelming majority of shareholder votes.

Once the resolution is approved, the company must notify the relevant state registration authority in writing within three working days and attach the original decision on liquidation. The executive authority of the company will then be terminated, and the liquidation commission will take over.

The liquidation commission is responsible for publicizing the pending liquidation of the company via the media. If the company has any licenses, the commission will request that they are canceled and returned to the relevant authority. The commission must also complete several actions during the liquidation process, including officially handing in the State Registration Certificate of the company, closing the company’s bank accounts, handing over the company’s official seal to the police, and obtaining a form from the Customs Office to confirm no related taxation issues remain on behalf of the company.

The Tax authority will then examine and investigate the company’s tax records, and an auditor will be required to handle the closing financial statements. An accountant will issue the closing balance of the company. Once the Liquidation commission has submitted the required documents to the State Registration Office (SRO), the SRO will remove the legal entity from the state register. The registration body will announce publicly the deletion of the company from the State Register. It will likely take 6 months to 1 year to complete the company liquidation process.

What is the Capitalization Requirement for a new Foreign-Owned Company in Mongolia?

Our team of Mongolian lawyers regularly field questions related to Mongolia’s capitalization requirements for the establishment of a new Mongolian company.

Mongolian law requires payment of at least USD $100,000 in capitalization funds per foreign shareholder when establishing a foreign owned company in Mongolia. This means a company established by a single foreign shareholder will be required to pay-in at least $100,000, while a company established by two foreign shareholders must pay at least $200,000. This requirement is the same whether the shareholder is a foreign individual person, or a legal entity.

A frequently asked question is what are the permitted uses of these funds after the company is successfully established. The good news is that once the company has been formally registered and operations commence, the initial capitalization funds will be available for normal use by the company in connection with the company’s expenses and liabilities incurred in the course of operations. The government of Mongolia, generally does not track how these capitalization funds are used. With the right contractual arrangements in place, the new Mongolian company will even be able to remit a significant portion of the initial capital back to the foreign shareholder/s.

Prospective investors should note however that in the event the Mongolian entity encounters difficulty, it will be legally liable up to the $100,000 threshold, regardless of whether that initial payment remains on the company’s books, or has been spent or remitted abroad.

It is important to note that where the total foreign ownership of a company is lower than 25% the company will not be considered foreign owned for the purposes of Mongolian law, and the $100,000 capitalization requirement per foreign shareholder will not apply. As a result, it is common for foreign investors interested in entering Mongolia to work with a local partner holding 76% of a new Mongolian entity, while the foreign side holds only a minority 24%. In some cases this arrangement works well, while in others differences in strategy or management style between the foreign investor and the Mongolian partner may lead to disagreements. When considering a prospective joint venture of this kind, care must be taken to structure the legal documentation appropriately to best protect the foreign shareholder.

Another model we have encountered is a “Nominee Shareholder” arrangement. In this structure, the foreign investor reaches an agreement with a Mongolian national individual or company to establish and hold the equity in a Mongolian entity while acting on behalf of the foreign investor. This model can be effective and is permitted by Mongolia laws, however this structure carries significant potential risk in the event the wrong Mongolian Nominee is selected. As the Nominee Shareholder will have full control over the Mongolian company operations and management care must be taken in the selection of the Mongolian side, as well as in putting in place the appropriate legal agreements to limit the Nominee Shareholder’s authority to act and to maximize the foreign investor’s rights to recover from the Nominee.

Setting up a Company in Mongolia

Establishing a new company in Mongolia is relatively easy, however as with any country, there are unique legal and business practices which require careful consideration and planning.

There are four steps to establishing a company in Mongolia.  Firstly, a name for the new company must be formally registered, along with sector in which the company will operate.

This can be done via filing an application for reservation of the legal entity’s name with the Legal Entity Registration Office (LERO). LERO will verify and confirm the proposed name of the new company by checking it for similarities with other previously registered corporate names. LERO will confirm the name of the new company if it is not too similar to the name of an existing legal entity. A newly confirmed name will be reserved for 10 business days.

Secondly, a bank account must be established in the name of the new company. For a new company established by one or more foreign shareholders totaling at least 25% of ownership of the Company, USD $100,000 must be deposited into the account for each foreign shareholder. This is a legal requirement and not optional.

Thirdly, the company must be formally registered with the LERO. LERO will decide whether or not to register the new company 10 working days after receiving application documentation for a foreign invested company.

The final step will be to obtain a formal company seal (stamp) for the new company. The stamp will be used to execute contracts and official documentation. After each of these steps has been completed, the new company is ready to start operations.

Our Mongolian lawyers have successfully established companies in Mongolia for a variety clients in various business sectors. We are also able to provide registered address services, document management services, accounting and payroll services, tax preparation and reporting services.

What is the difference between Salary and Remuneration?

Under the Labor Law, an employee’s remuneration consists of base salary, additions, additional pay, vacation pay, bonuses and incentives.  

Additions are paid to certain employees depending on specialty rank or degree, abnormal working conditions or responsibilities, as well as for utilizing the employee’s high professional skills or work experience in respect of Contract employees. Additions could also include similar additions provided by law, collective agreement or internal policies. 

Additional pay includes overtime pay, pay for performing work outside the scope of one’s job duties or job position (including simultaneously or in combination with the current job), pay for substitution of another employee, and other similar additional pay stated in law, collective agreement or internal policies (work rules). In respect of Contract employees, additional pay may be paid on the basis of work results.

Bonuses and incentives are paid for the employee’s work result or contribution to the company’s achievement, which include bonuses, one-time monetary incentive for completing a certain special task, and other monetary incentives paid pursuant to law, agreement or internal policy. The remuneration does not include the following: 

      - all types of statutory benefits, including for pregnancy and maternity leave, loss of working ability, unemployment, pension etc. 

      - reimbursements; and 

      - allowance income, including for transportation, fuel, housing and meal discounts.

The remuneration structure above applies to expats employees under contracts as well.

Establishing a Branch of Foreign Company in Mongolia

A foreign company may establish a branch in Mongolia as a secondary establishment of the parent company. Legally, such a branch is considered a part of the parent company, and as such, it is able to perform the principal functions of the company, however it is dependent on the foreign parent company. This type of branch will not be deemed to be a unique legal entity and must conduct its activities on behalf of the foreign company that established it. The foreign parent company will be responsible for the activities of the branch.

A branch of a foreign legal entity in Mongolia shall be registered with the registration authority. An executive director, founder, a person to represent without the power of authority or other persons authorized by the company will apply an application to the state registry and will include the following documents:

  • Foreign company’s registration certificate and the Charter. (copy)
  • Shareholders resolution to establish a branch in Mongolia.
  • Shareholders resolution to appoint a director of a foreign company’s branch and to provide an address and contact details where a branch will be.
  • A branch’s rule which includes branch address, contact information and conducting activities.
  • If a director of a branch is a foreign resident, a copy of the citizen’s passport.
  • Evidence of the branch office address such as rental agreement or an immoveable property certificate.

All the documents made in foreign language should be translated. Also, documents issued in a foreign country should be apostilled.

Helping Foreign Entrepreneurs Understand Today’s Mongolian Business Environment

The past couple days we have been assisting clients who have interest in entering the Mongolian market. but lack of guidance and reliable resources to do so was challenging them. If you are looking to expand you business in Mongolia, this post is for you.

Mongolia is a landlocked country established an industrial economy based mainly on mining and agricultural product processing. The government will keep looking into methods to diversify the economy, concentrating on new infrastructure projects, the development of the agriculture industry, and using materials and equipment made locally for major projects. In sectors including energy, fuel import and export, telecom, solar energy, wind turbines, and hydropower projects, the government provides international investors with opportunities.

So far, Mongolia has signed double taxation agreements with 26 nations and “Foreign Investment Protection and Promotion Agreements with 43 other nations.

Mongolian Investment Law requires that foreign investors to operate through the following forms of business which should be registered with the Legal Entities Registration Office (LERO): a limited liability company, a representative office or a limited liability partnership. Sole proprietorships like permanent establishments are not required to register with the LERO but should be registered with the tax and social insurance authorities.

There are particular legal and business practice that requires consideration and planning for starting a business. The main legal documents to consider are a company charter and shareholder’s resolution. Particularly because the company charter makes an arrangement for shareholder ownership, they should be resolved based on the company’s charter if there is any dispute over the share.

Furthermore, it also needs to examine whether your business activities are required to obtain special permission under the Law of Permits. Before the Permitting Law is enacted on 16 June, 2022, state administrative officials were authorized to issue 1600 different licenses for business activities. Now, the Law reduces licenses to 365 different types of permits in order to implement more flexible business environment for entrepreneurs and companies. This reduction is a step by the government to make investment in Mongolia more attractive for local businesses and foreign companies alike.

What to Consider when Entering into an Employment Agreement (Part 3)

Finally let’s look more closely into employment agreement with special conditions, and other additional clauses that may be included in any type of employment agreement.

So when should employer enter into employment agreement with special conditions and what are its specifics?

Employment agreement with special conditions should be concluded when hiring an executive level employee. In addition to specifying in employment agreement main terms and conditions provided by Labor Law, parties may also specify the expected final results of employee’s work, his/her duties and responsibilities, procedure to evaluate the agreement, and amount of compensations, bonuses, benefits and percentage of profit margin to be paid to employee. Employer may also specify in the employment agreement rights and assets made available to employee, his/her right of possession, use and disposition, liability for damage to employer’s assets and fiduciary obligations to employer. Aside from general grounds for terminating an employment agreement, Labor Law also provides four additional grounds for terminating an employment agreement with special conditions at the initiative of employer.

Pursuant to Labor Law noncompetition clause, confidentiality clause, training clause and clause for full liability for damage to employer’s assets may be included in employment agreement.

Non-competition clause. When entering into employment agreement with special conditions employer may include non-competition clause in the agreement or conclude ancillary non-competition agreement with employee. Duration of non-competition clause must not exceed one year after termination of employment agreement. Labor Law provides that after termination of employment, employer must pay employee at least 50 percent of his/her last month’s salary on a monthly basis during the term of non-competition clause or non-competition agreement. Terms and conditions of non-competition clause do not if employee is employed abroad.

Training clause. Upon agreement by parties an ancillary training agreement or training clause may be included in the employment agreement, where terms and conditions of any training provided to employee by employer must be set out. After the training, parties must agree on duration of employee’s continued employment in the company, which cannot exceed three years. Upon termination of the employment agreement at the initiative of employee, with the exception when employer partially or fully exempts employee from paying the expenses, employee must reimburse the employer training expenses proportionately to the time he/she not worked.

Employer should adopt regulation on storing and handling company’s confidential information, and must approve a list of jobs/positions that bear full liability for damage to employer’s assets.

What to Consider When Entering into an Employment Agreement (Part 2)

This week we continue the topic of issues the employer and employee should consider when concluding an employment agreement. The first post reviewing these issues can be found here.

Part-time employment agreement

Pursuant to Labor Law (Law) part-time employee means an employee who works less hours than a full-time employee. Law specifies that reducing work hours of a full-time employee in accordance with the law is not considered as working part-time. Employer may hire an employee to work part-time work and pay him/her a salary commensurate with the work performed and hours worked.

Employment agreement for employees working from home

Upon agreement employee may choose to work from home or any other place or location of his/her choice that is other than employer’s, using employer’s or own equipment and materials, under the supervision of employer. In this case employer is responsible for inspecting the safety of equipment and other tools used by employee working from home and providing safety instructions.

Chapter 6 of Law does not apply to employees working from home. Meaning that general provisions and regulations regarding work hours, rest hours, leaves and holidays does not apply to employees working from home.

Remote employee employment agreement

Upon agreement employer may allow employee to perform his/her duties remotely online, either permanently or partially.

In addition to specifying main conditions of the agreement provided by Law, remote employee employment agreement must specify place or location where employee shall perform his/her duties, term/deadlines and form of handing over the work performed, and amount of compensation payable by employer in the event of use of employee’s own assets and equipment to perform duties.

Unless otherwise provided by Law, part-time employee, employee working from home or remote employee has the same rights and obligations as a full-time, permanent employee of the employer or other employees performing similar duties, and is subject to provisions and regulations of labor laws, collective agreements, collective bargaining agreements and internal labor regulations.

When concluding any type of mentioned employment agreements main conditions provided by Law must be specified in employment agreement, which are name of the job or position, duties to be performed specified in the job description, place or location of the job, amount of salary and work conditions.

What to Consider when Entering into an Employment Agreement (Part 1)

Let’s look into what should both employer and employee consider when concluding an employment agreement.

Pursuant to Labor Law, depending on legal status of employer, there are employment agreement with individual-employer and employment agreement employer, which is legal entity. About regulation of employment agreement with individual-employer is briefly discussed in previous article.

Aside from common employment agreement, where employer is a legal entity and where it is concluded for permanent positions, Labor Law (Law) distinguishes seven other types of employment agreement.

Apprenticeship employment agreement

In order to provide an employee with work experience and skills employer may conclude an apprenticeship employment agreement. Term of regular apprenticeship employment agreement is up to three months with possibility of extending once for no more than three months. However, term for professional apprenticeship employment depending on characteristics of the profession and professional experience and skills to be acquired may be up to two years with possibility of extending once for no more than one year. Salary of an apprentice must be determined by agreement based on his/her duties, work experience and skills, and must not be less than 70% of the salary of a full-time permanent employee performing similar work.

Employment agreement for trainees

An employer, student and educational institution may conclude a tripartite traineeship agreement in order to provide vocational education and training to students of vocational educational institutions, combine theoretical knowledge with practical experience, gain work experience and skills. Term of employment agreement for trainees is up to three years, depending on the profession to be acquired. Salary of a trainee must be negotiated but not less than minimum wage, taking into consideration the ratio of study and working time, the quality and volume of work performed, as well as financial aid received from the educational institution.

Pursuant to Law at the end of agreement term employer is not obliged to hire apprentice or trainee on permanent basis, unless otherwise agreed by parties. Other provisions and regulations of Law, including provisions and regulations regarding employee allowances, surcharges and compensations also equally apply to apprentices and trainees.

Probationary employment agreement

When hiring an employee, employer may conclude probationary employment agreement to ensure that the employee meets the requirements of the job or position. Term of probationary employment agreement is up to three months with possibility of extending once for no more than three months. Salary of probationary employee must be not less than salary offered for the job or position. If employee is hired for one-time seasonal work, as replacement of a permanent employee or for temporary job or position to conclude a probationary employment agreement is prohibited.

Types of Employment Under the New Labor Law

As previously discussed here, the revised Labor Law came into force on January 1st of this year. Many of our clients have already have updated their employment agreements and internal labor regulations. However, some are still in progress in this matter. In some cases client have asked our Mongolian lawyers what types of employment agreements are permitted under the new Labor Law?

The revised Labor Law (Law) provides for a wider variety of employment agreement types. Even though Law provides general rules and requirements for all types of employment agreements, depending on legal status of employer, occupation characteristics, job description and other factors, the type of employment agreement shall vary.

The Law provides for slightly different regulation for employment agreement between employee and an individual as employer than common employment agreement, where the employer is a legal entity. Pursuant to Law such employment agreement should be concluded between the individual employer and and the worker. This uniquely type of labor arrangement is intended to accommodate a more rural employment environment. Due to the characteristics of rural work, the working schedule and resting hours are more flexible than in a typical employment arrangement. With this type of contract, the parties may agree for the employee to live and work directly in the employer’s residence or other facility, and in this case, the employer is required to provide normal living conditions to employee.

With regards to common employment agreement, Law distinguishes following types of employment agreements: apprenticeship employment agreement, employment agreement for trainees, probationary employment agreement, part-time employment agreement, employment agreement for employees working from home, remote employee employment agreement and employment agreement with special conditions (such as an executive employment agreement). Even though some types of employment agreement may sound to be somewhat similar to each other, they do differ in purpose and regulation. Also, Law separately regulates agreement for supply of labor. However, Law specifies that job placement services are not regulated by this Law, but are regulated by Employment promotion law.