Tag Archives: Corporate Commercial

Is your Mongolia Company Compliant? Are You Sure?

Our Mongolian lawyers often work with foreign companies to establish and close down Mongolian companies and Representative Offices in Mongolia. Almost every time, when closing down one of these Mongolian companies our lawyers encounter compliance issues and tax irregularities which must be dealt with carefully. Sometimes these are intentional, other’s they are caused by local employees who just didn’t know any better.

Just this week we have encountered a similar situation in connection with the Representative Office of an international company. The below is almost exactly the email one of our Mongolian lawyers sent to this client, explaining the situation in Mongolia. Names and identifying information have of course been removed.

“Yesterday afternoon we were summoned to the tax office. The tax inspectors showed us their preliminary calculations of the amount of taxable income of the Rep Office, from which pursuant to law, taxes must be withheld. The tax inspectors specifically pointed out that the Rep. Office employees and accountant had been negligent and failed in their responsibility to duly collect and maintain financial documentation, including failing to maintain appropriate ledgers, and financial reports.

For example, one employee withdrew a large sum of money from the Rep. Office’s USD account and didn’t deposit the money into the MNT account. We can assume that she may have taken this to the office as cash on hand, however because no official ledger was kept, there is no record of the office receiving that cash and it is impossible to prove that the money was so deposited.

Because of this lack of documentation, the tax inspectors must consider the value of that transaction as the withdrawing employee’s personal income. Now, since from the perspective of the tax office those funds were paid to the employee as personal income, the Rep. Office should have withheld the standard 10% income tax, which of course did not happen. Therefore, we must now make up for the value of that 10% with a payment in taxes.

There are other examples where the Rep. Office gave donations or sponsorships to certain local events or business partners. Normally of course these payments are subject to tax. However, again, the Rep. Office did not withhold relevant taxes. There are quite a lot of such transactions, and unfortunately, most are relatively large sums.

Yesterday, we met with the tax inspectors and reviewed all financial documentation again, seeking to find documentation for those transactions the tax office as identified as suspicious. We were able to find corroborating documentation for some transactions, but not all. All of those remaining have been identified by the tax office, added up, and the value is are required to be paid to the tax office before we will be allowed to finally liquidate the Rep. Office. Because of the relatively large amount of unpaid taxes, the Rep. Office is also subject to a fine, which must also be paid prior to liquidation.

Once the inspection is finished completely, the tax office will specify the exact amount of taxable income in the official inspection decision.”

To avoid this, we recommend your Mongolia company implements a corporate compliance system, which includes oversight of accounting issues by a local accounting firm. Our firm regularly works with approved Mongolian accountants, and is able to make recommendations and provide accounting support.

Mongolian Securities: What is a Depository Receipt?

What is a depository receipt?

According to Article 4.1.12 of the Security Market Law of Mongolia a “Depositary receipt” is a security issued by a depositary receipts issuer (depositor) for the purpose of future trade of that security on the securities market of another jurisdiction (where the depositor is not normally resident) on the basis of having deposited an underlying security at an institution conducting securities depository services (custodian) within that target jurisdiction.

In practical terms, a depository receipt is traded on the open stock market and it is a form of security and similar to a company share. Shares registered in the stock market of a foreign countries (for example Mongolia) are authorized to issue in another country’s stock market (for example USA) as a depository receipt.

In Mongolia, depositary receipts have the following types:

– Mongolian depositary receipts; and

– Foreign depositary receipts.

Mongolian depositary receipts

A “Mongolian depositary receipt” is a financial instrument registered and issued by a depositary receipts issuer for sale on the securities market of Mongolia on the basis of a deposit. The deposit is kept with a legal entity, such as a bank, licensed to undertake custodial services, of an underlying security registered with a stock exchange in another jurisdiction.

A domestic stock company which has fulfilled the requirements to issue depository receipt in a foreign market may deposit their own shares in any approved foreign custodian bank in that country. The bank issues depository receipts based on those shares, which will be traded in the foreign stock market.

The Mongolia Financial Regulatory Commission (“FRC”) defines the list of countries, types of underlying securities of Mongolian depositary receipts and current underlying security registration of relevant stock market based on proposal of Stock exchange. It is prohibited to trade or sell a depository receipt in Mongolia which are based on underlying securities that are not included in the list outlined by FRC.

Foreign depositary receipts

A Foreign Depositary Receipt is a financial instrument issued by a depositary receipts issuer on the basis of securities issued in Mongolia through an entity authorized to undertake custodial services. This means foreign companies are not required to register in the Mongolian Stock Exchange, and therefore place their shares in any custodian bank and its possible to sell or trade their depository receipts based on those shares in Mongolian stock market. One depository receipt may be represented by any number of shares. It’s prohibited to issue depository receipt unless the underlying security of depository receipt has not been deposited or incomplete quantity and amount. Issuer of depository receipt is prohibited to be beneficiary owner.

A foreign depositary receipt may have a name which identifies the market and jurisdiction in which the relevant depositary receipt will be traded.

A securities issuer that has decided to issue a global depositary receipt based on its own securities must inform the public, the FRC, and the stock exchange in writing after adopting a resolution to that affect.

There will be no consideration in the event of any conversion of a depositary receipt into an underlying security, or an underlying security into a depositary receipt.

Mongolian Employers Face Fines for Violation of Employee Rights to Unionize

We continue our series on the fundamental principles of labor law and the rights of the worker in Mongolia. As explained in a previous post, Mongolia became a member of the International Labor Organization (ILO) in 1969. This membership means Mongolia embraces the fundamental principles embodied in the ILO Constitution and the Declaration of Philadelphia, including the principle of freedom of association.

Ensuring the freedom of association and of collective bargaining is a fundamental principle recognized by Mongolia through the ratification of the Freedom of Association and Protection of the Right to Organize Convention, 1948 (No. 87), and the Right to Organize and Collective Bargaining Convention, 1949 (No. 98) in 1969.

Article 16 of the Constitution of Mongolia guarantees citizens freedom of thought, speech and expression, the right to favorable working conditions, to form a party, association or other public organization on the basis of social and personal interests and opinion, and to hold peaceful assembly. Furthermore, the discrimination and persecution of a person for joining a political party or other associations or for being their member is prohibited under Mongolian legislation.

The Labour Law (1999) sets out relations to be regulated by collective agreement and collective bargaining agreement, who may participate in them, how they shall be conducted and regulations on strike action etc. The Law on the Rights of Trade Unions (1991) deals with forming and joining unions, and prohibits discrimination due to union membership or non-membership. It also sets out the rights of unions and lays out measures to prevent employers’ interference with union activities.

Mongolian legislation provides for the right of employees to form and join organizations of their own choosing and enshrines the right of these organizations to freely organize their activities and formulate their programmes. Free and voluntary negotiation is promoted at all levels between employers or employers’ organizations without the intervention of the public authorities.

The Labor Law prohibits organizing a strike involving employees of organizations responsible for national defense, national security and public order. Public servants in general are entitled to join in unions, but banned from participating in strike action under the Law on Public Service (2002).

In recent years, labour disputes in related to the breach of freedom of association and collective bargaining have been increasing in the mining, industrial and construction sectors in Mongolia. There have been cases in which employees which are terminated due to organizing a trade union or being a member of trade union organize a strike to force collective bargaining.

A company taking action against employees or labour unions, or otherwise in breach of the freedom of association and collective bargaining face Sanctions. Penalties have increased under the newly adopted Law on Infringement and employers risk fines up to MNT 500,000 for violations.

Mongolia Employees and Employers: Know Your Rights

Mongolia has been a member of the International Labor Organization (ILO) since 1968 and has ratified 20 international conventions of the ILO, including all eight Fundamental Conventions, 2 of the 4 Governance Conventions, and 10 of 77 total Technical Conventions. Of the 20 Conventions ratified by Mongolia, 19 remain in force while 1 has been rescinded.

Through its ratification of all eight of the ILO’s fundamental conventions, Mongolia has recognized the following four fundamental principles and rights of the worker:

  • Ensuring freedom of association:
  • Eliminating child labour
  • Abolishing forced labour
  • Prohibiting non-discrimination in employment.

Recently, Mongolia hosted a National Workshop on International Labour Standards for members of the judiciary and lawyers. The workshop focused on application of labor rules by the courts domestic courts, and was organized in cooperation with the Mongolian Bar Association, the International Training Center of ILO and the ILO Country office for China and Mongolia (CO-Beijing).

Judges, attorneys and government officers participated in the training for 5 days. The training consisted of review of the ILO and international labour standards system, the use of the work of ILO’s supervisory bodies; and discussions as to when and how domestic judges and lawyers can use international labour law to effectively resolve labour disputes. Of key importance was ensuring the relevance of international labour standards in key situations with widespread practical application.

The workshop found that in practice, the international labour standards set out in the various conventions were not widely referred to or implemented by Mongolian lawyers and courts. This is determined to be primarily due to lack of knowledge of many of these professionals as to Mongolia’s ratification of these conventions, and the fact that due to inadequate translation into Mongolian, many professionals were not certain of the actual contents of the conventions.

The workshop focused on the importance training in strengthen participants’ knowledge and skill to effectively utilize these international labour sources to resolve employment and labor issues within Mongolia.  All participants noted that these international labour standards may be used directly to resolve the labour disputes or to interpret a relevant domestic provision to fill a gap and resolve ambiguities in the domestic law.

Proper awareness of and application of these international standards are vital for both Mongolian employees and expatriates working in Mongolia. Expatriate employees in Mongolia are granted equal  legal rights and protections, and should never feel their foreign employer has the upper-hand in cases of unfair termination or discrimination in Mongolia.

Enforcing Foreign Court Judgments and Arbitration Awards

As we work with many foreign clients engaged in a range of international businesses, one of the most comment questions asked by our clients is whether a foreign arbitral award or court decision will be enforceable in Mongolia.

Generally speaking, Mongolian courts will generally not recognize or enforce judgments rendered in a foreign state unless Mongolia has concluded a treaty with that state concerning the mutual recognition of judgments. In this case, we would have to look at the relationship between the particular state from which the court decision originated to determine if there is a treaty, however, Mongolia has ratified very few such treaties and changes are slim such court judgment will be enforceable.

So what to do? The Mongolian Enforcement Agency will generally enforce a foreign arbitration award, so long as enforcement would not violate any public policy.

Mongolia has ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958, in 1994 and the courts of Mongolia will enforce an arbitral award in Mongolia provided that such award:

  • is given by an arbiter of competent jurisdiction;
  • imposes on the judgement debtor a liability to pay a liquidated sum for which the judgement has been given;
  • is final;
  • is in relation to a dispute which is commercial in nature;
  • is confirmed by a judicial order in Mongolia;
  • is not in respect of taxes, a fine or a penalty; and
  • was not obtained in a manner and is not of a kind the enforcement of which is contrary to the public policy of Mongolia;

There are a few specific circumstances under Mongolia’s Arbitration Law in which a foreign arbitration will not be enforced:

  • one of the parties to the arbitration agreement is incapacity or arbitration agreement is invalid;
  • proper notice of the appointment of an arbitrator or of the arbitral proceedings was not given to the respondent party and unable to participate to the arbitral procedure and provide the response;
  • arbitral award is not contemplated by or not falling within the terms of the submission claim, or arbitral award is beyond the scope of the claim;
  • the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties and law of the country;
  • award is not binding or valid or suspended;
  • the subject-matter of the dispute is not capable of settlement by arbitration under the law of Mongolia;
  • the recognition or enforcement of the award would be contrary to the public policy of Mongolia.

Everything you Need to Know about Corporate Guarantees in Mongolia: Part II

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.

Everything you Need to Know about Corporate Guarantees in Mongolia

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.