Tag Archives: International Trade

Issues with Mongolian Competition Law

Our Mongolian lawyers have encountered an unusual number of inquiries regarding Mongolian competition and anti-monopoly issues in the past few months. The scenario below takes a looks a common situation found in Mongolian trade.

Let’s assume that multinational company A currently sells to several Mongolian counterparties (Supplier Customers) who have a product import permit. Under the terms of sale, title passes to the Mongolian counterparty before the product is imported on either the Russian or Chinese border.

Mongolian wholesale client (Company B) proposes a profit-sharing agreement whereby Company B will Purchase products from Company A for purposes of:

  • storing product in Company B’s facilities and reselling to the other Supplier Customers within Mongolia; and
  • selling to wholesale clients provided that they are not already existing customers of the Supplier Customers.

In this scenario Mongolian Competition Law does not apply to the company A.  The Mongolian Competition Law does not apply to business entities which are not registered in Mongolia and are operating outside of its borders. Since the proposed transaction contemplated by the agreement would have company A deliver the products to the purchaser outside of Mongolian territory, the provisions of the Competition Law would not be applicable.

In our view, Company A and B would not be forming a monopoly because the transaction is cross-border, and A is not a “business entity” within the meaning of the Competition Law.

Company B only occupies approximately 1% of the domestic market for sale and supply of certain products. Accordingly, since it does not occupy a “dominant position” in Mongolia’s market (defined as a party which sells or produces 1/3 or more of a certain type of goods), the prohibitions in Mongolia’s Competition Law with regard to monopolistic activities would not be relevant to its operations.

With regard entering into agreements and monopolies, the following activities are prohibited under the Mongolian Competition Law:

  • mutually agreeing to fix prices of products;
  • dividing markets by location, production, services, sales, name or type of products or consumers;
  • restricting the production, supply, sale, shipping, transportation and market accessibility of products, investment, technical and technological renovation;
  • participating in competitive tender or bid auction or activities procuring goods, works or services by state and local funds having in advance agreed on the price, other conditions and criteria of products;

In addition, the following agreements or entered between business entities shall be prohibited where they contradict the public interests or create circumstances restricting competition:

  •  refusing to establish economic relations without economic or technical justifications;
  • restricting sales to or purchase by third parties of products;
  • collectively refusing to enter into agreements or negotiations which have significance for competition;
  • preventing competitors from joining organizations with the purpose of running their businesses profitably;

Mongolian business entities are prohibited to enter into agreements with effects as described above.

Franchising in Mongolia: Intellectual Property is More than Trademarks

In the first part of this series we have discussed about trademarks as part of franchise system. In this part we will discuss about other elements of intellectual property that may be utilized in franchise system.

Other critical element of intellectual property in franchise systems are copyrights. Pursuant to law copyright protects the fixation of the expression of an idea in a tangible form, whether written, verbal, graphical or other objective forms. Copyright exists in a variety of items commonly used by a franchise: training videos, marketing material, ads, websites, music, logos and software. There is significant value to the copyright-protected materials incorporated into a franchise system and, like trademarks, these elements are licensed by the franchisor to the franchisee for use in the franchised business. And, unlike trademarks, copyrights do not have to be registered in order to be protected.

Trade dress is what makes a franchise system unique and distinctive from others, including the overall visual look, feel and impression of a location. Some part of trade dress may be protected by copyrights.

Not all franchises involve trade secrets (i.e. confidential information), but it is typical to see franchise systems maintaining some aspects of their operations as strictly confidential and maintained as trade secrets. In Mongolia there is no law that regulates specifically trade secrets or business aspects of trade secrets. However pursuant to Law on Corporate secret, any corporate information, document, research, method, solution, project and etc. which holds economic value may be considered confidential corporate secret (trade secret) and may be protected from divulgence. In the context of the franchise arrangement, the need and desire to share information with franchisees competes with the legal necessity of limiting the distribution of true trade secret material. Reasonable steps to ensure the identification and protectability of trade secrets include: confidentiality or non-disclosure agreements and clauses; marking of claimed trade secret material, limiting the distribution to “need to know”, password protected computer systems and databases, and locks on cabinets and doors. In some cases, a franchisor’s trade secrets are not even divulged to the franchisee, such as the specific recipes or bulk ingredients required to create a quick-service restaurant chain’s signature sauces.

Patents are usually not included in franchise systems, but they can be. Patent registrations are intended to protect an inventor’s rights to specific inventions, such as a newly engineered product, medical device, drug or other innovation. Unless a franchise system has specifically developed its own equipment, it generally will not include any patents within its intellectual property.

It is very important for franchisor, as well as franchisee, to take the time to fully analyze and review any franchise agreement, disclosure document and respective attachments before signing them. While the above information serves as a general overview, as always, one should seek their own legal advice when reviewing a franchise agreement. Only then it is possible to obtain specific information and recommendations relevant to particular circumstances.

Mongolia’s Double Taxation Treaties

Many countries have entered into tax treaties (also called double tax agreements, or DTAs) with other countries to avoid or mitigate double taxationDouble taxation is the levying of tax by two or more jurisdictions on the same declared income, asset or financial transaction. Double liability is mitigated in a number of ways, for example:

  • the main taxing jurisdiction may exempt foreign-source income from tax,
  • the main taxing jurisdiction may exempt foreign-source income from tax if tax had been paid on it in another jurisdiction, or above some benchmark to not include tax haven jurisdictions,
  • the main taxing jurisdiction may tax the foreign-source income but give a credit for foreign jurisdiction taxes paid.

Another approach is for the jurisdictions affected to enter into a tax treaty which sets out rules to avoid double taxation. In the all over the world, over 3000 double taxation agreement (DTAs) are in effect.

Mongolia has entered into “The Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital” with other 25 jurisdictions as of 2017. Namely,

Country In force since
1 The People’s Republic of China Jan 01, 1993
2 The Republic of Korea Jan 01, 1993
3 The Federal Republic of Germany Jan 01, 1997
4 The Republic of India Jan 01, 1997
5 The Socialist Republic of Vietnam Jan 01, 1997
6 The Republic of Turkey Jan 01, 1997
7 The United Kingdom of Great Britain and Northern Ireland Jan 01, 1997
8 The Republic of Hungary Jan 01, 1997
9 Malaysia Jan 01, 1997
10 The Russian Federation Jan 01, 1998
11 The Republic of Indonesia Jan 01, 1998
12 The Republic of France Jan 01, 1999
13 Czech Republic Jan 01, 1999
14 The Kingdom of Belgium Jan 01, 1999
15 The Republic of Kazakhstan Jan 01, 2000
16 The Republic of Kyrgyz Jan 01, 2000
17 The Republic of Poland Jan 01, 2002
18 The Republic of Bulgaria Jan 01, 2002
19 The Swiss Confederation Jan 01, 2002
20 Ukraine Jan 01, 2003
21 Canada Jan 01, 2003
22 The Republic of Singapore Jan 01, 2005
23 The Democratic People’s Republic of Korea Jan 01, 2005
24 The Republic of Austria Jan 01, 2005
25 The Republic of Belarus May 28, 2001

Mongolia’s double tax treaties with United Arab Emirates and Kuwait were terminated from 1 January 2015 and 1 April 2015 respectively. Mongolia’s double tax treaties with Luxembourg and The Netherlands were terminated from 1 January 2014 due to failure to provide for the balance and equity rights of parties.

Mongolia Introduces Investment Protection Council

We would like to introduce the Investment Protection Council (IPC), one of the effective way to protect rights and interest of the investors and to resolve the disputes involving the foreign investors in Mongolia.

The Investor Protection Council needs to be established in concern with the facilitation of investment related dispute settlement and of favorable environment for the sustainable operation of investors. The Investor Protection Council is established based on an ordinance of the Prime Minister of Mongolia in Dec 2016. That council is composed of Chairman, 16 members, and Secretary. The main formation of the Council’s operation structure should be Council’s session. The decision will be made by majority of the Council members during the session.

The IPC’s Main Roles:

  • Preview and make preliminary prognosis on foreign investment related issues that will be discussed by Cabinet Session
  • Improve investment legal framework, remove duplications and breaches of laws, introduce investment related proposal that made by relevant organizations to Cabinet.
  • Make proposals on implementation of laws and resolutions related to investment, and introduce it to Cabinet. The council should be supernumerary and the Council’s operation should be permanent.

In addition above, one of the main roles of IPC is to protect investors’ right, and solve their grievance (except the cases examined under court or arbitrage). So far 83 compliant and claims submitted by investors to this Council’s Secretariat. As we have been classifying these complaint and claims, there are 40% of them was related to mining, 20% for road, transportation, construction, manufacturing, 10% for information, communication, space technology, 10% for bank, finance, tax, 5% for land, land proprietorship, utilization, 5% for national development, planning, and remaining percentage was claims related to fair competition, as well as supervision, pressure and burden, registration, and authorization activities of the law enforcement agencies.

For example, in relation to the dispute related to the termination of the license of Mobicom Corporation with 100% – a business entity 100% owned by Japan, by the Communications Regulatory Authority, it was further discussed at the Investor Protection Council Meeting and it supported to resolve the investor’s claim. In doing so, KDDI, the Japanese investor, will make additional investments to expand Mobicom’s operations, which indeed has not been resolved over the past 10 years.

LehmanLaw Mongolia LLP suggests our clients this amicable mechanism to resolve the disputes involving them in Mongolia.

Franchising Proves Effective for Many Foreign Brands in Mongolia

There are numerous tools a business may use to grow and expand, not just locally but also globally. Franchising is one of the many ways through which brand owners can rapidly grow their businesses and expand profits while delegating much of the cost and risk to a third party.

Franchising is commonly used in a wide variety of service oriented businesses, such as restaurants, hotels, health care, real estate and others, and is also used production and distribution of products. In Mongolia for example, over the last few years many global brands entered Mongolia via a franchise arraignment. Major brands to do so include Coca-Cola, Pepsi, Ramada Hotels, Shangri-La Hotels, Cosmopolitan, Re/max real estate, KFC, Burger King, Coffee Bean and Tea Leaf, Pizza Hut, Emart to name only a few. This strategy is chosen very deliberately due to the low risk of bankruptcy, and a higher chance of success for business to enter a franchising agreement. Research shows that an average consumer in the world spends one of every three dollars on product or service provided via a franchise model, demonstrating the economic significance of franchising.

In a franchise arrangement, the franchising party or Franchisor gives the Franchisee permission to not only use the Franchisor’s intellectual properties (trademarks, brand name, know how, goodwill, copyright, etc.) but also the Franchisor’s business operations system. In addition, Franchisees often benefit from the Franchisor’s distribution systems and marketing campaigns to sell the Franchisee’s products or services. In return, the Franchisee pays the Franchisor consistent fees and royalties, providing a steady stream of income for the Franchisor.

The franchise model provides several benefits for both the Franchisor and the Franchisee. Along with other benefits franchise agreements allow Franchisor companies to expand much more quickly than they could otherwise. A lack of funds and workers can cause a company to grow slowly. Through Franchising, a company invests very little capital or labor because the Franchisee supplies both. The Franchisor company experiences rapid growth with little financial risk.

The Franchisee also has numerous advantages that come from entering a franchising agreement. There is a low risk for the Franchisee due to the tried and tested formula. Franchisee gets the benefit of owning a proven business formula that has been tested and shown to work well in other locations. In addition, the Franchisee gets training and head office support from the Franchisor; this may be essential if the Franchisee is new to running a business and has no experience or business knowledge. And in a broader sense, global franchising is beneficial for the local government and economy as well, because jobs are created, and ownership remains local.

There are three major types of franchises – business format, product, and manufacturing – and each operates in a different way.

In business format franchises (which are the most common type), a company expands by supplying independent business owners with an established business, including use of its name and trademark. The Franchisor company generally assists the independent owners considerably in launching and running their businesses. In return, the business owners pay fees and royalties. In most cases, the Franchisee also buys supplies from the Franchisor. Fast food restaurants are good examples of this type of franchise. Prominent examples include KFC, Burger King, and Pizza Hut.

With product franchises, manufactures control how retail stores distribute their products. Through this kind of agreement, manufacturers allow retailers to distribute their products and to use the manufacturer’s name and trademarks. To obtain these rights, store owners must pay fees or buy a minimum amount of product for sale. In Mongolia there are several clothing retail stores that utilize this type of franchise, for example, United colors of Benetton stores, and Mango stores.

Through manufacturing franchises, a Franchisor grants a manufacturer the right to produce and sell products using its name and trademark. This type of franchise is common among food and beverage companies. For example, soft drink bottlers often obtain Franchise rights from soft drink companies to produce, bottle, and distribute soft drinks. For example, MCS Coca-Cola LLC obtained Franchise rights to produce, bottle and distribute soft drinks of the Coca-Cola company in Mongolia.

There are four basic types of franchise agreements: single-unit, multi-unit, area development and master franchising agreements.

A single-unit franchise agreement is the most common and is simply where a Franchisor grants a Franchisee rights to open and operate one single Franchise unit. In Mongolia, explicit examples are Caffé Bene, a coffeehouse chain, or Re/max, a real estate agency. All single units of these chains use the same trademark and same utilize the business operations system of the Franchisor. However, every single unit in Mongolia is owned by a different local company.

A multi-unit franchise agreement is where a Franchisor grants a Franchisee rights to open more than one franchise unit. For example, Tavan Bogd Foods LLC has multi-unit franchise rights to operate KFC restaurants in Mongolia, and Max Center LLC has multi-unit franchise rights to operate Burger King restaurants.

An area development agreement allows a Franchisee the right to open multiple units over an agreed amount of time within a specified geographic location and/or to own rights to their specific territory and earn money on each franchise sold in their territory through sharing of the franchise fee and ongoing royalties.

A master franchise agreement, also referred to as sub-franchising, gives a Franchisee the same rights as an area development agreement but also gives that Franchisee rights to establish franchises arrangements with other individuals or entities within the specified territory. A Master Franchisee assumes many of the tasks and obligations of the Franchisor such as training and support and receives a portion of the franchise fee and royalties. While technically there are significant differences there are times that master franchising and area development are used interchangeably.

The regulation of franchising varies country to country. While some countries have adopted separate franchising laws, many countries do not have a separate law that regulates franchising in its entirety. In most countries franchising is regulated in their commercial laws, commercial codes or civil codes, and in some countries it falls under regulation of several laws. In Mongolia franchise arrangements are regulated via Articles 333 – 338 of the Civil Code. The Civil Code provides the definition of a Franchise Agreement, and outlines the legal obligations and liabilities of the parties, terms of agreement, and non-competition terms. Intellectual property related aspects of a franchise agreement shall be regulated by relevant intellectual property laws.

It seems clear that franchising model in Mongolia is poised to continue to grow, as several global brands have announced their opening in Mongolia in the near future. Of course, prior to any franchise arrangement in Mongolia, a foreign business should seek out qualified advice from their Mongolian lawyer.

Mongolia Continues Cooperation with China on Mutual Free Trade Zone

Chinese news media is reporting that China and Mongolia are beginning a new process of conducting a feasibility study regarding development of a new Free Trade Zone (FTZ).

This comes in the contest of the second China-Mongolia Expo, held in Hohhot, the capital of China’s Inner Mongolia region. The conference will occur in late September, and will serve as a forum to discuss issues of mutual cooperation and development between China and Mongolia.

Mongolia’s trade with China in the first six months of 2017 has been USD $3.1 billion. This is a 44.2% increase year-on-year. China mainly exports gas, diesel, food, machinery and equipment to Mongolia, and imports natural resources, fur and raw materials.

Talk of the new FTZ comes after the China-Mongolia Cross-border Economic Cooperation Zone (CECZ) was announced in 2015. The CECZ is a 18 square kilometer  territory evenly divided along the China-Mongolia border. The CECZ is intended to facilitate import/export processing, logistics, warehousing, and e-commerce.

The increase in economic cooperation between China and Mongolia is a core part of the wider China-Mongolia-Russia economic corridor, which seeks to facilitate integration of Mongolia with the economies and infrastructure of China’s northern territories and Russia’s far east.

Importing Products into Mongolia without a Buyer? Put it in a Bonded Warehouse.

Foreign investors who import products into Mongolia may be required or need to place their products into a custom bonded warehouse. In this case, below are main regulations of the bonded warehouse and things to know.

The purpose of the placing products in the custom bonded warehouse is providing an opportunity to find a market for imported products, as well as to time for the importers to pay customs duties and other taxes.

The kinds of goods which should be stored in the bonded warehouse are firstly, Mongolian goods, secondly, foreign goods coming from abroad and thirdly, goods which are placed in the bonded warehouse temporarily in connection with other non-import or export procedures.

Importantly, Foreign goods placed in bonded warehouse are not subject to non-tariff restrictions which means goods which are not generally prohibited to cross the national border of Mongolia are not required to obtain any further permissions from the relevant authorities when goods are entering into the border of Mongolia. When products are kept in the bonded warehouse, any permission or licenses normally required for possession of such products are not required to be obtained from the relevant government organization. This is because the customs bonded warehouse is considered as being outside of the customs territory of Mongolia. Keep in mind that the relevant license or permission is required upon release of the products from the bonded warehouse.

The product is to be stored in the bonded warehouse under the name of the importer. When imported products are exported directly from the custom bonded warehouse out of Mongolia, payment of an export tax is not required. There are not any export controls/restrictions and/or any licences/permits, to be obtained in order to export the product from the bonded warehouse.

In contrast to imported goods, Mongolian goods placed in the bonded warehouse will be subject to non-tariff restric­tions, which mean the exporter is required to obtain permission from relevant authority and limits may be imposed on the quantity of the goods. Of course, goods which are prohibited to be carried through the national border will not be allowed.

There are two types of bonded warehouse in Mongolia, open and closed. Open bonded warehouse is for public use and all goods allowed to enter or leave Mongolia may be stored or placed in the open bonded warehouse.

A closed bonded warehouse is not for public use and is designated for use solely by one or more legal entities or organization. Goods which require special storage condi­tions, facilities and equipment or which may have af­fect on other goods are typically placed in a closed bonded warehouse.

The timeline for storage of goods in a bonded warehouse is up to two years. The Customs Office will extend the timeframe by up to 1 year with no further renewal possible.

Bank of Korea Assisting with Modernization of Mongolia’s Foreign Exchange Policy

The Bank of Mongolia, signed a cooperation agreement on June 21, 2017 with the Bank of Korea. The agreement solidifies plans by both organizations to cooperation regarding development of a comprehensive strategy for development of the foreign exchange market in Mongolia.

The Bank of Korea has been conducting a study on Mongolia’s foreign exchange market. The results of the study are expected to have an important impact on development of foreign exchange regulations and growth of the foreign exchange market in Mongolia.

Major complaints about the current state of the foreign exchange market in Mongolia include the lack of transparency in the process and inefficient operations. The study will draw on the Bank of Korea’s past experience in managing foreign exchange issues in Korea to set out a road map for Mongolia.

The plan is expected to help stabilize the exchange rate of the Mongolian Tugrug, which will facilitate a better environment for foreign investment and domestic economic growth.

Foreign Exchange in Mongolia

Financial Regulatory Commission (the FRC) and Bank of Mongolia (Mongol Bank), which serves as the central bank of Mongolia, are authorized to regulate Foreign Exchange (ForEx) trading within Mongolia. The Law on Currency Settlement is the primary legislative authority as to conduct of ForEx in Mongolia.

The currency market of Mongolia operates on the basis of supply and demand and consists of the currency exchange activities of the authorized banks, exchanges and brokerage companies.

Mongol Bank is permitted to buy currencies and gold bullion from domestic and foreign banks, as well as from business entities, other organizations and from individuals. Mongol Bank’s primary official purpose for such purchases is management of currency and wealth reserves of Mongolia. Mongol Bank may likewise sell foreign currency and gold from its reserves as part of efforts to maintain the general stability of the Tugrug (the currency of Mongolia).

Mongol bank acts to fix the official exchange rate of the Tugrug, and to provide guidance as to the same. These fixed rates are set in relation to currencies which are bought and sold on the currency market by commercial banks on a comparative basis against a stable foreign currency used in foreign commerce by a majority of countries. The rate fixed by Mongol Bank is used in the State budget and for customs purposes.

An increase or decrease in the Tugrug exchange rate by 5 percent or more from the previous day shall be brought to the attention of the Prime Minister of Mongolia. This is only report and the Prime Minister has no authority to personally order or to prevent the Governor of Mongol Bank from increasing or decreasing the Tugrug exchange rate in accordance with market conditions.

Mongol Bank also sets various rules and regulations regarding foreign exchange activities, including as to FX swaps, forward transactions, and Forex auctions.

Commercial banks are able to establish their own exchange rate for using Tugrugs to buy and sell foreign currencies based on market conditions. Likewise the bank sets its own rate of commission.

Upon obtaining a license from Mongol Bank, Mongolian Commercial banks are allowed to facilitate non-cash transactions in foreign currency, buy and sell foreign currency in cash, establish and operation accounts in foreign currency (and pay required interest), provide credit and provide guarantees in foreign currency.

A Non-banking financial company may trade foreign currency after obtaining a license from the FRC.

Mongolia and Vietnam Promote Trade in Goat Meat

Vice President of Vietnam, Mrs. Dang Thi Ngoc Thinh, visited Mongolia for an official visit from May 07 -10. While in Mongolia, she participated in the Mongolian Vietnamese business forum in Ulaanbaatar on May 09. Mrs. Dang Thị Ngọc Thinh gave a presentation at the opening ceremony of the business forum discussing trade, investment and economic cooperation between Mongolia and Vietnam.

Vietnam’s trade volume with Mongolia is estimated at USD 59 million in 2016 alone. The trade includes over USD 40 million in race, sugar, canned foods and telecommunications equipment imported to Mongolia. Mongolia and Vietnam seek to increase cooperation and trade in natural resources and agricultural goods, which Mongolia is well placed to export to Vietnam.

Three main issues were touched on during the official talks between Vietnam’s Vice President and the Prime Minister of Mongolia. These included promotion of defense ties and cooperation between law enforcement agencies.

Also discussed was increased export of Mongolian meat products to Vietnam, particularly goat meat. Mongolia is scheduled to export 20 tons of goat meat to Vietnam this year, and trade is expected to grow significantly.

The agreement on export of goat meat highlights one of Mongolia’s current strengths in agricultural production of meat and dairy. The sector is ripe for foreign investment, including funding, technologies and techniques.