Tag Archives: Foreign Direct Investment

Franchising Proves Effective for Many Foreign Brands in Mongolia



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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.

Can Foreign Companies Acquire Land in Mongolia?



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In this article we shall discuss what land rights are there for foreign citizens, foreign companies /foreign invested companies/ in Mongolia and is it prudent to invest.

Pursuant to laws there are three types of land rights in Mongolia: land ownership, land possession and land use right. All land, other than land granted for ownership to citizens of Mongolia, is owned and managed by the state. Thus, obviously aside from the state only citizens of Mongolia are entitled to land ownership. Therefore, restrictions on private foreign land ownership in Mongolia are absolute, meaning foreign citizens and companies are prohibited from outright land ownership. Domestic companies and Mongolian citizens may “possess” and “use” the land, where foreign companies and citizens may only “use” the land and only for purposes established by legislation.

Foreign citizens, who permanently reside (for more than 183 days) in Mongolia, may acquire land use right through open auctions for residential needs only. Foreign citizens may be given land for use up to 0.05 hectares for a residential lot, and up to 0.1 hectares – for gardening activities (such as cultivating vegetables, fruits and berries). Land may be given for use for up to 5 years through a contract and be extended by up to 5 years at a time.

For foreign companies or Mongolian companies with foreign shareholding the acquiring of land use rights is much more complicated process. Foreign companies may acquire land use rights through an open auction process similar to foreign individuals. However only the Parliament of Mongolia is entitled to make a decision on giving land for use to foreign companies (including or Mongolian companies with foreign shareholding); whereas, a decision on giving land for use to foreign citizens is made by governors of corresponding level. Land may be given for use to foreign companies under lease or concession contracts for up to 60 years and extended once for up to 40 years upon its initial term. The Government determines land borderlines and land use regulations.

Aside from restrictions on acquiring land use rights, there are a couple additional restrictions for foreign citizen and companies’ land rights. Foreign citizens and companies are prohibited to freely transfer, or pledge acquired land use rights. Such transfers and pledges may be undertaken only between Mongolian citizens, companies and organizations. Mongolian citizens and companies, who gave the land for utilization to foreign citizens and companies without proper prior approval from authorized state body, are liable to compensation of damages and termination of their land use rights. In other words, in order to acquire land use right from Mongolian citizens and companies, once again one must obtain approval from abovementioned authorized state bodies. Thus, it makes acquisition of land use right from domestic companies and citizens also complicated.

In conclusion, while the process for a foreign invested company is difficult, it is doable. For those foreign companies for which acquiring such land use rights is important, it will be important to obtain the advice and assistance of an independent Mongolian lawyer.

Changes to Mongolia Central Bank Managment



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New Amendments to the Law of Mongolia on Central Bank

In our previous post, we introduced changes to the law on the governance of the Mongolia Central Bank. In this post, we will take a closer look at the most important changes.

Monetary Policy Committee

According to the new amendments to the Law of Mongolia on Central Bank, major changes are coming for the management committees’ roles. For instance, the Monetary Policy Committee will consist of 7 members including 4 adjunct members, and members will be appointed in terms of 6 years. Monetary Policy Committee will discuss and decide following matters: a) a draft of state monetary policy; b) determine interest of instrument of monetary policy; c) determine required reserves amount of bank, requirement of proper balance of percentage and amount. Form/ Formula of Monetary policy committee’s activity will be meeting.

The Monetary Policy Committee will decide matters via a majority vote of members participating in the meeting and the chairman will make a final decision in case of a tie. The meeting of the monetary policy committee will be held no less than 4 times a year. If President of Central bank of Mongolia or not less than 3 members of committee proposed to hold a meeting, special meeting will be conducted. Monetary policy committee’s decision will be issued by resolution type/form/format and certified by the signature of the chairman of meeting.

Monetary Policy Instrument

The Central Bank of Mongolia will use the following instruments to implement the state monetary policy.

1) Setting of the amount and proportion of compulsory reserves to be maintained by banks;

2) Grant a credit to the banks and use financial instruments;

3) pursuing a unified policy on interest rate;

4) conducting open market operations;

5) imposing a ceiling on credit outstanding to be granted by banks.

The Central bank will develop/draft the procedure for the determination, assessment, supervision of the required compulsory reserves of banks.

Supervision Committee of Bank:

Supervision Committee of Bank will discuss and issue recommendations on the following matters regarding to implement power of Central Bank to supervise on the banks.

  • To implement to supervise banks, regulate bank’s activity pursuant to the law, a draft of resolution, methodology, procedure, guidance, rule in connection with enforcement measure to the bank;
  • Report on the supervision of the banks;
  • Proposal to grant credit to the bank, Corporation of Savings Insurance in order to stabilize banking and financial system under the law.

The composition and rule of Supervision committee of Bank will be approved by the President of Central Bank of Mongolia.

Requirements for Offering Tax Consulting Services in Mongolia



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Some activities must be conducted under a specialized license in accordance with Mongolian law. One of those activities is specialized tax consulting service. Tax consulting service is allowed to be conducted by a legal entity with a license granted by the appropriate government agency, similar to auditing. The Law on specialized tax consulting was adopted on December 27, 2012 and is the primary legislation to regulate this service.

According to the law, an authorized tax legal entity must satisfy a number of requirements, such as having a physical workplace, equipment and software necessary for the conduct of the required activities; having handbooks or manuals and methodology to be used in its operations; having archive for storage of work documents of consulting services; and ensuring confidentiality of a client information and information security.

In addition, there are specific human resources requirements. An authorized tax consulting company must have 3 and more specialized tax consultants and its founder must be a specialized tax consultant. License for specialized tax consultant is issued for 3 years term.

The specialized tax consulting service aims to provide a client with an opportunity to perform its duties to pay taxes and protect its rights and legal interests. The law stipulates that the tax consulting service includes following activities:

  • to provide advice on legislation on taxation and professional assistance regarding its implementation and promote;
  • to make tax estimation and adjustment, review primary and accounting documents, register tax influence and develop tax reports in accordance with approved template;
  • to communicate with taxation office and other relevant persons on behalf of a client.

As we mentioned in our earlier post, an auditing legal entity may carry out the auditing or review of financial statements and provide relevant financial services to the client. In addition, an auditing legal entity can engage in specialized tax consulting service after acquiring relevant license. If auditing legal entity provides the tax consulting service on the bases of additional license, it is not required to use a proper name which includes abbreviated letter of “STC” (Specialized tax consultant”) as an ordinary authorized tax legal entity does.

If a business offers tax consulting services without the required license, the company and personnel are subject to legal penalty.  A person may be fined for three hundred thousand tugrugs and a legal person is fined for three million tugrugs.

Parliament Confirms Changes for Central Bank of Mongolia



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The Parliament of Mongolia has approved amendments to the law governing the Central bank of Mongolia. The changes will effect the legal status of the bank and its independence. The Bank’s decision making process has been adjusted based on the standards, practices and principles implemented by central banks in other countries so the operations of the Central bank of Mongolia will comport with the international standard. The amendments will enter into force from the April 1, 2018.

One big change coming is that the bank’s involvement and influence with matters such as the state budget will be circumscribed, making the bank more independent from the Government. At the same time, there will be a mechanism in place to ensure clear lines of communication between the government and the bank.

This amendment will contribute to the increase of independence of the Central Bank, proper development of monetary policy, improvement of implementation of legal circumstance, promotion of further price stability at the macroeconomic level and will help to provide greater financial stability, and to maintain and promote long term economic stability for the slowly growing Mongolian economy

Most of world’s Central banks are responsible for balancing inflation and price level, and such responsibilities are clearly provided for in relevant laws. However, the Mongolian Central bank’s mission had been to balance and stabilizing the National currency. The new amendments help to more clearly define the Central Bank’s goal. The amendment defines the Central bank’s objective as the “Price Stability”, this objective and goals is meeting and complying with international level and standard.

This is undoubtedly a positive development for the Mongolian economy. We will keep you updated and will have a more detailed discussion regarding the exact nature of the new amendments in an upcoming blog.

Mongolia Minerals Exploration License: Review and Revocation



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In our previous post, we introduced Mongolia’s new tender process for obtaining a license for minerals exploration activities. Here, we will briefly discuss the procedures and requirements on review of an application for the exploration license. 

Application Review

After receiving applications for a license to explore for minerals in a particular plot, the State Administrative Agency of Mongolia will evaluate each technical proposal and fee proposal submitted by the interested parties on a scale, and will notify the candidate who obtained the highest scoring evaluation that it is eligible to receive the exploration license. If two or more applicants obtained equal or similar evaluation scores, the applicant which first submitted the application is first eligible to be issued the exploration license. If an applicant submitted incomplete documents or a review of the technical aspects of the documentation reveals that the application does not meet the requirements to be eligible for the exploration license, the State Administrative Agency will notify the applicants in writing regarding their exclusion from the remainder of the tender process, and will provide and explanation along with returning the application documentation to the applicant.

The selected candidates are required to pay an initial annual exploration license fee within 10 days after receiving notice of eligibility. If the candidate fails to pay this fee, it will be deemed to be a ground to revoke the license. After payment of the initial fee, the State Administrative Agency will issue an Exploration License valid for a three (3) year period. When the Exploration License is issued, the Ministry of Environment, the local province, district, city’s governor, and local Inspection Agency with jurisdiction over the target plot will each be notified directly, and the aware of the exploration license will be published in public media.

Revocation of a License

There are several potential issues which may result in revocation of an issued minerals exploration license. Breach of rules and standard procedures for exploration will result in revocation, and the holder will be required to transfer the license back to the State Administrative Agency. Failure to pay required corporate income taxes, to duly report to the tax office and to report relevant information to the tax office will also result in revocation of the license. The Exploration License will be revoked in the event that the license holder does not report such status to the Mongolia Legal Entity Registration Office (LERO), along with relevant details about its corporate structure and holdings, or where changes to the license holders corporate governance and information is not reported within 10 days to the Tax Office.

What Are The Audit Requirements for a Foreign Invested Company in Mongolia?



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The National Audit Office of Mongolia has opened up public discussions on the Audit Law which was last amended in 2015 and effective from January 1, 2016. The working group of Audit law has been receiving suggestions from the public online and organizing a regular series of public discussions on changes to the current Audit Law.

On December 25 2017, a public discussion was held for independent legal auditors. There are now over 50 international and local audit companies admitted conducting the audit services in Mongolia.

Mongolia has some unique regulations regarding required corporate audits. According to the law, a particular audit firm is not allowed to provide auditing services to a certain client company for more than 5 consecutive years. Furthermore, an audit firm which had provided 5 consecutive years audit service to a certain client company may not provide auditing services to that company for at least 3 consecutive years. These requirements are designed to prevent arrangements between clients and audit firms to carefully disguise potentially non-compliant financial practices at the client company.

Under the current Audit Law, the following business entities or organizations must have mandatory auditing of financial statements:

  • business entities or organizations following the International Financial Reporting Standards;
  • business entities or organizations issuing consolidated financial statements;
  • business entities or organizations under a reorganization or liquidation process or selling all their assets through auction;
  • any foreign invested business entities or organizations;
  • any kind of financial fund; and
  • any other business entities or organizations which may be required to have mandatory auditing of their financial statements under the law and international treaties which Mongolia is a party.

Most business entities or organizations are required to have their financial statements audited by the April 30 of the following financial year. As for banks, annual final financial statements are due within March 31 of the following financial year. As for joint stock company, financial statements are required at least 2 weeks prior to any shareholders’ meeting in which it is intended to discuss financial statements of the reporting period.

For evading performance of obligations specified in law having its financial statements audited, or failure to have audited within above mentioned period, an individual is fined by amount equal to MNT 100,000 and a legal entity is fined by amount equal with MNT 1,000,000, in addition to compensate the damages occurred in accordance with Law on Infringement in Mongolia.

Political Unrest in Mongolia Threatens IMF Review of Funding



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The Executive Board of the International Monetary Fund (IMF) on May 24, 2017 approved a three-year extended arrangement under Extended Fund Facility (EFF) for Mongolia to support the country’s economic reform program. Other financing partners, including the Asian Development Bank, the World Bank, Japan, and Korea, have also committed to provide budgetary and project support, and the People’s Bank of China has agreed to extend its swap line with the Bank of Mongolia. In sum, the total financing package amounts to about $5.5 billion. The Board’s approval of the arrangement enabled the immediate disbursement of about $38.6 million. Addition of these funds to reserve currency of Bank of Mongolia had positive impact on the country’s economy and improves outlook for foreign investment.

Prior to each quarterly disbursement, IMF staff monitors and reviews if the country’s progress in meeting the conditions under the program justifies the continuation of disbursement. By this standard IMF staff team visited Ulaanbaatar from July 19 to August 2, 2017 to conduct discussions on the first review of the EFF arrangement. At the end of the visit the IMF staff team concluded that performance under the program has been good, with all quantitative targets on track. According to Bank of Mongolia’s report, the IMF staff’s positive conclusion enabled subsequent funding from above mentioned financing partners within the EFF arrangement. The IMF staff conclusion is subject to review by the management and Executive Board of the IMF. The Board is expected to consider the first review in late September, and this could lead to a disbursement of about $37.82 million.

In the midst of this positive news, Mongolian politics remains unwieldy. On August 23, 2017 thirty members of Mongolian People’s Party (MPP) group in the parliament signed and submitted a petition to dismiss the Prime Minister J.Erdenebat, and consequently, the Government. This is likely to cause some level of political destabilization. History of some countries (e.g. Argentina, Greece) shows that political destabilization may cause IMF to suspend or even cancel its financial aid altogether. Though we have high hopes that these political issues will not escalate to that point in Mongolia.

It is critical that this happens not long after the stir occurred during the Presidential election, in connection with payout of children’s money by the Government. The IMF staff team disapproved such action by the Government. Therefore the Government committed itself to target the Children’s Money Program to less affluent families, which partially led to overall positive preliminary findings of the IMF staff team. Thus any kind of political destabilization may not only affect the further implementation of EFF arrangement, as well as country’s further economic well-being.

According to the Constitution of Mongolia, the petition to dismiss Prime Minister should be discussed and resolved by the parliament within 15 days. We will keep you informed here of the outcome, and potential consequences.

Mongolia Company Liquidation: What are Requirements for Employee Termination?



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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.

Mongolia Presidential Election Maintains Divide Between Presidency and Parliament



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The people of Mongolia have just completed the election of the President of Mongolia. Battulga Khaltmaa, of the Democratic Party, is the victor. Mr. Khaltmaa follows Ts. Elbegdorj, also of the Democratic Party in serving as President. This will continue the previous dynamic of a Democratic Party President serving concurrently with a parliament dominated by the Mongolian People’s Party (MPP).

Mr. Khaltmaa achieved his win with 50.6% of votes cast, with a voter turn-out estimated at 60%. The MPP candidate received 41.2% of the vote, while 8.2% of ballots were returned in protest with no selection, a practice expressly allowed by the Election Law of 2015.

The MPP continues to hold a supermajority in parliament. Therefore, they will retain the capability to override any potential veto by Mr. Khaltmaa of proposed legislation. Still, his presence at the top is expected to force some concessions on the part of the parliament. Mr. Khaltmaa will be primarily responsible for foreign policy, and negotiations of treaties with foreign governments.

During the campaign, Mr. Khaltmaa advocated for state involvement in the economy, and management of natural resources. He has framed his pending presidency as a necessary balance against the MPP dominated parliament. It is expected that a period of adjustment will follow the election in which the parliament and Mr. Khaltmaa learn to work together and set boundaries.

Mr. Khaltmaa is called a Nationalist by Bloomberg. His campaign has promised to increase public access to wealth from Mongolia’s large resource mining projects. He has also promised to reduce trade imbalances Mongolia has with Russia China, a task which may be easier said than done. Even so, the rhetoric has not been overly hostile to foreign investment and the election is not expected to derail Mongolia’s recent efforts to revitalize its mining boom, or efforts to diversify its economy in the agricultural sector.