Category Archives: Corporate Commercial

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.

Investing in a Mongolia Company: Common vs Preferred Shares



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In general, purpose of investment is for one to gain profits and raise capital by acquiring certain assets, such as real estate, shares, bonds and so on, which are projected to rise in value. However, the significance of investment, particularly foreign investment is that it lets the investor not only raise its own capital, but it also becomes a tool for economic growth in Mongolia or any country. In this article we will take a look at a shareholder’s practical options as regards ownership of shares in a Mongolia company.

As provided in the Law of Mongolia on Securities Markets, a share evidences the investment of a shareholder in a company, gives its holder the right to vote at shareholders meetings, to receive dividends and to receive a proportionate share of proceeds from the sale of the company’s assets remaining following its liquidation. Shares are classified into common or preferred shares. There are several differences between the two, with each having it’s own pros and cons.

Most companies issue common shares, and similarly most investors acquire common shares. Common shares may benefit shareholders through appreciation and through dividends. Common shares also come with voting rights, giving shareholders more control over the business. In addition, common shares come with pre-emptive rights, ensuring that existing shareholders have a right to buy new shares and maintain their original percentage of ownership when the company issues new shares. A Common shareholder is entitled to following:

  1. Receive dividends: depending on company’s profitability and board of directors’ decision whether to distribute the profit, shareholder is entitled to receive dividends. Dividends may be paid in cash, as well as in form of assets and/or securities.
  2. Be involved in the management of the company by voting: shareholder is entitled to participate in shareholders meetings and vote regarding all issues proposed at such meetings. One common share comes with one voting right.
  3. Shareholder is entitled to receive and obtain all and any information regarding the company’s activities at any time.
  4. Receive a share of proceeds from the sale of the company`s remaining assets following liquidation of the company: following liquidation of the company and payment of all debts to creditors, shareholder is entitled to receive a share of proceeds (if any) from the sale of the company’s remaining assets.

In contrast, preferred shares in Mongolia, as in other countries, take priority over common shares, when dividends are distributed, as well as when the company is liquidated and pays its lenders, preferred shareholders receive payment before common shareholders. However, preferred shares typically do not offer voting rights in the company and have set payment criteria, a dividend that is paid out regularly. Usually preferred shares are issued when privatizing a state property or if a private company wants to attract additional funding (investment) without changing company’s control package. Preferred shareholder is entitled to following:

  1. Receive dividends before common shareholders: dividends are paid out to preferred shareholders before common share dividends are issued.
  2. Receive dividends regularly: while for common shareholder dividends are paid out only if company is profitable and board of directors decides to distribute profit, for preferred shareholder dividends are paid out regularly regardless of circumstances. Even if the company was not profitable and could not pay dividends, the payment is accumulated, and two-year dividend should be paid the following year.
  3. Receive a share of proceeds from the sale of the company`s remaining assets following liquidation of the company first: if the company is liquidating, shareholder is entitled to be paid from company assets first (before common shareholders).
  4. If provided in company charter, preferred shares may be converted into common shares.

Preferred shares are an optimal alternative for risk-averse equity investors. Preferred shares are typically less volatile than common shares and offer investors a steadier flow of dividends. Also, preferred shares are usually callable; the issuer of shares can redeem them at any time, providing investors with more options than common shares.

So, if you are thinking about buying shares in a Mongolian company, be sure to look into it more closely. There might be more options than just buying common shares.

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.

2018 Brings Changes to Personal and Corporate Taxes in Mongolia.



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With the beginning of 2018 several new tax regulations are coming into force. In 2017 the Parliament of Mongolia has passed number of amendments to laws. In this article we will highlight more relevant new tax regulations, which are coming into force from January 1st of 2018.

Increase of personal income (salary) tax and social insurance fee

On April 14th, 2017 the Parliament of Mongolia passed several amendments to Law on Personal Income Tax, Law on Social insurance and relevant accompanying laws. Pursuant to amendments to Law on Personal Income Tax, beginning from January 1st, 2018 personal income (salary) tax shall be incremental. Individuals shall pay starting from 10 percent and maximum up to 25 percent income tax depending on their annual income. Non-residents, who are employed in Mongolia, now shall pay 20 percent income tax regardless of their income. Before non-residents paid 10 percent income tax.

Pursuant to amendments to Law on Social Insurance, the rate for pension insurance fee shall gradually increase over the next 3 years. In 2018 employees and employers shall each pay 8 percent, in 2019 – 8.5 percent, from 2020 – 9.5 percent of pension insurance fee. Individuals, who are self-employed and/or pay pension insurance fee on voluntary basis, shall pay 11 percent of pension fee in 2018, in 2019 – 11.5 percent, from 2020 – 12.5 percent.

Tax on transfer of land possession and land use rights

Pursuant to amendments to Law on Personal Income Tax from November 10th, 2017, now any free of charge transfer of land possession and land use rights (whether if transfer is under gift contract, or transfer between family members) are taxable. Before only purchase-sale of land possession and land use rights were taxable. Under new regulation any transfer of land right (whether paid or free of charge) is subject to 10 percent tax.

Tax on transfer of land rights, exploration and mining licenses

On November 10th, 2017, the legislators passed an amendment to Law on Corporate Income Tax, pursuant to which transfer of land rights, exploration and mining licenses via transfer of owner company’s shares is now taxable. In other words, when a shareholder transfers his/her shares of company that holds land rights (land possession or land use rights), exploration or mining licenses to third party, such transfer is subject to 30 percent income tax. In compliance with amendments to Law on Corporate Income Tax, The Minister of Finances has published relevant methodologies, forms and required documents necessary to determine and calculate the taxable income amount from such transfers.

Is your Mongolia Company Compliant? Are You Sure?



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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.

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



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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



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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.