Using Customs Seizure to Stop Import of Infringing Products to Mongolia



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Our firm’s Mongolian intellectual property lawyers have seen a lot of inquires in recent months from clients seeking assistance regarding counterfeit products which were being sold in Mongolia.

There are several mechanisms our Mongolian lawyers recommend to deal with counterfeit products in Mongolia.  One of the most important of these is utilizing Customs to restrict entry of counterfeit products or goods infringing registered trademarks from entering Mongolia.

This works by seizing infringing goods at Customs upon attempted entry into Mongolia. Before this may be done, the authentic goods bearing a validly registered Mongolian Trademark must be registered with Customs.

This registration process is relatively easy, requiring documentation of the registered trademarks, basic information regarding the trademark owner, a description of the products, and a list of items requested to be reviewed and protected by Customs. Our Mongolian lawyers will walk you through the process. The review procedure will talk approximately 30 days from the date of submission of the application, after which, the registered information will be forwarded to Customs entry points around Mongolia.

A written request for seizure of infringing goods, must be submitted along with a small cash deposit or bank guarantee. The customs office prefers having the deposit to avoid incurring any damages to importer before starting examination of infringing goods based on the original goods with customs registration.

Our Mongolian lawyers and clients have found such Customs seizures to be effective at blocking incoming shipments of infringing products. However it is important to note the applicant seeking to block the shipments must have a valid, registered Mongolian trademark in order to support such action by Customs.

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 Mongolian Central Bank Guarantee Independent Operation



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Finishing our series (part one here, part two here) reporting on changes to the operations of the Mongolian Central Bank we present here the new provisions which will work to solidify and encode in the law the bank’s operations as an independent entity, not directly under the control of the executive branch of the government.

Independence of the Central bank from Government.

The amendments explicitly provide for the independence of the Central bank from the government. It is clear that the government should not provide any direction to the Central Bank regarding the agreements and transactions the bank enters into or in any other matter unless explicitly provided for in the law. The Central Bank of Mongolia should not directly or indirectly grant credit to the Government of Mongolia and may only purchase long and short-term securities of the Government from primary or secondary market except where explicitly provided for in the law.

Granting Credit to the Government

Under the new law, the Central bank of Mongolia may grant temporary credit or buy a short- term Government Bond in order to meet seasonal liquidity needs of the government, subject to repayment before the end of the financial year. If the Central Bank of Mongolia bought bond/securities issued by the Government, it will be added to the credit balance of the Government. In the frame of open market operation, the long -term securities of Government purchased by the Central Bank of Mongolia contingent upon repayment in short terms will not be included in the total amount of the balance of temporary credits.

Supervision of Bank Activities

The Central Bank of Mongolia will have authority to establish procedures, regulations and instructions, and make decisions, and carry out supervision and enforcement activities relating to the licensing to establish banks and operating activities of banks. This includes matters relating to the maintenance of adequate paid in capital and liquidity of bank assets, improving the security of the banking system, and regulation of banking activities for the purpose of protecting the interests of depositors and customers.

New amendment also updated the range of Central Bank’s activities.

In order to implement its objectives, the Central Bank of Mongolia will conduct the following activities:

  • issuing and regulating currencies into transaction;
  • formulation and implementation of monetary policy;
  • acting as the Government’s fiscal intermediary;
  • supervision of banking and entities specified in the law activities;
  • organizing, reconciling and supervising of local/national payments and settlements system;
  • holding and management of the State’s reserves of foreign currencies;
  • protecting right and interest of customer, depositor;
  • implement balanced/proper macro policy.

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.

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.

Mongolia to Amend Law on Patents



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Law on Patent was adopted initially in 1993 to facilitate the legalization of the ownership rights of the industrial design, the patent, the utility models and the certificate holders; to regulate relations arising out of their use; and to facilitate them into economic circulation. The Law on Patent was amended in 1996, 1999 and revised in 2006 in connection with social and economic reform.

With the development of technological developments, innovation of Industrial designs, utility model and patent and their scope of applications are growing rapidly.

Thus, innovators and entrepreneurs are keen to produce value-added products, as well as to focus on foreign markets and business development.

In Mongolia, the number of patent applications is steadily increasing, with 70% of 1555 applications filed for patent the last 6 years (2010-2016), 94% of 1817 applications for industrial designs, and 80% of 1065 applications for utility models have been issued.

Patents grant with exclusive rights in the territory. In Mongolia, 16 patents were filed under Patent Cooperation Agreement in 2008-2016

However, in practice, the enforcement of laws is inadequate due to failure of regulations that need to be regulated by law, conflicting regulations, as well as renewing needs to meet with international treaties in which Mongolia ratified.

In other words, there is only one standard regulated by laws regardless the difference between the 3 objects of the invention, the industrial design and the utility model, regulation in connection with the filing and examination process is not appropriate in practice, as well as the use of a compulsory license of the patent that violates the rights of the owners. In addition, there is no financial support, tax and fee discount policy that supports creators, and the process of international application relating to the patent regulated by laws do not meet the standards and requirements of international agreements ratified by Mongolia.

Guidelines for improvement Mongolian legislations until 2020 states that the Patent Law is aimed at improving the protection of patents based on global trends and agreements with World Intellectual Property Organization based on the views of the World Intellectual Property Organization.

In addition, the Government’s Action Plan for the 2016-2020 was obliged to the Ministry of Justice and Home Affairs in order to draft a law on amendments to the Patent Law to submit to the State Great Hural.

As a member of the World Intellectual Property Organization, Mongolia obliges to comply with the fundamental principles set forth in international treaties and conventions which ratified.

Law on Patent expects to be amended based on abovementioned requirements.

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.