Mongolia Implements New Tender Process to Obtain Mining Licenses



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Companies in or considering getting into the Mongolian mining industry need to be aware of new changes in procedures for obtaining a license for minerals exploration. The new changes are geared toward making it easier to apply for and register a minerals exploration license, which will hopefully facilitate interest in continued minerals exploration in the Mongolian steppe.

The amendment of the Law on Minerals regulating the issuing of new mining licenses, was adopted by the Mongolian Parliament on 10 November 2017. Under the law, new mining and exploration licenses will be granted through a new tender process starting this year. Prior to the amendment, mining licenses were obtained through applications and tender bids.

Area Selection

The minerals exploration process will start with a determination by the State Administrative Agency as to the target plot of land to be explored. After identifying a candidate area for exploration, the State Administrative Agency will notify the provincial governor and local municipality, and provide a detailed outline and map of the proposed exploration.

The governor and local municipality will have 45 days to provide a response to the State Administrative Agency giving local opinion as to the planned exploration in the target area. A meeting of citizen representatives should be held to determine local attitudes. If there is no official reply within the 45-day period the proposed exploration is considered accepted by the locality.

After a target area has been approved for minerals exploration, the State Administrative Agency will announce a selection process inviting potential exploration companies to submit application documents to be considered to management the exploration. The invitation period will last 30 days and include publication through public media and newspapers. In the event that an area targeted for exploration receives no applicants to conduct the exploration, the State Administrative Agency will leave the area open and conduct further announcements going forward.   

Selection Process

With the new Changes, licenses for minerals exploration will be issued through a special selection and bidding process. Interested companies are required to submit a request to be considered to participate in the selection process to the State Administrative Agency. The application must include documentation regarding the applicant’s technical proposal or project outline documentation. The required documentation will include information regarding personnel requirements, techniques and technology, and the nature of the planned exploration work.  The State Administrative Agency will register the request and give a receipt to the applicant while the request is considered.

Our next post will look at procedures for review of submitted applications and revocation of issued licenses.

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.

Issues in Mongolia Employment: Employment of Minors



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Foreign companies operating in Mongolia are sometime surprised regarding local laws on employment of minors. In Mongolia, employment of minors, is legally acceptable under limited circumstances and with high protections required in favor of the young employees.

There are a number of legislations regulating the child employment In Mongolia. There is the Labour Law, as well as The Law on Protection of Child Rights, and the relevant international conventions. Mongolia was one of the first countries to ratify the Convention on the Rights of the Child in 1990. Minimum Age Convention, 1973 (No. 138) and Worst Forms of Child Labour Convention, 1999 (No. 182) were also ratified by Mongolia.

In Mongolia, a person at the age of 16 is allowed to enter into an Employment Agreement.  In addition, a person of age 14-15 years of age may be hired under the consent of the parents or guardians for the purpose of acquiring vocational training or work experience.

However, minors are allowed to be hired only in approved sectors. The Minister in charge of labour issues recently renewed the list of positions at which minors not allow to be employed, namely alcohol, tobacco related, plastics industry, construction, hotel, nightclub, bar, casino gambling, entertainment venue and generally jobs with hazardous labour conditions.

Horse racing, a traditional Mongolian sport, often sees children as young as five riding horses in the races. The children train the horses at even younger ages. Such activities have come under criticism by international child protection organizations for being a hazardous activity for these children, but due to the traditional nature of the sport, it is not likely that it will be restricted.

The employer of a minor is obligated to protect the health of minor employees by providing a medical examination twice a year. Furthermore, it is prohibited to require the minor employees to carry or lift load exceeded the permitted amount, and to work overtime, on public holidays or weekends. Violations may result in fines to the employer in addition to a requirement to compensate the young employee for with.

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.

Cryptocurrency: A New Financial World Order?



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Cryptocurrencies have become a global phenomenon. While most people still don’t understand the concepts of it, many companies, major banks, financial institutions, and governments are aware of the importance of cryptocurrencies and are developing regulations and business models to manage and channel the trend.

In several-part series of articles we will go through all basic aspects of cryptocurrency and the firm’s growing cryptocurrency practice. Today we will discuss basic concepts of cryptocurrencies.

A cryptocurrency is a digital or virtual currency that uses cryptography for security. Cryptography is process of converting legible information into an almost uncrackable code, to track purchases and transfers. Therefore, cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency is that it is not issued by any central authority, such as a central bank or government. Cryptocurrencies use decentralized technology to let users make secure payments and store money without the need to use their name or go through a bank. Transactions are recorded on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders.

Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that periodically generate coins. After coins are mined, users can also buy the cryptocurrencies from brokers, then store and spend them using  online cryptographic wallets.

Cryptocurrencies make it easier to transfer funds between two parties in a transaction; these transfers are facilitated through the use of public and private “keys”, which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them, for security purposes. The public key (comparable to a bank account number) serves as the address which is published to the world and to which others may send cryptocurrencies. The private key (comparable to an ATM PIN) is meant to be a guarded secret, and only used to authorize cryptocurrency transmissions. These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers.

As a new and largely unregulated financial asset, the cryptocurrency markets have been known to take off meaning a small investment can become a large sum overnight. But the same works the other way, with volatility sometimes resulting in steep losses of value.

Also because of the level of anonymity they offer, cryptocurrencies are often associated with illegal activity, such as money laundering, tax evasion and illegal activities on the dark web, however, crypocurrencies themselves are not illicit or criminal item. Those seeking to invest in or buy cryptocurrencies should be aware of the volatility of the market and the risks they take, and be careful about the implications when choosing to buy the currencies.

Still, many observers look at cryptocurrencies as hope that a currency can exist that preserves value, facilitates exchange, is more transportable than hard metals, and is outside the influence of central banks and governments.

Future posts in this series will examine the current state of crypocurrency regulation, legal trends in crypocurrency and practical aspects of engaging in cryptocurrency related business in Mongolia.

Mongolian Securities: What is a Depository Receipt?



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What is a depository receipt?

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

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

In Mongolia, depositary receipts have the following types:

– Mongolian depositary receipts; and

– Foreign depositary receipts.

Mongolian depositary receipts

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

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

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

Foreign depositary receipts

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

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

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

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

Mongolian Employers Face Fines for Violation of Employee Rights to Unionize



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

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

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

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

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

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

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

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

Adopting a Mongolian Child: Cause for Refusal, Termination and Monitoring Systems



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We are continuing our series on international adoption of a Mongolian child. In our first post, we reviewed the legal framework of the international adoption system. Our second post listed the specific steps required to apply for adoption of a Mongolian child. In this post we will take a closer look at potential legal grounds for a refusal of the adoption application, and we will review the monitoring mechanisms in place to ensure the adoption is a success, and beneficial to the child.

An application for international adoption will be rejected if it is found that false information or false documents have been submitted or the information and documentation provided in the application does not comply with the real circumstance of the adopting parents. This is simple and expected, potential adoptive parents must be truthful and forthcoming on their adoption application papers.

The application may also be denied if the examining officers feel that the prospective parent’s reasons for the adoption are uncertain or suspect; or where the adoptive parents’ ideas and goals for the adoption and subsequent rearing of the child are divergent and their opinions are not unified.

After the adoption is approved, a bilateral or trilateral agreement shall be signed by the adoptive parents and an adoption agency in compliance with the UN Convention on the Rights of the Child, this is required to finalize the adoption legally. The contract provides detailed information on adoptive parents’ obligation to provide the child with normal opportunities for growth, safety, education, and protection of rights.

Normally, the adoption agreement with include provisions requiring the adoptive parents to submit updated information about the child to the Diplomatic Representative Office of Mongolia each year until the child reaches the age of 16. If the adoptive parents change their place of residence, they are obliged to immediately notify the competent authorities of their country of residence and Diplomatic Representative Office of Mongolia. Additionally, the intermediary adoption agency will responsible to organize visitation to ensure the adopted child’s situation.

Over the course of the adoption, the Immigration Agency of Mongolia will maintain the right to terminate the adoption arrangement if it is proven that the adoptive parents consciously lost the child, or engaged in any activity not beneficial for the child’s best interest, such as physical, mental, or sexual abuse or neglect of the child, or drug use by the parents. The adoption will also be canceled if the parents lose the right to act as adoptive parents under the domestic laws of their country of residence, or where the child’s rights as set out in the adoption agreement, or local laws regarding child protection are violated.

Adopting a Mongolian Child: International Adoption Procedure



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Adoption of a Mongolian child by a foreign individual or couple is a complex procedure requiring several stages. As we mentioned in our previous post, the adopting parents are firstly required to obtain approval for adoption in their home country.

The prospective parents must then submit their adoption application via their home country’s adoption system, which will forward the application to the appropriate body in Mongolia. If a prospective foreign parent has resided in Mongolia for over six months, the international adoption application shall be submitted directly to the government central administrative body in charge of population matters of Mongolia (the “State authority”).

The applicant must submit a report containing information on their personal characteristics, presenting their suitability of the adoption, their educational status, information regarding their family background and health information, their history of the disease, income and social status. The adopter must also describe their reasons for adopting.

After review and approval of the international adoption application the State authority will select a probable adoptive child and initiate contact with the prospective adoptive parents through the international adoption agency.

The Immigration Agency of Mongolia will review the relevant adoption documents, and will examine and make a decision on the condition of the child and suitability for adoption. An adoption commission will conduct a face to face interview with the prospective adoptive parents, as required by the Mongolian “Regulation on the Procedure to Interview Foreign National Requesting Adoption of a Mongolian Child”. The regulation is approved and implemented directly by the head of the Immigration Agency of Mongolia.

The purpose of interview with the prospective adoptive parents is obtain a better understanding of the parents ideas, goals, the reasons for adoption, and to gauge their parental fitness, education, employment, financial prospects, understanding of the responsibilities of adoption, understand their family history, determine future plans. The interview will also assess the prospective parent’s ability to care for the health of adoptive child, the appropriateness of the parent to match the characteristics of the child, as well as ensuring the adoptive parent’s attitude toward and ability to socialize and educate the child.

The final decision to approve the international adoption will be made by the majority vote of the members of the commission after the interview with adoptive parents. If the adoption is approved, the Head of the Immigration Agency of Mongolia will issue an approval order based on the decision.

Throughout the process, it is beneficial for prospective parents to have a local contact or legal support to liaise with government officials to assist in responding to questions or concerns of the reviewing officials.