Doing Business in Mongolia



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Mongolia is a country with vast open land, and few people. While the economy has been slow in recent years, the country has a huge amount of untapped potential. Now could be an excellent time to consider starting a new unique business opportunity in China.

LehmanLaw Mongolia is pleased to introduce our clients to the Business Counsel of Mongolia, and its support for the Doing Business in Mongolia project.

The Business Council of Mongolia (BCM) strives to make real effective contributions to bettering the environment for businesses large and small in Mongolia. BCM fosters international trade and healthy business relations by providing a network for its members and Mongolian businesses. BCM also works closely with the Mongolian Government private sector, embassies, NGOs, special interest groups and business associations to advance these goals. About 370 individuals act as volunteers on the BCM’s working groups which help to make recommendations on key areas for effective advocacy.

The Doing Business in Mongolia project aims to identify and promote new opportunities in Mongolia and well as help businesses struggling with common issues and challenges regarding operating their business in Mongolia. The volume will include 12 detailed and insightful interviews exceptional Mongolian business leaders.

http://bcmongolia.org/news/detail/doing-business-in-mongolia

Keep up to Date on The Mongolia VAT



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As we posted previously, the newly adopted Mongolia Value-Added Tax  (VAT) law has come into effect since January 1, 2016.

According to the VAT law, “Any citizen and legal person, who is engaged in the import and export of goods as well as the sale and manufacturing of any goods, performance of work and rendering of services in the territory of Mongolia, shall be value-added taxpayers.” VAT shall be applicable for the following goods, works and services where operational income value reaches 50 or more million tugrugs:

  • all types of goods, works and services sold within the territory of Mongolia;
  • all types of goods, works and services imported from abroad to Mongolia; and
  • all types of goods, works and services exported from Mongolia;

Furthermore, the VAT shall apply to the representative office of a foreign legal entity whose revenue of sold goods, performed works and rendered services in the territory of Mongolia, has reached 50 million tugrugs or more.

In almost all cases, the value-added tax shall be imposed at the rate of 10 percent of the taxable amount of imported, manufactured or sold goods, performed works and rendered services.  However, some certain types of goods, work and services can be subject to zero (“0”) percent VAT. The payment of VAT must be within the first ten days of the following month.

The newly adopted law also creates an incentive system with the possibility of recovering up to 20 percent of paid taxes if certain conditions are met. Initial such tax returns are expected to refund in the first quarter of this year.

A conference with our Mongolian Tax Law specialists can help you determine whether your company may be able to take advantage of the 0% VAT, or the VAT recovery.

Mongolia Set to Allow Trading of Real Estate Interests Via Stock Exchange



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Mongolian Parliament approved the Law on Allocation of Land to Mongolian Citizens for Ownership (LALMCO) in 2002 under the authority of Article 6.3 of the Constitution, “the state may give for private ownership plots of land, except pastures and areas under public and special use, only to the citizens of Mongolia”.

Implementation of LALMCO began May 1, 2003, granting every Mongolian Citizen a right to own a plot of land. This was the first time in the history that Mongolian citizens were entitled by law to own land. However, implementation of this law was not satisfactory. The right to acquire land for ownership is opened to all Mongolian citizens according to LALMCO, but implementation mechanism were not set out in this law, as result, many citizens face obstacles to their legal acquisition of land for their ownership. Those individuals who live in an apartment in the city, in particular have encountered difficulty in gaining access to land ownership despite the  guarantee in the LALMCO. Since LALMCO’s implementation only 7.6% of the 1.2 million city dwellers in Mongolia have been granted the land rights as guaranteed.

Reasons for the unsatisfactory implementation of LALMCO are not for lack of available land, or   limitations on use of land. The law is missing specific regulations and procedures with regard to establishing and confirming land ownership rights obtained under LALMCO. As a result of the lack of clear regulations and procedures, some national and local authorities have used the law to distribute land to friends and family through corruption and without transparency or public oversight.

As set forth in the new draft law, a Certificate of the Right to Own Land will be issued to each citizen, and upon establishing Land Ownership, a Certificate of Land Ownership will be issued. A Certificate of the Right to Own Land will represent each respective citizen’s right to own land. The Certificate of Land Ownership will clearly set out the individual’s ownership rights to a specific plot of land.  Details regarding issuance of these certificates and relevant regulations are also set out in the draft law.

The draft law also provides an interesting mechanism regarding the Land Ownership Certificate. Land Ownership Certificates will be able to be securitized and traded via the Mongolian Stock Exchange. This will provide an avenue for profits for those citizens, such as city dwellers, who are not planning on living on or using the granted land rights themselves.

While real estate can be very valuable, undeveloped land, may not always offer any profit or other benefit to the owner. Development of the land often takes substantial resources and time commitment, which owners may not be able to provide. The ability to trade ownership interests in these plots of land could be a major reform for the Mongolian economy enabling many citizens to profit off land ownership in new ways.

Currently, it remains unclear whether foreign individuals or companies will be able to invest in and trade the Land Ownership Certificates once they are listed on the exchange. This could also be a substantial opportunity for foreign investments in Mongolia. We will keep our eye on developments and update here when we know more.

Crash Course on Mongolia Corporate Income Tax



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Mongolia resident economic entities are taxable on aggregate annual income earned worldwide. Non-resident economic entities carrying out business activities in Mongolia are taxable on the income earned within the territory of Mongolia and otherwise from Mongolian sources.

According to the Law on Corporate Income Tax enacted in 2006, taxable corporate income includes income from activities, properties and sale of property.

The general tax rate for an economic entity incorporated in Mongolia is ten percent (10%) for the first 0-3.0 billion MNT and 300 million MNT, plus twenty-five percent (25%) for all income exceeding 3.0 billion MNT.

Dividend income, royalty income and interest income are taxed at ten percent (10%), income from the sale of a right at thirty percent (30%) and income from the sale of immovable property at two percent (2%).

A representative office of a foreign economic entity that transfers its own profit overseas is taxed at twenty percent (20%).  Similarly, the following income of a taxpayer who does not reside in Mongolia but generates income in Mongolia shall be taxed at twenty percent (20%):

  1. dividend income received from an economic entity that is registered and operates in Mongolia;
  2. loan interest and payment for issuing a guarantee;
  3. royalty income and interest on a finance lease, payment for administrative expenses, rent, management expenses and lease, and income from the lease of tangible and intangible assets; and
  4. income from goods sold, work performed and services provided in the territory of Mongolia.

Payment of corporate income tax is on a quarterly basis with the payment for the first three quarters to be paid between the 1st and the 20th of the first month for the following quarter, and for the fourth quarter between January 1st and February 10th of the following year.

LehmanLaw Mongolia employs Mongolian Tax Attorneys and Accountants and can take care of all your Mongolia taxation needs!

Fresh Amendment to Mongolia Company Law Incoming



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A new draft law to amend to the company law was submitted to the Mongolia Parliament recently. The purpose of the proposed amendments is to improve the regulation of liability limited companies with majority state ownership. There have been problems which have occurred with corporate governance of such majority state owned companies, in areas such as shareholder and board meetings and selecting members of the Board and executive management.

The amendment aims to improve legislation concerning proposals to call regular and irregular meetings of shareholders of these companies and improve the effectiveness of the regular Board of Directors meeting so as to aid is role as decision maker and to ensure normal operations of these companies.

The draft amendment includes the regulations clarifying procedures for to the call of regular and irregular meetings of shareholders of and the effectiveness of Board of Directors meetings.

Once the draft law enacted, rights, obligations and liabilities associated with the liability limited companies dominated by state ownership shall be clear and no additional funding from state budget shall be required for enforcement of this law.  We see this as a positive step to encourage independent decision making among leadership of key state owned enterprises, which are the primary vehicles by which Mongolia facilities and draws profits from several of its major mining operations.

Mongolia Individual Income Tax



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According to the Personal Income Tax Law, a taxpayer is defined as “A citizen of Mongolia, foreign citizens and stateless persons residing in Mongolia who are responsible for payment of tax in accordance with law for their earned taxable income for the tax year or even when no income is earned.”

Taxpayers are further classified as “resident” and “non-resident” taxpayers.

A foreign individual is considered as Mongolian tax resident if he or she resides in Mongolia for 183 or more days in a tax year or owns a residence in Mongolia. Above days are calculated based on the number of days of a calendar year from the day of entry into Mongolia and in case of multiple entries, it will be determined based on the total days of stays in Mongolia.

A foreign individual is considered as a non-resident taxpayer in Mongolia if he or she has no residence in Mongolia and has not stayed in Mongolia for 183 or more days in a tax year.

Income is determined to be taxable “on income earned by the permanent resident taxpayer of Mongolia for the relevant tax year in the territory of Mongolia and abroad” and “on income earned by the non-resident taxpayer for the relevant tax year in the territory of Mongolia.” This includes, but is not limited to, salaries, wages, bonuses, income from activities, income from proprietorship, income from the sale of property and indirect income.  In general, the tax rate on salaries, wages, bonuses and income from activities is a flat rate of ten percent (10%).

If a taxpayer did not pay taxes on time, tax administration will impose penalty per each late payment day on outstanding balance of taxes payable. Penalty for late submission of tax return is imposed on individuals. Responsible person who has failed to file tax returns on time as specified in tax legislation to the tax administration would be fined 3-4 times the minimum labour wage. Please note that current minimum labor wage in Mongolia has been increased to MNT 240,000 since the beginning of 2017.

Don’t Get Your Mongolia Mining License Revoked



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The Mongolian mining industry is a big part of the firm’s client base. Of course, mining in Mongolia is a very carefully regulated sector. Mongolian mining companies require a special mining license to legally manage a mine or conduct geological exploration activities. In some cases, a valid mining license may be revoked by the government. It is important to be mindful of these circumstances so that steps may be taken to avoid such a risk.

The State administrative agency will revoke a mining and exploration license on the following grounds:

One of the general requirements to hold exploration and mining license are that the legal entity holding the mining license, should be incorporated under the laws of Mongolia and must be Mongolian taxpayer for the entire duration of a valid license. Without meeting this requirement will be one of the grounds to be revoked the licenses. If a company is not paying correct taxes, it is at risk.

Another important requirement is to pay license fees on time as specified in the law. The amount of the license fee will be calculated on the basis of the measurements of the real estate covered by the license. Timely payment of the required license fees will be determined by the date of the transaction as recorded at the bank. The license holder must pay the license fees each year in advance, on or before the anniversary date of the issuance of the license. If the fee is not paid in advance, the company will be levied fines of 0.3 percent of the annual payment amount for each day overdue. If payment is overdue for 30 days or more the license is at risk of being revoked.

Where a designated area for exploration or mining has been reclassified as a “special purpose territory” by a decision of the Government, or it has been prohibited by the law to explore or mine in such area, the government may compensate the mining and exploration license holder, and duly revoke the license ;

If a company holding an exploration license is not conducting expected exploration activities, as indicated by annual exploration expenditures being lower than the expected minimum cost of exploration, the license for such exploration may be revoked.

A license may be revoked if environmental authorities determine the license holder has not adequately carried out its environmental conservation duties.

Where a designated area for exploration or mining has been identified as a cultural heritage area, the license will be revoked.

If it is determined that the license holder has breached obligations under Mongolian Law as it relates to fresh water conservation, the license will be revoked.

Mongolia Secures New Funding for Water Supply



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Regional Deputy Vice President for Europe, Asia, Pacific and Latin American of Millennium Challenge Corporation’s (MMC) Department of Compact Organizations, Ms. Fatema Z. Sumar has informed the Mongolia Minister of Foreign Affairs Mr. Ts. Munkh- Orgil  that MCC’s Board of Directors have decided to include Mongolia in a list of countries eligible to sign the Second Compact Agreement.

Mongolia’s first MCC compact, a five-year, $285 million infusion of targeted development assistance from the United States was concluded on September 17, 2013.

The MMC’s second compact agreement will be focused on creating comprehensive ways to create sustainable and suitable solutions for Mongolia’s long-term development.

The MCC will cooperate with Mongolia to improve sanitation and water supply facilities serving the ger districts of Ulaanbaatar. The Board of directors of MCC believes that maintaining efforts to combat corruption in Mongolia will yield improvements for the economy. The preparations for the signing of the Second compact are underway and it expects to sign in 2017.

This is seen as an important development for Mongolia, as securing clean water and sanitation is a key element to attract Foreign Direct Investment. It is expected that new water and sanitation facilities will help to bring in new investments and help to diversify the Mongolian economy.

Mongolia Cabinet Approves Construction of Oil Refinery



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The Cabinet’s ministers voted to pursue negotiations to use a one billion USD loan from India to build a petroleum processing factory in Sainshand soum in Dornogovi Province. Total preliminary estimated cost for opening refinery will be 1 billion USD, 264 million USD will be spent on refinery and 264 million USD will be spent on a petroleum pipeline.

Early studies indicate the refinery could generate annual revenue of 1.2 billion USD, and net profit would be 43 million USD. The plan for the refinery capacity to process is up to 1.5 million tons of petroleum annually, 560,000 tons of gasoline, 670,000 tons of diesel fuel, and 107,000 tons of liquefied gas meeting Euro 4 and Euro 5 emission standards.

Studies shows that the proposed factory could contribute to increase the country’s GDP by 10 percent and a twofold increase in the revenue generated by the natural resources processing sector.

Economists predict that the investment could contribute to increasing the flow of foreign currency and help to stabilize Mongolia’s macro economic and monetary policy. The Cabinet believes that the refinery could create around 600 new jobs and pay more than 150 million USD a year in state and local taxes which will contribute to the state budget. The Finance Ministry suggests that a total of 30 factories, including tire, rubber, plastic, cosmetics, and pharmaceutical factories, could be established with direct access to a domestic refinery.

8 “Must Do’s” to Keep your Mongolia Company Safe



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Every Mongolia company, foreign or domestic, is required to have a Company Seal, which takes the form of a simple stamp. These seals serve as the legal “signature” of the company for various documents and are officially registered with the government. When a seal is affixed to a contract the company will be legally bound to the terms of the contract.

While these seals can be a convenient way for a company to indicate acceptance of a contract, the nature of the system can allow misuse by unapproved parties, or misappropriation of the seal if not kept securely. Even a misused seal will legally bind the company.

Problems encountered due to misuse of seals include employees redrafting employment contracts and granting themselves increased salary or benefits, Employees using company seals to bind the company to expensive contracts with the employee’s friends or relatives, or employees using seals to deposit company funds directly into the employee’s foreign bank account.

Seals personally kept and under the control of individuals may also be subject to theft or simply refusal to cooperating in executing certain company policies. This can include, holding seals “hostage” and demanding a payout from the company, refusal to approve important business deals, leaving the company unable to take action. Employees holding seals may refuse to cooperate in providing the necessary seal for the employee’s own termination from employment; or if terminated, an employee may continue to hold a company’s seals and continue to carry out business in the company’s name. In an extreme case, a terminated employee holding the companies seals may initiate lawsuits against the company itself, or against its trusted business partners sabotaging the relationship.

It is imperative for each company to establish clear systems for management of the company’s seals, particularly where they are kept on premises. The following are recommended best practices.

  1. Company management should appoint persons authorized to approve use of each particular seal (such as a department manager, whether in Mongolia, or abroad), and clearly communicate these authorizations to all employees.
  1. Company management should appoint persons authorized to hold and use each particular seal, and clearly communicate these authorizations to all employees.
  1. An employee seeking to utilize a seal is required to first report the required use, and gain approval from the authorized personnel, and then report to the individual authorized to hold and use the seal to finally affix the seal on the document.
  1. Each individual authorized to hold a seal is to be required to maintain the seal safely and securely, and has the responsibility to prevent unauthorized use of the seal in their possession, or delivery to unauthorized personnel.
  1. When applying for use of a seal, the applicant shall file an application form or send an application email stating clearly the purpose of the required use of the seal and the nature of the documentation to be stamped.
  1. Each time the seal is used, the individual seeking use of the seal is required to sign their name, and mark the date to record the seal use.
  1. Each time a seal is used, the authorized holder is required to maintain the application and approval documentation in their possession, clearly filed along with scanned copies of each stamped document.
  1. Seals are not to be affixed to any blank or incomplete document.