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Changes, Recent and Future, to the Foreign Investment Law of Mongolia
Sep 30,2016 1350

Changes, Recent and Future, to the Foreign Investment Law of Mongolia

1. Investment in Mongolia 

In the last few years the interest of foreign investors in capital investment in Mongolia has been rising, especially among investors from Northeast Asia and North America, and the volume of capital investment has increased in the all fields of trade, most of all in the mining industry.

 

The government of Mongolia is, of course, very concerned with the question of foreign investment and has directed the creation of both foreign and domestic policy which supports and stimulates the increase of foreign investment within Mongolia.

 

The Foreign Investment Law of Mongolia was adopted in 1993.  Further amendments were made in 1998 and 2002.  The objective of these changes was to create good conditions for foreign investment such as reducing the value-added tax on imported goods, improving services for registration and operation of companies with foreign investment, introducing provisions for cooperation between Mongolian and foreign investors, and establishing preferential tax treatment and stable investment guarantees.

 

After amending the Foreign Investment Law of Mongolia investment in Mongolia has grown by between five and six percent, compared to the averages between 1996 and 2000, and investment for the exploration and mining industries rises every year. In 2006 foreign entities invested 366$US billion dollars in Mongolia, and total foreign investment reached 1.8$ US billion dollars since 1990.  Today in Mongolia 73 percent of all foreign investment companies consist of companies which have paid-in capital between US$10,000 and US$50,000.  9 percent of foreign investment companies have a paid-in capital of between US$50,000 and US$100,000 and the remaining 18 percent have paid-in capital of more than US$100,000.

 

Between1990 and 2006, 6,165 foreign companies from 96 countries were registered in Mongolia.[ http://www.mit.pmis.gov.mn/modules.php?name=News&file=article&sid=38]   

2. Establishment of Foreign Companies in Mongolia

The companies which have paid-in capital of more than US$100,000 compose 95 percent of investment in Mongolia and the remaining companies compose only 5 percent. In 2002, Article 12 of the Foreign Investment Law of Mongolia regarding the establishment of foreign investment companies in Mongolia was repealed.  At that time, this article was misunderstood, as most foreign investors treated it like a licensing requirement.

After Article 12 was voided establishing foreign investment companies created problems with licenses, because this article had included all schedules of important documents and conditions for the establishing of a foreign investment company.

In response to this problem, the Minister of Industry and Trade and Minister of Justice and Internal Affairs in November of this year introduced revised draft legislation and further amendments to Article 12 of the Foreign Investment Law. Also, along with this, changes to the Law on the State Registration of Legal Entities regarding the registration of foreign companies will soon be introduced.

The present Foreign Investment Law allows the foreign investor to establish only legal persons. That is, it creates problems for some investors who are interested in establishing a representative office of a company and is unclear about documentation requirements for registration.  The proposed amendments to Article 12 should create a more comfortable environment for foreign investors and make it easier for them to establish representative offices of companies and legal persons in Mongolia.  Also, the documentary requirements and terms for establishing foreign companies and representative offices are being made more precise.

 

3. Registration of Foreign Citizen’s Investment

The Foreign Investment Law and the Law on the State Registration of Legal Entities contradict each other regarding registration of foreign investors.  Article 16.1.5 of the Law on Registration didn’t include the possibility of foreign citizens as investors, that is to say foreign private citizens could not register as investors in Mongolia.  They were not explicitly excluded from registering, but they were omitted from the list of entities who could register.  However, the Foreign Investment Law, Article 3.2, quite clearly stated that foreign private citizens could be investors.  This made investment by foreign citizens difficult to regulate.  Since then, this article has been amended by the Minister of Industry and Trade, and the Minister of Justice and Internal Affairs, whereupon they re-submitted the revised law to parliament for review.

According to Article 16.1.5 of the Law on State Registration of Legal Entities, “If a foreign legal entity is participating in the foundation, then they will be required to produce a copy of the respective legal entity’s national registration documentation of that particular country, or other equivalent documents”.  This is a shortcoming of the Law on State Registration of Legal Entities and creates problems for registration and investments in Mongolia for active and potential foreign investors.  The proposed amendments to Article 16.1.5 give potential foreign investors, the possibility to make investment in all sectors and to find a place in the Mongolian market.

 

4. Creating the “Unified Information Fund”

For foreign investment, the government believes[ http://www.parl.gov.mn/detail.php?pid=24&sid=140&table=parl_detail&id=6929] the following information to be very important: target of investment, research for improving the economy and increasing direct investment in Mongolia, advertising investment outside of Mongolia.  They also consider it important[ Ibid.] to provide foreign investors with this information and to include them in investment project.  Recently, certain institutions of government have begun trying providing foreign investors with the above information but the current system is insufficient and is not being properly regulated.

 

While the investment is increasing in Mongolia, there are still difficulties in getting detailed information regarding investment.  This is creating difficulties for investors who waste more time than necessary researching.

  

Responding to this matter, the government of Mongolia amended Article 14.2.4 of the Foreign Investment Law, which regards plenary rights of the Foreign Investment and Foreign Trade Agency of Mongolia Body to establish the “Unified Information Fund.” This is planned to be an information center where the foreign investors can get whatever information they seek regarding investment in Mongolia. 

 

The proposed function of the “Unified Information Fund” is to combine information from all government institutions, to make the statistical information available, to provide information regarding taxes, customs, investment capacity, incentives to stay in Mongolia, import-export news and other relevant information to foreign and Mongolian investors.

 

5. The Number of Foreign Companies in Mongolia

There is also currently a question regarding the number of foreign companies and their place in market.

 

 According to Article 32 of the Company Law all Mongolian and foreign companies established as a joint stock company, the owner’s equity must be at least ten million tugrigs (10.000.000).  The owner’s equity in a limited liability company must be at least one million tugrigs (1.000.000) but while the number of such companies is growing, they are not contributing much to the economy.

 

As a result of Article 32 of the Company Law, there have not arisen any important benefits for Mongolia, except the establishment of many small companies with foreign investment and an increase in the number of foreign employees in Mongolia.

 

Recently, foreign citizens have sometimes established small companies and violated Mongolian laws, causing them to fail market requirements.

 

Therefore, in order to deal with this issue the government has submitted draft legislation to amend the Foreign Investment Law and the Company Law such that the owner’s equity of a foreign invested joint stock company must be at least US$100,000.  The stated reason[ http://www.parl.gov.mn/detail.php?pid=24&sid=140&table=parl_detail&id=6929] for this is to improve the quality of investment and to attract the attention of large investors to Mongolia.  Article 32 of the Company Law will not apply to foreign entities or branches of foreign legal entities.

 

Large investment possesses high technology and potential for aiding the development of Mongolia.  It can facilitate exchange of experiences while enhancing the Mongolian economy, and increase the government’s reliability among investors. Also, the proposed amendments to Article 32 of the Company Law will both act as a defense for Mongolian companies and improve the quality of foreign companies by raising the paid-in capital requirements for new enterprises.

 

The Foreign Investment and Foreign Trade Agency has compiled the below table[ http://www.investmongolia.com/index.php?sel=menu&mnl=3_8_17] of the top twenty foreign-invested companies in Mongolia:

 

Names of Foreign Invested Companies in Mongolia  

Sector

SOCO Tamsag (USA)

oil

Ivanhoe Mines Ltd., (Canada)

mining

Monhua Qiang (China)

trade and services

Mobicom (Japan)

telecommunication network

Boroo Gold (Canada)

mining

Buyan Holding (Japan)

cashmere

Chinggis Khaan Bank (Russia)

banking

Mongol-Amicale (USA)

cashmere & camel wool 

Tumurtei Huder (China)

mining

10 

Zolotoi Vostok (Russia)

mining

11 

Mongol Hung Hua ( Hong Kong)

textile

12 

GL-Monpolimet (USA)

mining

13 

Gobital (Italy)

cashmere

14 

Zuilun (China)

construction

15 

Huanchan (China)

construction

16 

„Menatep – Sankt Peterburg“

banking

17 

Temujin Mench (Hong Kong)

textile

18 

Rock Oil (USA, China)

oil

19 

Trade & Development Bank (Luxemburg)

banking

20 

4×4 Parts Mongolia (Australia)

trade and services

 

 

6. Liquidation of Foreign Invested Companies

To liquidate companies which have not met requirements for investment in Mongolia, The Foreign Investment and Foreign Trade Agency of Mongolia has introduced an amended version of the Foreign Investment Law, Article 16.2 regarding liquidating foreign invested entities and branches of foreign legal entities. The changes mean that foreign entities and branches of foreign legal entities may liquidate either temporarily or completely according to the suggestions of a professional inspection agency.

 

Also, the proposed amendments to, Article 17.3, “If foreign invested companies liquidate completely, then their licenses must be voided by The Foreign Investment and Foreign Trade Agency of Mongolia and this must be reported to the General Tax Office.”

 

This proposed change will impose very high requirements on foreign investors regarding legal concerns, technology, sanitation and the environment in Mongolia.  

 

7. The Stability Agreement

According to Article 19 of the Foreign Investment Law, “If the amount of investment in a start-up company to be implemented by a foreign investor is between two and ten million US$, or the equivalent amount in Mongolian tugrigs, a stability agreement can be signed for I0 years, and if the amount is over US$10 million or its equivalent in Mongolian tugrigs, then the agreement can be signed for 15 years.”  In the mining industry such agreements are called Investment Agreements.

 

According to Article 29 of the Mineral Law of Mongolia, “if a mining license holder undertakes to invest no less than fifty (50) million US Dollars during the first five (5) years of its mining project in the territory of Mongolia, an investment agreement with the purpose to provide a stable operational environment may be concluded with a mining holder at latter’s request.”

 

The Stability Agreement is sometimes a more comfortable alternative for large investors, especially regarding the so-called “stable tax environment clause” for the term of the agreement.

 

Currently in Mongolia there are registered nine foreign invested companies (Boroo Gold, Tsairt Minerals, Mongolia mid-Asia International, Zam International, Vostok Oil & Gas, Erin International, Chin Hua Mak Nariin Suhait, Bumbat, and Skytel) which have invested more than two million US$ and have concluded stability agreements with the government. The amount of start-up investment in these companies ranged between US$2.7 and US$70 million.[ http://lavlav.mn/modules.php?name=News&file=article&sid=1821&catid=0]

 

The government of Mongolia prefers[ http://www.parl.gov.mn/detail.php?pid=24&sid=140&table=parl_detail&id=6929] that the amount of money involved in stability agreements stays very low, however this makes investors lose interest. Therefore, the government has been allowing stability agreements to get larger, and has amended the Foreign Investment Law.  Article 19.1 and Article 19.3 of the Foreign Investment Law was amended in the following way:  the lower boundary of start-up investment to be implemented by a given foreign investor was raised to US$20 million and the upper limit of US$10 million was changed to US$50 million.

 

The government of Mongolia has discussed revised drafts of the Foreign Investment Law, the Company Law, and the Law on the State Registration of Legal Entities, including all of the above changes, and has submitted their draft legislation to the Great Hural.

 

This author believes that this draft of the abovementioned laws is likely to create a more favorable legal environment for foreign and Mongolian investors.