INVESTMENT GUIDE TO MONGOLIA - DOING BUSINESS

Journalist A.Odontuya

2015-11-24 15:03 GMT+8

LEGAL FRAMEWORK

The Mongolian legal system is based on the Roman-German (continental) legal system. The principal legal act is the Constitution (1992). In many cases, laws are worded vaguely, leaving latitude for alternative interpretations.

Economic and business activities in Mongolia are regulated by a variety of laws, including the Company Law of July 2, 1999 (revised substantially on September 13, 2007); the Civil Code of January 10, 2002; the Law on Investment of October 4, 2013, and many others.

The Arbitration Law of 2003 regulates arbitration disputes. In the drafting of contracts in Mongolia, in most cases, parties are free to select international arbitration as the method for the resolution of disputes of certain types of international trade, contractual and non-contractual civil disputes. Mongolia is signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), which mandates that arbitration awards made within the Territory of Mongolia are enforceable in Mongolia and other countries that are parties to the New York Convention.

Mongolia keeps improving its legal environment by introducing new law and modifying existing laws for good will and better subsistence.

New “Glass Account Law”/ Transparancy Law (2015/01/01) (Only applicable to public entities or if private Entities involved with public funded projects)

The objective of this law is to make budget and operations of a country, provinces and state enterprises more transparent, open and coherent to public, so that it will be under public monitoring. 

Law Principles:

Information should be accurate, correct and complete with up to date, consistent and prompt delivery, in order to be coherent and substantive to public. Information should be transparent, despite those that are approved confidential by the law.

Entities requested to publish information on their website. Technical requirements for the website are:

  • Separate segment for the Glass Account
  • Downloadable and printable information
  • Contact details of the person in charge are visible
  • Information update on regular basis save the information in the archive, enable public access into archive, enable download and print information in the archive.

Modified Law on Petroleum (2014/07/01)

Modification objectives are to create favorable environment by applying international standards to create coherent and transparent law framework to investors and avoid infringement of the rights of an investor. During first 5 years of oil and gas, imported equipment, raw materials, chemicals and explosives implementation in non-traditional oil and gas exploration is exempted from customs duty and VAT. Oil, gas, coal and oil shale producing equipment will be exempted from customs and VAT duty until the year 2018.

Modified Mineral Law (2014/07/01)

Modification objectives are firstly, to protect legal rights of an investor through implementation of ordinary and simple termination process, and secondly, to simplify license obtaining procedure by applying “first come first serve” basis. 

INTERNATIONAL TREATIES AND AGREEMENTS

Mongolia is a party to many international treaties in various areas, from the protection of the environment to free trade, the protection of foreign investments, and the avoidance of double taxation. Mongolia has been a member of the WTO since 1997. Mongolian legislation recognizes the primacy of International Treaties in cases of conflict with domestic legislation.

With respect to foreign investment, Mongolia is a signatory to the Washington Convention on the Settlement of Investment Disputes between the State and National of Another State (1965, joined in 1996), which provides the settlement of international investment disputes. It is also a signatory to the Seoul Convention on Investment Guarantee Agency (MIGA) since 1999, which ensures the eligibility of foreign investors for risk insurance through MIGA.

Mongolia is continuously improving its trade policy and investment environment on global level. Mongolia has introduced its investment strategy and policy to WTO and United Nations in order to be analyzed by international reviews. WTO`s Trade Policy Review and World Investment Report by UNCTAD delivered positive evaluation on Mongolian legal and investment environment. 

Mongolia has negotiated bilateral agreements with numerous countries. Encouraging and Mutual Protection of Investment Agreements have been negotiated with 43 countries and Exemption on Double Taxation Agreements have been negotiated with 25 countries. 

BANKING, FINANCE AND INSURANCE

Banking System

Since 1991, Mongolia has had a two tier banking system. The Bank of Mongolia is the central bank of Mongolia and represents the upper (first) tier of the banking system of Mongolia. All other banks represent the lower (second) tier of the banking system.

The Bank of Mongolia formulates and implements monetary policy by regulating money supply through charges in reserve money to achieve its main objective of currency stability, according to the Central Bank of Law of 1996. The BOM has focused on price and exchange rate stability, while ensuring adequate money supply.

The banking sector has been one of the most attractive sectors for foreign investors in recent years and has attracted considerable investor interest from Japan, the USA, Russia, and other countries. Though most of the major banks are financed in part by foreign investors, at present, only two foreign banks have representative offices in Mongolia: ING and Standard Chartered Bank.

Based on regulations adopted during 2011, the minimum capital requirement for commercial banks has increased from MNT 8 billion (approximately USD 6 million) to MNT 16 billion (approximately USD 12 million). This requirement is effective 1 May 2013. Foreign banks may establish local subsidiaries no earlier than one year after the establishment of their Mongolian representative offices. Further, the minimum share capital requirement for a Mongolian subsidiary of a foreign bank is set at USD 50 million. As a result, consolidation of the banking sector is expected in the following years.

The largest commercial banks are rated by the international rating agencies and have plans for IPOs in the following years. Bond issues are expected to be a first step for establishing reputation on the international market before proceeding with IPOs. 

The profitability of banks is high compared to most advanced countries. Risk aversion of banking sector is relatively high, though it has been gradually reducing. Investments in financial instruments are not sophisticated and a significant portion of assets relates to the investment in cash and bills issued by the Central Bank or other instruments guaranteed by the Government of Mongolia. 

Capital markets

Mongolia’s capital market first emerged in 1992. As of today in Mongolian capital market work 320 companies and 91 professional participants.

The Mongolian government has a policy since 2010 to make changes in the capital market laws in order to bring it into the international standards. The Parliament of Mongolia adopted in 2013, “Law on Investment funds” and “Law on Securities Market” of Mongolia, both of which entered into force on 1 January 2014.

The newly passed Law on the Securities Market has the main four objectives:

 1. To improve the security registration procedure: 

  • ​Detailed regulation of listing and initial public offering;
  • Allow dual listing;

 2. To attract foreign investment inflows;

  • Introduce custodian banks and investment funds; 
  • Decentralize over accumulation of shares
  • Protect rights and interests of investment community. 

 3. To improve market convertibility:

  • allow DRs, derivative instruments, asset backed securities,
  • allow OTC transactions;
  • allow dual listing.

 4. To increase market transparency:

  • require greater disclosure; 
  • promote better governance;
  • introduce self-regulating industry group. 

Law on Investment Fund

The purpose of this Law is to regulate matters regarding establishment of an investment fund, undertaking fund operations, protecting investor`s interests, and regulation and supervision of the fund operations by an authorized state organization.

This Law shall regulate matters related to granting special permits for [establishment of] an investment fund, undertaking management of fund assets, taking into custody and registering fund assets, distribution of information to investors and relations related to operations by the securities market`s regulated legal entities which will provide services to an investment fund.

In other words, Law on Investment Fund allows SMEs and companies to expand their businesses by attracting investment. On the other hand, it gives new chance for citizens to hold shares and to get a share of revenues from economic growth by receiving professional investment management system. 

Full Law on Investment Fund is available on the website of Financial Regulatory Commission of Mongolia www.frc.gov.mn

Insurance sector

Insurance activities in Mongolia are regulated by the Insurance Law of Mongolia, which was approved in 2004 and enforced in 2005, and Insurance Intermediaries Law and Driver’s Insurance Law. Under these laws, the Financial Regulatory Commission of Mongolia (FRC) is responsible for regulating insurance companies through its adoption of regulations and issuing insurance contracts with insurance companies that have not obtained a license from the FRC, including foreign insurance companies, unless FRC approval is obtained. At present the regulatory minimum share capital is MNT 2,75 billion (approximately USD 1.6 million) and expected to increase to MNT 5 billion (approximately USD 3 million) in 2017.

The Mongolian insurance market is at an early stage of development with insurance penetration (premium income as a share of GDP) of only 0.5%, though it is growing at fast rate. In the last five years total assets have more than tripled, whilst the gross written premium has doubled. At present the insurance sector consists of 17 insurance companies; 16 general insurance and one life insurance Company. The top five largest insurance companies represent more than 70% of gross written premium. The majority of insurance products cover property and liability insurance. As the size and financial strength of Mongolian insurance companies is limited, high risk and high value insurance policies are usually reinsured with international reinsurance companies.

Mining sector growth is expected to be the key driving force behind the expansion of the Mongolian insurance industry. Workers, equipment, infrastructure, and mines themselves will all need to be covered as projects become operational. Rapid expansion planned for the following years, however, necessitates further improvements in capital management, as well as insurance and financial risk management and other internal process of insurance companies.

At present time, there are 17 insurance companies, 24 insurance broker firms, 17 insurance loss adjuster firms, 15 professional actuaries and 3,400 insurance agents are operating in Mongolia. 

Land & Real estate

Office space in Ulaanbaatar remains considerably cheaper than in the neighboring countries although there are an increasing number of new buildings that offer A-Class office space.

Renting an apartment costs anywhere from USD 500 a month for a reasonable two-room apartment in the suburbs to as much as one is willing to pay for a five to six room flat fully furnished (with local or foreign furniture) in the city’s centre. It is important to confirm that the person renting the property has its legal title and, therefore, the right to lease the apartment. In addition, proper identification and a simple lease agreement in Mongolian and English should be obtained. Leases, at a very minimum, should state the terms of renting the property and should form the basis for a working relationship and understanding with a landlord. In some arrangements, the landlord agrees to cover utilities charges (except international phone charges) and to carry out basic repairs.

Foreigners are entitled to own buildings in Mongolia but not land. Landlords are unwilling to consider rental periods of less than three months, especially for residential accommodation. There are a number of real estate agencies that can offer assistance in this and other areas for reasonable fee. 

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