Dear AustCham Mongolia members and friends,
We are proudly presenting ‘Doing Business in Mongolia’ cheat sheet prepared by our Corporate Member MinterEllison Mongolia Advocates LLP.
We hope this sheet will help anyone who are interested in and/or planning to start their businesses in Mongolia.
Presence on the ground can be established through a representative office, branch office or Mongolian-incorporated legal entity. However, representative offices can't undertake any economic activities and branch offices, as a matter of practice, can't be registered. So, establishing a Mongolianincorporated legal entity, such as a limited liability company, is the only current option.
Mongolian companies with more than 25% foreign ownership, must have minimum paid in share capital of US$100,000 per foreign shareholder. Mongolian limited liability companies do not need to have a board of directors, but must have an executive director. Legally there are no residency requirements for board members or the executive director, but in practice it is difficult to operate in Mongolia without a resident executive director (although it is possible through the use of a power of attorney).
Structuring investments into Mongolia through countries that have double taxation treaties in place with Mongolia can help reduce or avoid double taxation (including withholding tax on dividends and other returns) on foreign investors. Whilst Singapore and Mongolia have a double taxation treaty in place with Mongolia, neither Hong Kong nor Australia have one.
Mongolia is a signatory to, and has ratified, the New York Convention 1958 and as such the choice of parties to use foreign arbitration is treated as valid by Mongolian courts and foreign arbitral awards handed down in other member states are enforceable in Mongolian courts without further examination of the merits.
However, Mongolian courts may refuse to recognise /enforce a foreign arbitral awards where to do so would, among other things, infringe Mongolia's common interests. Where parties choose to have their disputes resolved by foreign arbitration, it is possible for Mongolian courts to permit interlocutory applications or grant relief.
Taxes at a glance
Corporate income tax: Mongolian-sourced income taxable at rate of 10% on profit up to MNT 3 billion (US$1.5m) and at 25% all profits in excess of MNT 3 billion.
Indirect transfer for the sale of an entity holding land possession and use rights or minerals licences are subject to 30% withholding tax on a gross basis.
Personal income tax: Mongolian tax residents (in-country for more than 183 days in any year in question) pay 10% personal tax on their global income.
Withholding tax: Mongolian entities pay 10% withholding tax on all dividends/ interest/royalties paid to other Mongolian entities. Mongolian-sourced income paid by Mongolian entities to offshore entities is subject to a 20% withholding tax.
VAT: 10% on all goods sold and services rendered within Mongolia. Companies should register for VAT as soon as possible. All VAT incurred prior to registration is not creditable or refundable.
Three categories of land rights: land ownership, land possession and land use.
Whilst foreigners, foreign companies and Mongolian companies with more than 25% foreign ownership cannot own or possess land rights, they may be granted land use rights. Whereas Mongolian law does, in certain circumstances, provide for the grant of land use rights for extended periods (with renewal options) prevailing practice is for land use rights to be granted for between three and five years.
Enforcing foreign judgements
Foreign court judgments are not enforceable in Mongolia unless Mongolia has a bilateral treaty for providing legal assistance in place with the country where such court is located.
Foreign worker quotas are set on an annual basis based on the sector and number of employees of the employer. The default foreign worker quota for companies not specifically listed in an annual quota resolution is 5% of the company’s workforce. Foreign worker quotas may be higher on a sector-by-sector basis. All foreign employees require a work permit or an investor visa in order to be employed in Mongolia. A Mongolian company with more than 25% foreign ownership qualifies for 3 investor visas for representatives of the shareholder. Work permits and investor visas are valid for a period of one year and can be extended annually.
Monthly contributions must be made into a 'Social Health Insurance Fund'. Employee contribution is capped at 11.5% of employees salary and an additional employer contribution is 12.5-14.5% of employee's salary, uncapped.
Goods, works and services within Mongolia must be charged and paid for only in Mongolia's local currency: the togrog (MNT).
Furthermore, parties may not agree to adjust their contractual payments based on movements in exchange rates. Generally, offshore counterparties can charge and be paid in foreign currencies and currency adjustment mechanisms are permissible, where goods are sourced or work or services are performed, offshore.
Choice of law
In most cases it is legally possible to choose a non-Mongolian law to govern contractual arrangements and Mongolian courts will uphold the parties' choice. However, certain types of contracts (e.g. immovable property transfer agreements) must be governed by Mongolian law. Disputes relating to ownership, possession and use of immovable property located within the territory of Mongolia are subject to the exclusive jurisdiction of the courts of Mongolia.