Spring session 2015 new laws of mongolia (by lex loci)

LEGAL UPDATE #2/2015

Legal Update #2/2015 by LexLoci LLP contains general information on selected Mongolian laws

adopted by the Parliament of Mongolia during the Spring Session 2015. The information contained

in this document is not for the purpose of providing legal advice, and should not be treated as

such. You must not rely on the information in this document as an alternative to legal advice from

your attorney or other professional legal services provider. If you have any specific questions

about any legal matter in respect of Mongolian laws and regulations, you may contact with us or

should consult your attorney or other professional legal services provider.

LEXLOCI LLP

Legal Update #2/2015

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LIST OF SELECTED LAWS APPROVED BY THE PARLIAMENT OF MONGOLIA

(as of July 30, 2015)

The Parliament of Mongolia has adopted various new legislation including new laws and amendments to the

existing laws during its spring session held between April 6, 2015 and July 10, 2015, despite some politically

driven issues not resolved as expected, such as Election Law, Law on Political Party, Law on Financing of

Political Party, Amendment to the Constitution of Mongolia, as well as the Tavan Tolgoi Coal Project

Agreement. Overall, we consider that the new legislation would bring positive effects on the development

or improvement of Mongolian legal environment.

1. Law on Pledge of Movable Properties and Intangible Assets

The Parliament of Mongolia has approved the Law on Pledge of Movable Properties and Intangible Assets

which will be effective from September 1, 2016.

The Law is to enable present or future movable properties, all kinds of stocks, securities, right to demand,

industrial designs, trademarks, all creative works of sciences, arts and other movable properties and

intangible assets to be pledged, so that to increase market transactions, reduce the interest rates and

support small and medium enterprises.

Secured obligations under the pledge shall be any or combination of contractual obligations or obligations

imposed by the law and other related obligations to the same (loss or damages caused in connection with

the performance of the pledge, penalty interest, default penalties, stamp duties and court expenses) that

could be expressed in monetary form. Collateral Pledge Agreements must comply with the requirements

set by Article 10 of the Law.

Pledge shall be ensured and confirmed upon (i) transfer of possession of the collateralized item to the

Pledger according to the Collateral Agreement; (ii) registration of Pledge Notice in the Electronic Database of

Pledge or (iii) upon control over the account if a saving account is pledged. Particular collateral could be

pledged to several Pledgers, and the Pledgers’ right shall be satisfied according to sequence of the pledge

confirmation. However, if a Seller sold equipment or a vehicle on credit or a Creditor who financed the

equipment or vehicle purchase has registered the pledge with the Electronic Database within 10 days from

the date of transferring the equipment or the vehicle, then the Seller or Creditor shall have priority right

over the other confirmed Pledgers. Such Electronic Database is to be managed by the government agency in

charge of state registration and shall be open to public.

In event there is a default by the Pledgee, the Pledger is entitled to (i) have the possession of the collateral

or get a court order to receive the possession if the Pledger is not able to do so by itself and sell the

collateral and return the remaining amount to the Pledgee after satisfying the obligations in default, (ii)

receive the payment directly from the payer if an account receivable is pledged, (iii) directly proceed with

the rights entitled by the pledged bearer security held by the Pledger or (iv) satisfy the obligations in default

directly from the cash deposited in the pledged bank account that controlled by the Pledger.

The Law also provides detailed provisions on the rights and obligations of Pledgers and Pledgees,

registration procedure of Pledge Notice, the Electronic Database, etc.


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Separate Implementation Law effective from the same date has also been adopted in order to regulate the

pledges that occurred before the enactment of the Law on Pledge of Movable Properties and Intangible

Assets.

More study needs to be done on this newly adopted legislation, and more details are to be provided in a

separate memo at request.

2. Law on Value Added Tax (revised) (subject to official publication)

The Parliament of Mongolia has approved the revised version of the Law on Value Added Tax which is

coming into force on January 1, 2016. Principal changes on the existing VAT Law (2006) are, among others,

listed as follows:

- New definitions and provisions are introduced and the existing terms are revised or clarified.

- VAT threshold of MNT10 million was increased to MNT50 million.

- VAT Payer – is an individual person who purchases and imports goods, work and services only for

his/her personal use, but not for any forms of sales and business activities.

- VAT Withholder – is a legal entity responsible for imposing and withholding tax from the sales

amounted to MNT50 million and/or more, and transferring the withholding to the budget; VAT

Withholder shall include the sellers of the goods, work, and services within the territory of Mongolia,

the importers or the exporters of the goods, work, and services to/from Mongolia.

- ‘Sales’ under the newly approved Law is defined as ‘transfer of ownership of the goods, performance

of works and provision of services’, thereby removed the existing wording ‘… in exchange of

payments …’ from the definition.

- Electronic means of VAT slip and other financial documents are accepted and introduced.

- List of the goods, works and services that are subjected to VAT is expanded and clarified by adding

public notary service, penalty or interest received from others, asset appraisal service, state funding,

subsidy or allowance, factoring, forfeiting or similar transactions, legal service and all other services

not exempted from VAT to the List.

- Goods received under the soft loans from foreign governments or international organizations, loan

interest payable to non-banking financial institutions or savings and credit cooperatives and funeral

services are exempted from VAT.

Please consult your accounting and tax advisors for more details.

3. Accounting Law (revised)

The Parliament of Mongolia has approved the revised version of the Accounting Law which is coming into

force on January 1, 2016.

The Law requires that all business entities, organizations and permanent establishments of foreign

companies conducting business operation within the territory of Mongolia shall keep their accounting

bookkeeping in Mongolian language and in Mongolian national currency.

Under the newly approved Accounting Law (2015), reporting requirement is largely lessened by setting a

regulation on companies to file their financial statements electronically signed by the executive directors or


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the chief accountants once or twice a year (annual or semi-annual and annual) in electronic form to the

relevant finance departments. Actual submission deadlines are stated in Article 10 of the Accounting Law

(2015).

Financial documents in electronic form are also recognized by the law in addition to the documents in

written form. Financial source documents in written must be signed by relevant person who prepared,

approved or reviewed the same and stamped by the company, while electronic documents are required to

be confirmed by means of electronic signature.

The Law specifically listed out the international standards to be adhered by business entities and

organizations, namely IFRS, IFRS for SMEs and IPSAS.

4. Audit Law (revised)

The Parliament of Mongolia has approved the revised version of the Audit Law effective from January 1,

2016 with intent of improving legal and institutional framework of auditing activity in Mongolia and

effectively introducing the international standards.

Under the Audit Law (2015), an auditing entity who obtained the auditing license from the Ministry of

Finance may conduct (i) financial statement audit, (ii) verification of financial statements and (iv) other

confirmation work, and/or (iv) other related financial services, as well as (v) tax professional advisory

services (subject to additional license), (vi) asset appraisal work, (vii) accounting advisory services and (viii)

trainings under the relevant laws. The law restricts an auditing entity from providing auditing services for

five consecutive years to a single legal entity and prohibits the auditing entity to resume its services within

three years after its replacement upon such five consecutive years.

Foreign invested companies and other entities listed in Section 10.1 of the Audit Law (2015) are subject to

mandatory audit required to be completed by April 30th each year in general.

Article 17 of the Audit Law (2015) provides provisions on owners’ entitlements in terms of auditing. For

instance, holder(s) of more than 10% of the issued shares of a public/listed company and shareholder(s) of a

closed company/Limited Liability Company has a right to request audit reports on the financial statement,

debt and equity, conflict of interest transactions and other transactions, financial stance and performance

results of the company.

The Law also set detailed regulations on independent characteristic of auditing services in Article 7 and

requires auditors be independent from their clients in terms of business and personal relationships, as well

as circumstances related to the past or present auditing services.

5. Law on Encouraging Manufacturing

On July 9, 2015, the Parliament passed the Law on Encouraging Manufacturing. The purpose of this new

legislation is to provide government support for the manufacturing of the competitive and environmental

friendly value added products that directed to be exported and substitute the imports. The state support

include, among others, allowances on the loan interests on the loan received from commercial banks for the


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purpose of technological improvement and revolving funds and compensation of up 75% of the expenses on

research and development of high-tech products.

The law, however, shall not apply to those companies with foreign investment and the companies entered

into the investment agreements with the state as described by the Investment Law (2013). To this extent,

the companies could enjoy the state support under the Law on Encouraging Manufacturing if less than 25%

of its shares issued are held by foreign individuals and entities.

6. Law on City Redevelopment

The newly passed Law on City Redevelopment provides legal basis for redeveloping constructed area and

public land, demolishing and reconstructing the buildings not qualified for normal use and reorganizing and

developing ‘ger’ (traditional tent) area of Ulaanbaatar city.

7. Legislation Law

Law on Legislation was approved on May 29, 2015. The Law shall become effective from February 10, 2016

and regulate law making procedures including initiation and drafting of laws and parliamentary resolutions

(laws and regulations), requirements on the draft laws, submission procedures, printing of newly approved

laws and regulations and monitoring and assessment of the laws and regulations. It should be noted that an

entire Chapter on the public discussion over the draft laws and regulations including receiving writing

opinions, organizing public debates and meetings, public surveys, online discussions et al. is added to the

Law.

8. Amendments to Investment Law

On April 9, 2015, the Parliament revoked Section 6.10 of the Investment Law (2013), so that the provision of

requiring two third (2/3) votes of the Parliament members on any amendments to this law is no longer

effective and the general application of majority votes shall apply. One may argue that the Amendment

(2015) weakened the stability of the Investment Law (2013).

On May 14, 2015, an amendment was made to the Investment Law for the purpose of clarifying the duties

of the government agency in charge in order to comply with the newly approved Government Cabinet

Structure. All powers of the Ministry of Economic Development (former) were transferred to the Investment

Agency including, among others, issuance of the government permission on the investment by foreign state

owned entities in mining, banking and finance, telecommunication and media industry in Mongolia.

9. Amendment to Minerals Law

An amendment to the Minerals Law (2006) effective from June 4, 2015 was approved by the Parliament of

Mongolia for purpose of removing conflicts between the General Taxation Law (2008) and the Minerals Law

(2006). By the Amendment (2015), mining companies are now required to pay mining royalties concerning a

particular quarter within the first 20 days of the first month in the following quarter instead of paying the

amount before the end of the next quarter.


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10. Amendment to General Taxation Law

On June 4, 2015, amendments were made to the General Taxation Law (2008) by which financial documents

in electronic form are permitted. The definition, requirement and storage of the electronic documents will

be further addressed by the regulation to be approved by the Finance Minister. The companies are now,

subject to the said regulation, allowed to keep their financial documents both in hard copies and in

electronic form and to provide the documents in hard copies or electronic form to the tax inspectors

conducting the tax assessments. Meanwhile, tax officers are entitled to access to tax payers’ computers,

applications or software for the purpose of the tax assessments.

In addition, the tax assessments are only conducted by providing 10 business day prior notifications to the

tax payers. The possibility of immediate assessment without notification is removed from the General

Taxation Law (2008). Overall, the Amendment (2015) is expected to reduce the burden caused to the

business entities during the state tax audit/tax assessment.

11. Amendment to Corporate Income Tax Law

In order to remove uncertainty over the deductible expenses concerning mining royalties and depreciation

and amortization expenses concerning long term fixed assets, an amendment was made to the Corporate

Income Tax Law (2006) on June 4, 2015. In particular, the mining royalties reported shall be treated as the

deductible expense from the gross taxable income. The new assets obtained by the tax payer during a

particular quarter shall be depreciated from the first day of the following quarter, while the calculation on

the fixed assets under construction shall be commenced when the assets (building or construction) are

commissioned to use.

12. Amendment to Energy Law

On June 19, 2015, a number of new provisions and revisions are made to the Energy Law (2001) with the

intent of improving institutional structure of the energy sector and address the free market needs in the

sector.

For instance, a definition of ‘Power Purchase Agreement’ is, among others, added to the Energy Law (2001)

and the Ministry of Energy shall issue the permission to enter into Power Purchase Agreement while the

draft Power Purchase Agreement is to be approved and the agreement is registered by the Energy

Regulatory Commission. The Energy Regulatory Commission is also entitled to approve the start-up tariff of

a power generator.

In connection with the introduction of ‘natural gas’ and ‘coal bed methane’ in the newly approved

Petroleum Law (2014), the ‘methane gas’ being supplied to the end-users is included in the definition of

‘energy’, and relevant regulations on gas and gas supply are stipulated in the Energy Law (2001).

The Amendment (2015) has also broadened and increased the liability of the law breach by making

amendments to the Article 37 of the Energy Law (2001).


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13. Amendment to Renewable Energy Law

The Parliament of Mongolia approved an amendment to the Renewable Energy Law (2007) on June 19, 2015.

By the Amendment (2015) new definition of ‘supporting tariff’ (renewable portfolio standard or renewable

obligation) is introduced. Energy Regulatory Commission is entitled to set the ‘supporting tariff’, as well as

setting the price and tariffs upon expiry of the Power Purchase Agreement of which term is set in line with

the payback period. The renewable energy price and tariffs shall be set by the Energy Regulatory

Commission in consideration of the payback period and within the limits set by the law. Price difference of

the electricity generated from renewables shall be compensated by the said ‘supporting tariff’.

End of the Document