By Elena Fehrbach
The new Investment Law has been passed as a result of an extraordinary Parliamentary session in Ulaanbaatar. The new Investment Law will replace the Law of Mongolia on Foreign Investment and the Law on the Regulation of Foreign Investment in Business Entities Operating in Sectors of Strategic Importance.
Though the new Law has been announced as adopted, the text version of the document is not available for public yet. As reported by sources close to the matter, up to 75 amendments have been suggested for review compared to the first versions of Laws. In order to legally implement the new Law, 11 (eleven) other Laws, such as for instance, the Law on the State Registration of the Legal Entities as of 23 May 2003, should be amended.
The new Law will play a crucial role providing an attractive investment environment and supporting an attempt in bringing bigger investment to Mongolia. The major highlights of the newly adopted Law are the following:
1. The investment approval process will be easier with the new Law.
Previously adopted version was providing a 2 – step registration process for the foreign- invested entities: the first step was a registration of the new entity with the Foreign Investment Registration and Regulation Department (FIRRD) of the Ministry of Economic Development followed by the second stage of registration at the Legal Entity Registration Office (LERO). The new Law stipulates that the private investment from foreign or domestic sources require registration only at the LERO.
2. Classification of strategic economic sectors for foreign investments is removed.
The previous version of the Law has identified 4 strategic sectors requiring strict approval by the Government of Mongolia. The list of previous strategic sectors comprised mining, finance and banking, telecommunications and media.
The new Law allows investment in any production or service sector in Mongolia except for prohibited ones including gambling, pornography, narcotics and pyramid sales.
3. Clear definition of the Foreign State-Owned Entity (FSOE).
The current definition states that FSOE is a legal entity in which a foreign state directly or indirectly possesses more than 50 percent of the entity’s equity.
According to the new Law, FSOEs should undergo approval for all the investments (both direct and portfolio), operations or acquisition of 25 percent or more interest in Mongolian- incorporated entities.
4. Approving authority.
The Ministry of the Economic Development (MED) is entitled as an official authority approving all the investments initiated by the FSOEs.
5. Establishment of the Investment and Business Promotion Agency (IBPA).
The new agency will be operating under the MED supervision. The main purpose of the new establishment is the promotion, regulation and advertisement of investment in Mongolia.
Another important function of the new establishment will be issuing of the “Tax Stabilization Certificates” to qualified entities. The holder of the Certificate will be entitled for the stable conditions related to certain taxes for a certain time period.
The key condition for issuing the Certificate is the amount of investment which will be calculated with reference to a balance sheet based on the relevant accounting standards of financial reporting. The time period covering the stable taxation regime is up to 10 years for the heavy industrial projects investments and up to 5 years in the case of the light industry investments. If the stabilized taxes rates are reduced with time, the holder of the Certificate will have better tax treatment as well.
Taxes under cover include: corporate income tax, VAT, customs duties and mining royalties.
Terms for issuing the Certificates:
- Investment should exceed 15 billion MNT (equivalent to 8.8 million USD) in value.
- The new business should be environmentally friendly.
- Provides new employment opportunities and introduces new technologies.
Limitations related to issuing of the Certificates:
- Certificates will not be issued for investments related to production/import/sales of tobacco products and alcohol beverages.
- Investors who already have other tax arrangements with the Government of Mongolia cannot obtain the Certificate.
6. Differentiation between Foreign Direct Investments and Portfolio Investments.
The differentiation is based on the degree of investor’s involvement in the management of the invested company. The new Law will not be applicable to the Portfolio investments unless it is made by FSOE.
7. General Legal Guarantees.
The new Law is providing a number of general legal guarantees to the future investors, such as protection from nationalization.