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INVESTMENT GUIDE

Legal environment

Overview

The present-day legal system is part of the Continental (Romano-Germanic) legal tradition. The core of Mongolian law is the Constitution that was enacted in 1992. The functioning law of Mongolia is comprised of the provisions and laws of the Constitution, other regulatory legal acts, international treaties, and prior commitments of Mongolia, as well as regulatory resolutions of Constitutional Court (Tsets) and the Supreme Court. International treaties ratified by Mongolia have equal weight as domestic laws, however, treaties and other legal documents that contradict the Constitution are not followed.

The court system is organized into three branches: civil, administrative and criminal. Each branch has representative units and judges at the urban district or rural soum (a sub-provincial administrative unit roughly equivalent to a county in the U.S.) level. A superior appellate court unit for each branch exists in each province and in the capital city. The system is overseen by the Supreme Court, which handles high-profile cases passed on from lower units as well as human rights cases referred to it by the Prosecutor General or the Constitutional Court of Mongolia. The Supreme Court interprets all Mongolian laws, except for the Constitution, which is the province of the Constitutional Court. The judges of the Supreme Court and other courts are appointed by the President of Mongolia. The Court’s General Council nominates the Supreme Court judges and all judges should be approved by the State Great Khural. The Supreme Court selects one of its members to be their Chief Judge and the appointment is made for a six-year term.

The Arbitration Law of 2003 regulates arbitration disputes. Many Mongolian contracts use international arbitration as the method for the resolution of disputes. Mongolia signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 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. The Mongolian National Chamber of Commerce and Industry, which is the Arbitration Bureau in Mongolia, is sometimes regarded as politically influenced and unfamiliar with commercial practices, prompting preference for international arbitration.

Mongolia has signed the Washington Convention on the Settlement of Investment Disputes between the States and Nationals of Other States in 1996, which provides for the settlement for international investment disputes. It is also signatory to the Seoul Convention on Investment Insurance in 1999 and became a member of the Multilateral Investment Guarantee Agency (MIGA) the same year, which ensures the eligibility of foreign investors for risk insurance through MIGA. Additionally, Mongolia signed the Encouraging and Mutual Protection of Investment Agreements with 39 other countries as well as the Exemption of Double Taxation Agreement, negotiated between 34 countries. In total, Mongolia has joined 24 international treaties to date.

Unlike many developing Asian markets, Mongolia does not enforce any form of capital controls. Foreign investors are free to inject or remove capital from the country at will. The currency is fully convertible and the exchange rate is freely floating. In 2009, Mongolia enacted legislation mandating that local transactions be expressed and settled only in the local currency, with an exception for entities granted specific waivers from the Bank of Mongolia or Financial Regulatory Commission. 
There is a wide range of laws which may affect the mineral industry. The major laws related to mineral in Mongolia are:

  • Mineral Law
  • Common Mineral Law
  • Nuclear Energy Law
  • Petroleum Law
  • Petroleum Production Law
  • Law on Investment
  • Concession Law
  • Company Law
  • General Law on Taxation

Mineral law

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As mining continues to be the driving force of Mongolia’s economy, the legal framework in the mining sector is of vital importance. The most significant piece of legislation in the mining sector is the Minerals Law of 2006 (as amended from time to time).

The Minerals Law was amended on July 1, 2014, bringing a number of positive changes which should eventually help in attracting further investment. The amendments to the Minerals Law will be discussed in greater detail below.

The Minerals Law lays out the framework whereby companies, both domestic and foreign, can obtain exploration and mining licences.

Pursuant to the Minerals Law, a holder of an exploration licence is granted the exclusive right to obtain a mining licence if the holder deems the mineral deposit to be commercially viable.

Exploration licences are granted for an initial term of three years, with the possibility of extending the term for an additional three years three times, with the exception of exploration licences for radioactive minerals. Mining licences are valid for an initial term of 30 years, with the possibility of extending the term for an additional 20 years twice.

The Minerals Law outlines rules concerning what are deemed “strategically important deposits”, and allows the state the ability to acquire certain ownership interests in companies that are exploiting such deposits. If state funding was used during the exploration phase, the state may purchase up to 50% of the shares in a company exploiting the deposit. If no state funding was used, the government still has the right to acquire up to a 34% interest in the company conducting the mining activities.

After a great deal of deliberation and consulting with various stakeholders, the country’s parliament, the State Great Khural, adopted certain amendments to the Minerals Law on July 1, 2014. Many of the amendments to the statute were based on the State Minerals Policy, which was adopted prior to the passage of the amendments to the Minerals Law. The important amendments to the Minerals Law adopted on July 1, 2014 include the following:

  • The amendments to the Minerals Law establish a National Geological Office, which is charged with conducting “geological cartographic, geophysics, geochemical and hydrogeological and geoecological mapping and research on the territory of Mongolia”. (Article 11 of the Minerals Law);
  • The maximum geographical size of an exploration licence was reduced from 400,000 ha to 150,000 ha (Article 17.4 of the Minerals Law);
  • The maximum term for exploration licences (including all possible renewals) was extended from nine years to 12 years, with the exception of exploration licences granted for radioactive materials (Article 21.1.5 of the Minerals Law); and
  • Mining Licence holders are now required to give priority to domestic taxpayers when procuring goods and services (Article 35.9 of the Minerals Law). Also on July 1, 2014, Parliament adopted the Law of Mongolia on the Repeal of the Law on the Prohibition of Granting Exploration Licences.

Until this law was passed, there had been temporary moratoria on the issuance of new exploration licences since 2010, stemming from investigations into corruption at the Minerals Resources Authority of Mongolia.

Repealing the prohibition on the granting of exploration licences is certainly a welcome move for the investment community, as it demonstrates the Mongolian government’s willingness to take steps to encourage economic growth.

Common mineral law

This law regulates matters relating to exploration and mining of common minerals (sand, gravel, clay, basalt, granite, grindstone) for road and construction. Local government issues exploration license and mining licenses.  Exploration licenses are granted for an initial term of 3 years, with the possibility of extending the term for an additional 2 years, and mining licenses are valid for an initial term of 15 years, with the possibility of extending the term for an additional 10 years twice. The royalty rate is 2.5% for common mineral resources sold.

Nuclear energy law 

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State policy and nuclear energy law

Policies and legislations:

  • State policy of Mongolia on the exploitation of radioactive minerals and nuclear energy /2009/
  • Sustainable development concept of Mongolia–2030 (2016)
  • Law on Nuclear Energy (2009)
  • Law on Nuclear Weapon Free Status (2000)
  • Law on State Inspection (2003)
  • Law on License (2001)
  • Other Laws related to environment, mineral, criminal, customs

State Policy on the exploitation of radioactive minerals and nuclear energy

Goals:

  • Exploitation of radioactive minerals and nuclear energy is an important factor to ensure sustainable development and national security of Mongolia and to improve living standard of its people.
  • Radioactive minerals and nuclear energy is the sector of high intellectual potential and of high technology and developing dynamically in the world.
  • Mongolia will pursue a complex policy aimed to study its radioactive minerals resources and its exploitation, processing and exporting for peaceful purposes and further the utilization of nuclear energy and production of electricity and power through the introduction of advanced technology.

Regulations and standarts

Core regulations:

  • Regulation on Safe Transport of Radioactive Material (1987)
  • Code of Practice for Diagnostic Radiology (2010)
  • Basic regulation on radiation protection and safety (2015)
  • Radiation Safety Standard (2015)
  • Regulation on security of radiation sources (2015)
  • Radiation safety regulation on exploration of radioactive mineral (2015)
  • Regulation on management of radioactive waste from mining and milling of ores (2015)
  • Regulation on internal control of licensee (2015)
  • Technical regulation for acid in situ leach uranium mining (2015)
  • Mongolian Integrated nuclear security support plan (2015)
  • Drafted radiation safety regulation for uranium mining and milling

Main standards:

  • “Radiation dose limits” MNS 5631:2006
  • “Surface contamination limit” MNS 5630:2006
  • “Permissible concentration of radon indoors” MNS 5627:2006

Implementing projects

State-owned “Mon-atom” company is working to collaborate with domestic and international investors on projects such as prospecting, extracting, and processing of uranium and other radioactive minerals in accordance with related law, regulations and implement state attendance.

  • “Dulaan-uul”, “Zuuvch-Ovoo” projects – “AREVA” group's invested “Cogegobi” LLC has done prospecting of uranium.
  • “Kharaat”, ”Khairkhan”, “Gurvansaikhan” and ”Ulziit” projects – accurate geological studies and technology experiments has done.

Law on Petroleum

The Law on Petroleum is to regulate matters pertaining to petroleum and unconventional petroleum prospecting, exploration, and exploitation within the territory of Mongolia.  The Law on Petroleum shall apply to the petroleum and unconventional petroleum relations within the territory of Mongolia. The law regulates for improving the competitiveness of the conventional oil industry and creating an enabling environment for investment of unconventional oil. 

Regulated: 

  • Legalized basic conditions of selection of a Contractor. 
  • Agreement shall be discussed by Government meeting once instead of three times. 
  • Government Cabinet must approve the template of Production sharing agreement. 
  • In the event of an accumulation of petroleum deposit or oil field was discovered and extends beyond the national border, it shall be regulated by treaty between the Governments. 
  • A contractor shall handling all investment and sales revenue transactions through commercial banks registered in Mongolia and fully reflecting the same in transparent and open financial statements. 
  • An entity, which made prospecting Contract of unconventional oil will have an advantage to conduct the “Production sharing agreement”. 
  • Petroleum and unconventional oil operations shall be regulated by production sharing concepts. 

The contractor has the following rights:

  • Dispose of the petroleum allotted to it in accordance with the contract;
  • Transfer its contractual rights and obligations to another party in accordance with this law;
  • When necessary, amend the annual plan and budget with approval of the Petroleum Authority;
  • In the event it has fully met its obligations to protect and restore the environment, return the exploration area in whole or in part;
  • The administrative costs of the contractor shall be up to five percent of the cost recoverable expenses for a respective year.

Promotion investment

  • Promote and protect investment for oil industry under Government authority. 
  • According to the Customs Tariff Law and Value –Added Tax Law of Mongolia, a contractor and /or a sub – contractor will exempt from Customs duty and VAT during first five years of operation for “imported equipment, facilities, materials, raw materials, appliances, spares, chemical and explosive materials, and special machines and techniques, which will be used for petroleum and unconventional oil operation”. 

The new Petroleum Law designed with competitive conditions in international market, understandable, and flexible that will boost foreign investment in the country, helps extend the life of oil reserves and increase economic growth.
Policy, law, regulation, standards, permission and monitoring become in compliance with the international standard that will create understandable and transparent legal environment for investors. 

Law on investment

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In general, Mongolian law does not discriminate against foreign investors. In an effort to support Mongolia’s economic growth, the government of Mongolia ratified a new investment law effective from November of 2013, which encourages investors to participate in all sectors of the economy without any government approval by establishing a common legal guarantee for investors, supporting investment and stabilizing the tax environment, etc. This law applies to both foreign and domestic investors. The law provides incentives, such as tax exemptions, tax credits, longer terms to possess land, increased quota of foreign employees, simplified visa arrangements, and others. Only foreign state-owned entities (those with a minimum of 34% ownership of entities in the mining, media and communication, or financial sectors) must obtain approval from the newly established Invest Mongolia Agency, an official government representative. The Investment Law declares that a foreign state’s direct or indirect ownership exceeding 50% qualifies it as a foreign state owned entity.

According to the law, a foreign investor is defined as “a business entity with an overall equity of US$100,000 or more, not less than 25% of which must to be owned by (a) foreign investor(s)”. Investments into Mongolia can be made in the following ways:

  • By the establishment of a solely or jointly owned business entity
  • By the purchase of Mongolian companies’ shares, bonds, and other types of securities
  • By merging or wholly acquiring Mongolian and foreign companies
  • By establishment of franchises or by financial leasing
  • And by other forms acceptable, which are not prohibited by law.   

Furthermore, foreign investors who incorporate companies and conduct business operations in Mongolia are offered “Stabilization Certificates,” which propose a stabilized amount and rate of taxes and other payments to the government during their business operation period in the country. The holder of a Stabilization Certificate is guaranteed stabilized tax rates for a period of five to eighteen years depending on the amount, industry, and geographic location of the investment in Mongolia, and should comply with the criteria stated in the law. 

  • Corporate Income Tax;
  • Customs Duty;
  • Value-Added Tax; and
  • Mineral Royalty Tax.

For mining extraction, heavy industry and infrastructure sectors, the Stabilization Certificate conditions and grants the following:

Investment Amount (billion MNT)

Valid Length of Stabilization Certificate (in years)

Investment Completion Period (in years)

Ulaanbaatar

Central Region

Khangai Region

Easter Region

Western Region

30-100

5

6

6

7

8

2

100-300

8

9

9

10

11

3

300-500

10

11

11

12

13

4

500 & above

15

16

16

17

18

5

For other sectors, the Stabilization Certificate conditions and grants the following:

Investment Amount (billion MNT)

Valid Length of Stabilization Certificate (in years)

Investment Completion Period (in years)

Ulaanbaatar

Central Region

Khangai Region

Easter Region

Western Region

10-30

5-15

4-12

3-10

2-8

5

2

30-100

15-50

 

9

10

8

3

100-200

50-100

40-80

30-60

25-50

10

4

200 & above

100 & above

80 & above

60 & above

50 & above

15

5

Concession law

The purpose of this law is to regulate matters related to organization of tenders for granting investors concessions over state and local own property, the concession agreements, and the settlement of disputes.

Public-Private Partnership strategy:

  • To attract and support implementation of the projects of the projects that are prioritized by government
  • To intense the growth of the economy depending on the private sectors’ resources, technology and management abilities
  • To liberalize the economy by increasing the participation of the private sector in the government’s investment policy and strategy.

In September 2013, the Government of Mongolia has approved the Resolution number 317 on “List of the Concession/PPP projects”. The concession sectors are:

  • Infrastructure and Construction projects
  • Highway projects
  • Airport projects
  • Energy sector projects
  • Environment sector projects
  • Education projects
  • Health, art, sport and tourism projects
  • Railway projects
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