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BREAKING NEWS: Friday, November 1, 2013
Hogan Lovells: Mongolia revises its regulatory framework for foreign and domestic investment
October 2013 (Hogan Lovells) Further to our recent client note on the proposed amendments to the investment regime in Mongolia, we wish to update our clients that on 3 October 2013, Parliament approved the Law of Mongolia on Investment ("Investment Law") along with other supporting amendments. The official version of the Investment Law was made available on the Mongolian Parliament's website on 30 October 2013.
The Investment Law comes into effect on 1 November 2013 and replaces the Law of Mongolia on Foreign Investment, enacted on 10 May 1993, as amended ("Foreign Investment Law") and the Law of Mongolia on the Regulation of Foreign Investment in Business Entities Operating in Sectors of Strategic Importance, enacted on 17 May 2012, as amended ("SFI Law").
As expected, the Investment Law eases the regulatory approval requirements for foreign private investment and streamlines the registration process for foreign direct investment. Further, it sets out certain legal guarantees and incentives so as to promote investment activities in Mongolia.
The key features of the Investment Law are:
· It applies to both foreign and domestic direct investments.
· It consolidates the registration process for setting up a subsidiary by stipulating that private investment from foreign sources need only register with the Legal Entities Registration Office ("LERO").
· No approval requirements are imposed on foreign private investment.
· It increases the minimum capital requirements for foreign- invested entities in Mongolia which have two or more foreign shareholders by requiring that each foreign shareholder contributes US$ 100,000 if foreign investor(s) hold a 25% or more interest therein.
· It provides the definition of a foreign state-owned legal entity ("FSOE") as "a legal entity in which a foreign state directly or indirectly holds more than 50 per cent of the entity's issued shares".
· It removes the classification of strategic economic sectors for foreign private investment, but maintains the approval requirements for certain equity investments made by FSOEs in those sectors that were regarded as strategically important under the SFI Law.
· It appoints the Ministry of Economic Development ("MED") as the approval authority for certain investments by FSOEs.
· It establishes an ad hoc board with a mandate to issue opinions on applications for tax stabilisation certificates made under the Investment Law.
· It provides legal guarantees to protect investment in Mongolia and sets out tax and non-tax incentives so as to promote investment in Mongolia.
· It offers tax stabilisation incentives in the form of "tax stabilisation certificates" and "investment agreements".
In addition to the repeal of the SFI Law and the Foreign Investment Law, 9 other laws, including the Law of Mongolia on the State Registration of Legal Entities, enacted on 23 May 2003, as amended ("Legal Entities State Registration Law"), are amended in order to implement the Investment Law. Further, the Law of Mongolia on the Implementation Procedure for the Investment Law ("Implementation Procedure") was approved to provide for application of the Investment Law to existing investment.
2. SCOPE OF THE LAW
3. STATE REGULATION OF INVESTMENT
4. GENERAL FRAMEWORK FOR INVESTMENT
5. GENERAL LEGAL GUARANTEES AND OBLIGATIONS
6. PROMOTION OF INVESTMENT
The Investment Law is certainly a welcome development which should assist to promote domestic and foreign investment in Mongolia. Following the tumultuous investment environment after adoption of the SFI Law, it is a positive step in streamlining the investment environment and creating more favourable investment conditions.
The Investment Law removes rather subjective and confusing approval requirements imposed on certain equity investment by foreign private investment. It further simplifies the registration process before a single body in place of the previous dual registration with FIRRD and LERO. The concept of Stabilisation Certificates and investment agreements suggests a more routine handling of significant investment. However, effective implementation is subject to further regulations to be issued by the MED and the Government, and therefore the main concern of foreign and domestic investors remains to be tested in relation to consistent application of the Investment Law and a stable operating environment.
It is not clear whether the amendment to the current regime which requires each foreign investor in a foreign-invested Mongolian entity to contribute a minimum of US$ 100,000 to the share capital of such entity is an unintended consequence of the legislative drafting process.
The approval system for investment by FSOEs is somewhat discretionary, and there is a considerable degree of subjectivity in a number of the general obligations on domestic and foreign investors.
Anthony Woolley, Senior Associate
+976 7012 8904
Solongoo Bayarsaikhan, Associate
+976 7012 8908
Munkhdul Badral Bontoi
Founder & CEO
Mobile: +976 9999 6779
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