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Mongolia – Regulatory Framework For Investment: Promotion of Investment.

5 November, 2013

 

Legal News & Analysis – Asia Pacific – Mongolia

 

The Investment Law specifies tax and non-tax incentives available to investors for making investment in Mongolia.


NON-TAX INCENTIVES


To facilitate the operations of investors, the Investment Law provides certain non-tax incentives in relation to land rights, customs clearance, foreign labour quotas, and immigration matters.


General incentives are provided in relation to land rights or immigration and residency permits. Further, certain incentives would be available for those who will implement projects in free economic zones1, industrial and technological parks2 or projects in the infrastructure, production, science and education fields, or innovation projects3.


The Investment Law provides a general framework for such incentives and the detailed regulations will be provided in sector-specific laws.


TAX INCENTIVES


In relation to tax incentives, investors may be entitled to enjoy the following:


(a) exemption from the payment of certain taxes;
(b) preferential tax treatment;
(c) accelerated depreciation and amortisation that is
deductible from taxable income;
(d) carrying forward of losses; and
(e) deduction of employee training expenses from taxable income.


Further, equipment and technology imported for the following purposes may be exempt from import duties and enjoy a reduced rate of value added tax (to zero per cent) during the construction period:


(a) construction of plants for processing of construction materials, petroleum, or agricultural products or export-oriented plants;
(b) construction of plants for nano-, bio- or innovation technology; and
(c) construction of power plants or railways. Specific details of tax incentives will be provided in the relevant tax legislation.


TAX STABILISATION


Qualifying projects may enjoy a stable tax environment in accordance with the Investment Law. According to the Implementation Procedure, not only new projects but also those projects that have been implemented within the 5 years preceding the adoption of the Investment Law and that meet the requirements of the Investment Law will be eligible to enjoy tax stabilisation benefits. The investment amount will be verified by reference to audited financial statements.


The benefits of tax stabilisation will not apply to investment made in activities relating to the production, import, and sale of tobacco products or alcoholic beverages. Further, investors who already have entered into investment or stability agreements with the Government would not be eligible to apply for a Stabilisation Certificate. According to the Implementation Procedure, existing stability or investment agreements (such as the Oyu Tolgoi Investment Agreement) will not be affected by the Investment Law and will remain in force until such time as their term expires.


Tax Stabilisation Certificates


To promote large-scale investment in Mongolia, the Investment Law proposes to introduce tax stabilisation certificates (“Stabilisation Certificate”), which will entitle the holder to enjoy stable tax treatment for a period of up to 18 years (and up to 27 years for priority projects). Further, in the event the stabilised tax rates are reduced, a holder of the Stabilisation Certificate is entitled to the more favourable tax treatment.


The criteria for the issuance of a Stabilisation Certificate are:

 

  • the investment amount exceeds the relevant threshold specified in the Investment Law;
  • environmental impact screening has been carried out;
  • the investment creates new jobs in a sustainable way; and
  • the investment introduces advanced technology.
 

The most important and quantifiable criteria for a Stabilisation Certificate is the amount of investment and this is determined by reference to specific sectors and the geographical area within which the investment to be made. For capital-intensive mining or industrial projects, the capital expenditure requirements to qualify for tax stabilisation are higher than for other projects. Further, investment in certain regions of Mongolia will attract preferential treatment and a potentially longer term of tax stabilisation.

 

In respect of mining, heavy industry, or infrastructure projects, Stabilisation Certificates may be issued as follows:

 

Amount of
Investment (in billion MNT)

Term of a Stabilisation Contract (years)

Period within
which the
investment
must be made(years)
Ulaanbaatar region Central Region
(Gobisumber,
Dornogobi,

Dundgobi,

Darkhan-Uul,Umnugobi,

Selenge, Tuv)

Khangai
Region
(Arkhangai,
Bayankhongor,

Bulgan, Orkhon,

Uvurkhangai,

Khuvsgul)

Eastern
Region
(Dornod,
Sukhbaatar,

Khentii)

Western
Region
(Bayan-Ulgii, 
Gobi-Altai, Zavkhan,
Uvs, Khovd)
30 to 100 5 6 6 7 8 2
100 to 300 8 9 9 10 11 3
300 to 500 10 11 11 12 13 4
More than 500 15 16 16 17 18 5

 

In all other sectors, the following terms will apply:

 

Amount of Investment (in billion MNT) Term of a
Stabilisation
Certificate
(years)
Period within
which the
investment
must be made(years)
Ulaanbaatar
Region 
Central Region
(Gobisumber,
Dornogobi,

Dundgobi, 

Darkhan-Uul, Umnugobi,

Sevenge, Tuv) 

Khangai Region
(Arkhangai,
Bayankhongor,

Bulgan, Orkhon,

Uvurkhangai,

Khuvsgul) 

Eastern
Region
(Dornod,
Sukhbaatar,
Khentii) 
Western
Region
(Bayan-Ulgii,Gobi-Altai,
Zavkhan, Uvs,Khovd)
10 to 30 5 to 15 4 to 12 3 to 10 2 to 8 5 2
30 to 100 15 to 50 12 to 40 10 to 30 8 to 25 8 3
100 to 200 50 to 100 40 to 80 30 to 60 25 to 50 10 4
More than 200 More than 100 More than 80 More than 60 More than 50 15 5

 

The effective period of a Stabilisation Certificate will be extended by 1.5 times the period specified in the Investment Law in relation to projects:


(a) that will contribute to the sustainable long-term social and economic development of Mongolia by way of producing products to replace imported goods, or export-oriented products and that will require investment of more than MNT 500 billion and have a development period of more than 3 years; or
(b) that will produce value-added (processed) products for export.


A Stabilisation Certificate will be issued either (i) to a legal entity that implements the project or (ii) to a parent company if two or more affiliated companies implement the project.


The Stabilisation Certificate will stabilise the applicable rates for the following taxes:


(a) corporate income tax;
(b) customs duties;
(c) value-added tax; and
(d) minerals royalties.


The Investment Law sets out the procedures to apply for, issue, and terminate a Stabilisation Certificate.


Investment Agreements


Another option to stabilise the tax environment provided under the Investment Law is entry into of an investment agreement with the Government.


If an investor whose proposed investment exceeds MNT 500 billion (approximately US$ 300 million) so applies, it is possible to enter into an investment agreement with the Government with the objective of stabilising the operational environment for making such investment, including the tax environment. The Minister of Economic Development will enter into an investment agreement with an applicant investor.


The scope of investment agreements include providing legal guarantees as specified in the Investment Law, stabilisation of tax environment, and certain regulatory and financial incentives. The term of an investment agreement should be similar to that of Stabilisation Certificates.


Thus, an investor who makes investment in an amount exceeding MNT 500 billion has the option of either obtaining a Stabilisation Certificate or entering into an investment agreement.


Compared to Stabilisation Certificates, investment agreements would most likely provide better protection for investors given that such agreements create binding contractual obligations for the Government, as opposed to a Stabilisation Certificate which is an administrative act by the Investment Agency.

 

Endnotes

 

1 Law of Mongolia on Free Zones, enacted on 28 June 2002 regulates matters relating to the legal status of free (economic) zones in Mongolia.
2 Industrial and technological parks are regulated by the Law of Mongolia
on the Legal Status of Industrial and Technological Parks, enacted on 17 December 2009.
3 Law of Mongolia on Innovation, enacted on 22 May 2012 regulates matters relating to innovation.

 

Index:

 

1. Overview

2. Scope Of The Law, State Regulation Of Investment

3. General Framework For Investment

4. General Legal Guarantees And Obligations

6. Sanctions, Conclusion

 

Hogan Lovells

 

For further information, please contact:

 

Michael Aldrich, Partner, Hogan Lovells
[email protected]

 

Chris Melville, Partner, Hogan Lovells
[email protected]

 

Anthony Woolley, Hogan Lovells
[email protected]

 

Nominchimeg Odsuren, Hogan Lovells
[email protected]

 

Solongoo Bayarsaikhan, Hogan Lovells
[email protected]

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