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Incorporation

Setting up a company in Mongolia

When setting up a company you may want to consider these factors:

  1. Business factors

    Business factors such as:

    • The industry and type of business
    • Nationality of the headquarters/individual(s) and
    • Presence of existing trade agreements or relationships
  2. Location

    Location will be another factor. Mongolia is the most sparsely populated independent country in the world, with a population of 3 million spread out over land more than 6 times the size of the UK.

  3. Regional language

    While there is a rising number of English language speakers amongst the younger generation, all documents filed with the relevant government agency must be translated into Mongolian.

Your Options

Mongolia currently faces several key issues such as political and economic difficulties in its desire to become an economically developed nation and these can be evident when considering a Mongolia company incorporation. However, the legal system has struggled to adopt new regulations of business and the general public, with many Mongolians faced with a significant lack of understanding of the modern business law in the country and its application. Economic and business activities in Mongolia are regulated by a variety of laws, such as the Company Law of October 6, 2011, the Civil Code of January 10, 2002, the Investment Law of October 3, 2013.

Representative office

This is one of the relatively faster and simpler ways to set up a company in Mongolia. Under the Law of Investment, foreign legal entities are able to set up representative offices, which are not separate legal entities. They are not entitled to charter capital, and the head office is legally responsible for liabilities to third parties. The registration process is the same as those for Mongolian legal entities, are ROs are registered with the State Tax Department.

Steps Required:

 

  • Verify and reserve a unique company name
  • Pay registration fee
  • Register company incorporation and register a taxpayer
  • Apply for social security code
  • Make a seal

Time:  Around a week

Cost: MNT 148,800

First time investors in Mongolia often find that establishing a representative office may best suit their near-term business needs, particularly for those looking to establish a light presence to initially develop local relationships and a deeper understanding of Mongolia’s business and political environment.

They may not generate income and are restricted to only undertake limited, non-profitable activities.

While there is no initial capital requirement and no tax payment requirement for ROs, they are not separate legal entities and hence the head office incurs any liabilities of the RO.

Wholly Foreign-Owned Enterprise (WFOE)

WFOEs are limited-liability corporations organized by foreign nationals and capitalized with foreign funds.  WFOEs are often used to produce the foreign firm’s product in Mongolia for later export to a foreign country.   The WFOE must go through the entire registration and incorporation process, and is the most costly business structure to setup.   

Steps Required:

  • Verify and reserve a unique company name
  • Pay registration fee
  • Register company incorporation and register a taxpayer
  • Apply for social security code
  • Make a seal

Time:  Around a week

Cost: MNT 148,800

A Wholly Foreign-Owned Enterprise (WFOE, sometimes incorrectly written as WOFE) is a common investment vehicle for Mongolian businesses wherein foreign parties (individuals or corporate entities) can incorporate a foreign-owned limited liability company.

WFOEs are limited-liability corporations organized by foreign nationals and capitalized with foreign funds. This can give greater control over the business venture in Mongolia, and avoid a multitude of problematic issues which can potentially result from dealing with a domestic joint venture partner.

Such problems often include profit not being maximized, leakage of the foreign firm’s intellectual property and the potential for joint venture partners to set up in competition.

The steps are explained below.

1. Verify and reserve a unique company name

Business owners must propose a name to the Legal Entities Registration Office of the General Authority for State Registration of Mongolia (LERO) and reserve the name of the company. Upon approval, LERO will then issue a name reservation slip, either electronically or in writing, as well as bank account permission slip. The business owner will need to open a temporary account at the back within the same office and also instruct the bank to make a payment to the account of the Tax Authority.

The name reservation slip needs to be supplied in original for the purposes of incorporation, and as such, an in-person visit to LERO is necessary.

Time: 1 day

Cost: MNT 500

2. Pay the registration fee

This can be done at any commercial bank.

Time: 1 day

Cost: No charge

3. Register the company incorporation and register as a tax payer

The following documents need to be submitted to LERO in order to register for incorporation and obtain a state registration certificate:

  • Completed pro-forma application form
  • Bank account approval letter, and evidence of dormant account with some funds deposited
  • Company charter
  • Lease agreement with the company’s official address
  • Founding or shareholders’ resolution
  • Payment slip of the registration fee
  • Name reservation slip
  • Opening balance sheet
  • Copies of the shareholders’ passports (IDs).

 

According to legislation passed in 2015, LERO must process company registration within 5 business days.

Upon registration of the company, LERO will automatically publish a notice of company formation. LERO will also pass along relevant documents to the tax department for the area in which the company is located. The company will subsequently be registered as a corporate income tax and VAT payer.

Taxpayers should submit their requests for registration as a VAT payer within 3 days of sales income exceeding MNT 10,000,000, as evidenced by certified corporate income tax and financial reports.

 

Time: 2 days

Cost: MNT 44,000

4. Apply for Social Security Code

After the company has employees and incorporation procedures have been undertaken, the company must register with relevant social insurance departments of the appropriate district. The registration needs to be completed in person, upon which a social insurance code will be assigned by the District Social Insurance Department. The service is free and it is no longer required that a paper copy of the certificate of social insurance registration be obtained.

Time: 1 day

Cost: No charge

5. Make a seal

The company must obtain and complete a seal request form from LERO and then provide one of twelve seal makers located in Ulaanbaatar, the capital city, who are currently registered with the Ministry of Justice with a copy of its state registration certificate.

Time: 1 day

Cost: MNT 59,800 for fastest available service

Joint Venture

A joint venture (JV) is a form of foreign invested enterprise (FIE) that is created through a partnership between foreign and Mongolian investors. However, contractual JVs are particularly rare in Mongolia and generally not a business option that either businesses or government in Mongolia are familiar with. Where the term “Joint venture” is used in Mongolia, it will generally refer to a incorporated joint venture, commonly an LLC. While unincorporated joint ventures are not strictly prohibited, they are simply not considered by law at all.

Joint ventures are uncommon in Mongolia – typically set up as incorporated LLCs, the Mongolian Law on incorporation does not address unincorporated LLCs, and thus creates a grey area under law. Unincorporated JVs in Mongolia face numerous problems, such as common ownership of property, particularly in the resources industry since only one party may be registered as the licence holder for an exploration or mining licence, as stipulated by the Minerals Law. This law also specifies that foreign entities cannot hold these licences. Furthermore, there is no concept of equitable interest in property in Mongolia, thus there is no promises that one’s equitable interest in property will be safeguarded. This creates inherent risk for JV partners, who are reliant on their contractual agreements for their respective interests in property.

The best course of action would be to register an incorporated JV – i.e. the same business form (LLC) as a WFOE. The minimum startup capital is US$100,000 for this business structure, which is favoured as it provides greater flexibility in management structure. The steps are the same as above.

Outsourcing Employment Through a GEO Employer of Record Service

Whether to incorporate in Mongolia, and what sort of entity to setup are just two of the many choices companies must make when expanding into a new market.

 

If the company intends to have staff in Mongolia they must also decide whether they will administer that employment internally or use a Global Employment Organization to handle payroll and Employer of Record responsibilities.  A GEO Employer of Record solution is an attractive alternative where

  • the company is looking to setup an office quickly
  • the company wants to work within a defined budget
  • the company wants to limit its initial commitment in Mongolia
  • the company needs help with tax, employment, immigration and payroll compliance in Mongolia

 

The complexity of employment regulations in Mongolia makes the use of a GEO advisable coupled with local legal counsel to ensure full compliance with employment laws, for example the drafting of local contracts for workers.

 

Shield GEO provides a comprehensive service in Mongolia allowing companies to deploy their staff quickly with reasonable, clearly stated costs and timeframes. The company contracts directly with Shield to employ and payroll their staff on their behalf in Mongolia.

 

Shield GEO then becomes the Employer of Record. Shield GEO assumes the legal responsibility for these employees, sponsoring them on work permits, complying with local employment law and running their monthly payroll. Using Shield GEO is the fastest and most cost effective way to deploy local and foreign workers into Mongolia. Read more about outsourced employment through Shield GEO.

 

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