Mongolia's new investment law a good start, but more reforms needed

A new investment law passed in October 2013 sent a clear message about the government’s pro-business reform ambitions, placing foreign and local investors on equal footing. New “tax stabilisation certificates” now offer an alternative to the previous investment agreements by freezing the relevant taxes for a period of up to 22.5 years.

While the state mechanisms for such benefits were set up quickly, the process for granting them has proven slower than expected – the handful of applications that were under review in the first half of 2014 are mainly from local investors. Boosting foreign direct investment (FDI) after a 52% slump in 2013 will hinge on resolving disputes with existing investors and clarifying Mongolia’s duties under its foreign treaties, such as double taxation.

New Rules

The new legislation – which replaced the 1993 Foreign Investment Law and its restrictive amendment of May 2012, the Strategic Entities Foreign Investment Law (SEFIL) – levelled the playing field between foreign and local private investors, and clarified Mongolia’s stance on acquisitions by foreign state-owned enterprises (SOEs).

The SEFIL had introduced the requirement of parliamentary approval for any foreign acquisition of more than a one-third stake in the “strategic sectors” of mining, telecoms and finance, as well as for any deal involving more than 49% or MNT100bn ($60m) in foreign investment. The new rules loosen these criteria and streamline the approval process.

Private companies will no longer need such approval. Foreign SOEs (those more than 50% state-owned) will still need government permission to purchase stakes above 33% in Mongolian businesses, but these are now handled by the new Invest Mongolia Agency (IMA), which took over this task from the former Ministry of Economic Development (MED) – itself folded into the Ministry of Finance. All other foreign firms with FDI over 25% are only required to register with the government and hold $100,000 per foreign investor. The law also resolves SEFIL’s core ambiguities, such as how foreign investment stakes will be measured – whether by book, transaction or market value – and the scope for politicisation of decisions in parliament.

The IMA, which is tasked with facilitating and promoting investment, is intended to help reduce uncertainty and boost investor confidence in Mongolia’s regulatory framework. Its duties include assisting with the stabilisation certificates – which freeze corporate tax, mining and import duties, and value-added tax for between five and 22.5 years – and managing a planned grievance mechanism to improve protection of investors’ interests. The level of incentives granted varies by sector (except for tobacco and alcohol), size and location, but since 2009 any investment has been eligible to apply.


Under the new organisation system, the IMA assists with the application process, while a new Investment Council assesses and approves applications for the stabilisation certificates. Established by the former MED, the council is composed of eight permanent members – six from government and two from the private sector – and one non-permanent seat, which rotates between representatives from five state ministries.

Though the council’s deliberations are meant to be swift, applicants have faced delays as they prepare the relevant documents. By October 2014, six projects had applied for stabilisation certificates, but only one had been presented to the council for approval and five were in the mining sector. The most eager applicant has been local conglomerate MCS Group, with two projects under consideration: its firm Energy Resources, founded in 2010 and held through its Hong Kong-listed subsidiary, Mongolia Mining Corporation, has applied for the coking coal-washing plant at its Ukhaa Khudag mine, and for the Tsaikhar Khudag coking coal mine held through its subsidiary Khangad Exploration. The other four applications are for already-completed investments from South Gobi Sands (coal), Erdenet (copper), Altain Khuder (iron ore) and a construction materials project under development by Erel Group. has been slower still, pending completion of an investor survey that was due by end-2014 from the International Finance Corporation (IFC), which was instrumental in drafting the 2013 investment law. According to IMA staff, the mechanism will be advisory in nature, offering support in coordinating investor redress with specific government agencies or through the courts. While the agency will not itself have jurisdiction over grievances and has no power to resolve disputes, the government aims to streamline its handling of cases through better coordination between departments.

Broader Climate

Investor sentiment has been slow to change, though in the first half of 2014 parliament passed a quick succession of long-awaited legal reforms on mining, oil and public governance (see overview). The inertia is partly linked to ongoing disputes with investors like Rio Tinto (in copper and gold) and Khan Resources (in uranium), and to broader concerns over the sanctity of contracts. casts a shadow. At the height of tensions between the government and Rio Tinto over the Oyu Tolgoi mine in November 2012, the government unilaterally cancelled double taxation treaties with Kuwait, the UAE, Luxembourg and the Netherlands, effective from January 2014. These treaties, which exempt dividends from Mongolia’s 20% withholding tax, waived the tax on some €6bn in investment from the Netherlands between 2004 and 2010, according to the Ministry of Finance. goi project, whose 2009 agreement insulates it from any legal change, it does apply to all other projects. The government admits to a certain brusqueness with the cancelation. “We realise it is not good practice to cancel international agreements like double tax treaties unilaterally, without consultation,” O. Chuluunbat, former vice-minister of economic development and now the prime minister’s economic adviser, told OBG. “We are negotiating new double taxation treaties on terms favourable to Mongolia.” The Ministry of Finance is currently preparing a standard tax treaty form for all new double taxation agreements, though as of March 2015 it had not yet announced a timeframe for completing negotiations.

Applications Pending

Amid the inconsistent policies of recent years, the investment agreement agreed in October 2009 for the Oyu Tolgoi project stands as the only one approved by parliament that insulates it from legislative risk, despite ongoing shareholder disputes. It will likely remain so in light of new provisions in the Investment Law giving the government the ability to conclude agreements without parliamentary approval. “The Investment Law grants Cabinet the power to conclude investment agreements without parliamentary approval,” N. Dashdemberel, the IMA’s secretary of the investment board, told OBG. “While Oyu Tolgoi is the only concluded agreement, the ministry is currently considering three more proposals.”

Two of these are for projects in the mining sector, covering strategic deposits like Centerra’s Gachuurt gold mine. The third is for the Tavan Tolgoi mine-mouth power plant, in which MCS will hold a 34% stake alongside foreign partners including France's GDF Suez, South Korea’s Posco Energy and Daewoo E&C, and Japan’s Kansai Electric Power and Marubeni Corporation. As the project’s key local backer, MCS has set up a team to develop a draft proposal to be presented to the Cabinet in 2015.

Though new investment agreements do not need parliamentary approval, any new major project will need the endorsement of the powerful National Security Council (NSC) – composed of the president, prime minister and speaker of parliament – which has become increasingly active in recent years. “The NSC remains active in economic matters, cancelling the Darkhan refinery project in early 2014 for instance,” B. Munkhdul, CEO of market intelligence firm Cover Mongolia, told OBG. The council also holds veto power over new production-sharing contracts in upstream petroleum and “strategic” minerals like uranium. Deliberations can last years.

Despite the new pro-investment legislation, applications for new investment – especially from foreign investors – have been slow to follow. The ministerial reshufflings of November 2014 may cause further delays, as the Ministry of Finance takes over responsibility for MED agencies, including the IMA. As the government strives to rebuild the credibility of its commitment to contract sanctity, larger proposals will continue to push for project-specific agreements that insulate them from political risk. Far better than piecemeal investment agreements, however, would be consistent rules applied evenly across the board.

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The Report: Mongolia 2015

Trade & Investment chapter from The Report: Mongolia 2015

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