How to Set Up a Subsidiary Company in Mongolia?

Setting up a subsidiary company in Mongolia involves creating a legally independent entity wholly owned by a foreign parent company. Many businesses are expanding into Mongolia to capitalize on its strategic location, expanding market, access to key Asian markets, and rich natural resources.

This blog will cover the key steps to establish a subsidiary in Mongolia, including legal requirements, registration procedures, tax obligations, compliance needs, and tips for a successful setup.

Key Takeaways

• Business Structure: The most common structure for subsidiaries in Mongolia is an LLC (Limited Liability Company) or a Joint Stock Company (JSC), offering flexibility and limited liability.
• Tax Compliance: Register with the Mongolian Tax Authority (MTA), file annual tax returns, and adhere to Mongolian Accounting Standards.
• Company Registration: Submit incorporation documents to the General Authority for State Registration Office, which manages the one-stop registration process.

What are the Types of Subsidiaries in Mongolia?

Understanding how to establish a subsidiary company in Mongolia involves selecting the right structure, which determines the level of control, legal responsibilities, and the type of activities the entity can undertake. Foreign investors can choose from several structures based on ownership, control, and business objectives. The main types include:

Wholly-Owned Subsidiary

A wholly-owned subsidiary is fully controlled by the parent company, which owns 100% of the shares. This structure allows the parent company to have full control over operations and profit distribution. However, it requires a higher capital investment, and the parent assumes all financial and operational risks.

Joint Venture

A joint venture is formed when two or more companies collaborate to establish a subsidiary, sharing ownership, control, and profits. This structure helps spread risks and leverage local expertise, but the companies involved may face challenges in decision-making and sharing profits.

Partially-Owned Subsidiary

In a partially-owned subsidiary, the parent company holds a majority stake (more than 50%), while minority shareholders hold the rest. The parent company maintains control, but the minority shareholders may have influence over key decisions, potentially leading to conflicts.

Branch Office

A branch office is an extension of the parent company and is not a separate legal entity. The parent company has full control, but also bears all liabilities and risks associated with the branch’s operations. It is easier to set up but offers less operational flexibility compared to a subsidiary.

Representative Office

A representative office is set up for non-commercial purposes, such as marketing or liaison. It cannot generate revenue and has limited business activities. While it is cost-effective and straightforward to establish, it does not provide the same operational capacity as a subsidiary.

Step-by-Step Guide to Setting Up a Subsidiary in Mongolia

Opening a subsidiary in Mongolia comprises various legal and administrative procedures. The following is a step-by-step guide outlining the key stages to establish and register your subsidiary successfully:

Step 1: Choose the Appropriate Business Structure

Decide on the most suitable legal structure for your subsidiary. The most common options for foreign investors are the LLC for smaller businesses and the JSC for larger-scale operations.

Step 2: Reserve the Company Name

Check the availability of your desired company name with the General Authority for State Registration. The name must be unique and comply with local regulations. Once approved, it will be reserved for a limited period to complete the registration process.

Step 3: Prepare Incorporation Documents

Prepare the necessary incorporation documents, including the Company Charter, identification of shareholders and managers, proof of address, and a declaration of non-conviction for managers. These documents must meet Mongolian legal requirements.

Step 4: Register the Company

Submit the business incorporation documents to the General Authority for State Registration Office. Upon approval, you’ll receive a Certificate of Incorporation, Company Identification Number (TIN), and Taxpayer Registration Certificate.

Step 5: Open a Local Bank Account

Open a corporate bank account in Mongolia to deposit the required share capital. The bank will issue a certificate of deposit, which is part of the company registration process. This certificate is essential for completing the registration and obtaining your company’s official documents.

Step 6: Register for Taxes

Register with the Mongolian Tax Authority (MTA) to obtain a TIN. You will be enrolled for corporate income tax, VAT (if applicable), and other relevant tax obligations. The registration process will also require you to submit various documents related to your company’s financial activities.

Step 7: Register Employees, Obtain Licenses, and Maintain Compliance

If hiring employees, register them with the Social Insurance Fund. Depending on your industry, secure any necessary licenses or sector-specific permits. Ensure ongoing compliance by maintaining accounting records, submitting annual financial statements, filing tax returns, and adhering to Mongolian labor laws to avoid penalties or legal issues.

Key Benefits of Establishing a Subsidiary in Mongolia

Setting up a subsidiary company in Mongolia offers key strategic and operational advantages for foreign investors. With its growing economy, abundant natural resources, and business-friendly policies, Mongolia is an appealing destination for international businesses. Key benefits include:

• Access to Skilled Workforce and Growing Sectors: Mongolia offers a young, educated workforce, with expanding opportunities in sectors such as mining, agriculture, construction, and renewable energy.
• Strategic Location: Positioned between China and Russia, Mongolia serves as a gateway for businesses looking to access key Asian markets. The country also benefits from its proximity to major regional trade routes.
• Attractive Incentives: Foreign investors in Mongolia can take advantage of tax incentives, customs benefits, and special economic zones, which provide a favorable environment for investment and business operations.

Essential Documents for Registering a Subsidiary

If you’re researching how to form a subsidiary in Mongolia, then you need to submit several key documents to ensure compliance with local regulations. The essential documents include:

• Business Registration Application: A completed application form for registering the business with the State Registration Office.
• Company Charter (Articles of Association): A document outlining the subsidiary’s governance structure, business activities, and ownership details.
• Proof of Identity for Shareholders and Managers: Copies of passports or national IDs for the company’s shareholders and legal representatives.
• Proof of Registered Office Address: Documentation proving the physical address of the company, such as a lease agreement or property deed.
• Bank Certificate for Share Capital: A certificate from a local bank confirming the deposit of the required share capital.
• Tax Registration Documents: Application forms for obtaining the TIN from the MTA.
• Declaration of Non-Conviction: A document declaring that the managers of the subsidiary have no criminal record, as required by Mongolian law.
• Other Sector-Specific Licenses (if applicable): Depending on the business sector, additional licenses or permits may be required (e.g., for construction, mining, or manufacturing industries).

Note: If you are not sure about setting up a subsidiary company in Mongolia, it’s advisable to work with a local legal expert to ensure accuracy and full compliance.

Legal Structures Available for Subsidiaries in Mongolia

When considering setting up a subsidiary company in Mongolia, it’s essential to choose the proper legal structure. The type of entity you register affects your ownership rights and liability. In Mongolia, foreign investors typically establish subsidiaries under one of the following legal structures:

• LLC: A popular, flexible structure with limited liability for shareholders. Ideal for small to medium-sized businesses with minimal capital requirements. The requirements for opening a limited liability company, which is the most chosen type of company in Mongolia, are as follows:
  • Minimum of one shareholder
  • At least one director
  • A minimum share capital of $100,000
• JSC: A structure for larger companies that issues shares to raise capital. A JSC can be established with at least two shareholders, who may be non-resident individuals or entities. Like an LLC, every foreign shareholder with a 25% stake will contribute US$100,000 to the company.
• Representative Office: A non-commercial entity for marketing and research. It can’t generate profit, but it helps establish a local presence.
• Branch Office: An extension of the parent company, operating under the same legal entity. It allows business operations, but the parent holds full liability.

Note: For most foreign investors who are looking at how to create a subsidiary in Mongolia, the LLC is the preferred choice due to its ease of setup, full foreign ownership, and legal protections.

Taxation Rules and Incentives for Subsidiaries in Mongolia

Understanding Mongolia’s tax system is essential when planning how to set up a parent company with subsidiaries in Mongolia. The country offers a competitive corporate tax regime along with attractive incentives to encourage foreign investment.

Here’s an overview of the taxation rules and benefits for foreign-invested subsidiaries:

Corporate Income Tax (CIT)

Mongolian Corporate Income Tax (CIT) is levied using a progressive rate scale, as follows:

• 1% for entities with annual revenue up to MNT 300 million, except for those in the mining, petroleum, alcoholic beverage, and tobacco industries.
• 10% on the first MNT 6 billion of annual taxable income.

Tax Incentives for New Businesses

Mongolia offers several tax incentives for foreign investors, particularly in special economic zones (SEZs) and free trade zones. The following are the key points:

• Industry-Specific Tax Credits:
  • 90% tax credit for heating and electric power projects (first 3 years) and 50% for the next 3 years.
  • 90% tax credit for businesses with revenue under MNT 1.5 billion in non-mining sectors.
• Employment of Disabled People: A Tax credit proportional to the disabled employees’ share in the workforce.
• Corporate Social Responsibility (CSR): Investments in CSR activities (environment, culture, sports, etc.) are eligible for a 1% CIT credit.
• Agriculture: 50% CIT credit for producing cereals, vegetables, milk, and other agricultural products.
• Foreign Investment Incentives: Tax loss carryforward, accelerated depreciation, and training cost deductions.

Tax Compliance Requirements in Mongolia

Subsidiaries in Mongolia must register with the General Authority for State Registration (GASR) and obtain a TIN from the MTA. Companies must submit a quarterly or semi-annual return by the 20th day of the month following the end of each respective period and an annual return by 10th February after the end of the tax year.

Regulatory and Compliance Requirements in Mongolia

Whether you’re setting up a subsidiary company in Mongolia or exploring how to start a parent company in Mongolia, understanding ongoing compliance is critical. Businesses must meet legal, tax, and reporting obligations to operate smoothly and avoid penalties. The following are the key compliance requirements:

• Legal Compliance: Adhere to the Mongolian Company Law and Labor Law, maintaining accurate corporate records and employment contracts.
• Tax Compliance: Register with the MTA, file annual Corporate Income Tax (CIT) returns, and comply with VAT regulations. Taxes are typically paid quarterly based on the previous year’s liabilities.
• Social Security and Labor Compliance: Register employees with the Social Insurance Fund for social security contributions, including pension, health insurance, and other employee benefits. Ensure contracts comply with labor laws.
• Annual Reporting: Submit annual financial statements in line with Mongolian Accounting Standards (MAS), undergo audits if required, and file tax returns on time.
• Other Obligations: Report any changes (e.g., address, shareholders, or legal representatives) to the relevant authorities and maintain accurate accounting records.

Note: Post-incorporation, subsidiaries in Mongolia must register for CIT, file annual tax returns within the deadlines, and make quarterly tax payments.

Do You Need a Physical Address for a Subsidiary in Mongolia?

Yes, a physical address is required when setting up a subsidiary in Mongolia. It must be a real office location (not a P.O. Box) for legal and tax purposes. Virtual offices or co-working spaces can also be used if they comply with local regulations.

The address will be used for official communications and legal notices. It can be a leased office, co-working space, or owned property, as long as it meets the regulatory requirements.

Operational Setup for a Subsidiary in Mongolia

Setting up a subsidiary in Mongolia requires several key operational steps. You must register employees with the Social Insurance Fund, obtain work permits for foreign staff, and secure a physical office address. Additionally, you will need to open a corporate bank account, implement an accounting system that complies with Mongolian Accounting Standards (MAS), obtain any necessary licenses, and stay informed about regulatory changes.

How to Open a Business Bank Account for a Subsidiary in Mongolia?

Opening a bank account is essential when setting up a subsidiary company in Mongolia. It allows for capital contributions, daily transactions, and tax compliance. Here are the key steps:

1. Select a Bank: Choose a reputable local or international bank operating in Mongolia, such as Khan Bank, XacBank, or the Trade and Development Bank.
2. Prepare Required Documents: Gather necessary documents, including the Company Registration Certificate, Articles of Association, Company Charter (notarized), TIN, and Legal Representative’s ID (passport or national ID).
3. Visit the Bank: The legal representative (or authorized person) must visit the bank in person to submit the required documents and complete the application process.
4. Submit Documents and Open the Account: Provide all necessary paperwork to the bank officer for account setup.
5. Deposit Initial Capital: Some banks require an initial deposit or proof of capital contribution from the parent company to activate the account.
6. Account Activation and Use: Once approved, the bank will activate the account, enabling the subsidiary to manage transactions, make capital transfers, handle payroll, and fulfill tax requirements.

Is an Operating Agreement Necessary for a Subsidiary in Mongolia?

In Mongolia, an operating agreement is not legally required, but a Company Charter (or Articles of Association) is mandatory for a subsidiary. This document outlines the company’s structure, ownership, and governance. While not required by law, having a clear agreement is recommended, especially for joint ventures or companies with multiple shareholders, to avoid potential disputes.

Opening a Branch vs. a Subsidiary: What’s the Difference?

Foreign companies expanding into Mongolia can choose between opening a subsidiary or a branch office. Both options provide a business presence but differ significantly in legal terms. Below is a comparison:

How Commenda Can Help You Expand in Mongolia

Entering the Mongolian market involves several legal, tax, and operational steps. Managing these complexities can be time-consuming and challenging without the right local expertise and guidance.

Commenda simplifies the process by guiding you through choosing the right business structure, registering your company, and obtaining necessary licenses, ensuring full compliance with Mongolian law.

Our team provides comprehensive support from selecting the best structure to securing investment licenses and completing the registration process. We also provide ongoing support with compliance, payroll, and legal matters to ensure your business operates efficiently.

Book a demo today to see how Commenda can simplify your expansion into Mongolia.

FAQs

Q. How much does it cost to set up a subsidiary in Mongolia?

Establishing a foreign-invested subsidiary in Mongolia typically involves a minimum capital investment of USD 100,000 per foreign investor. This requirement applies to foreign-invested limited liability companies (LLCs) where foreign shareholders hold at least 25% of the company’s shares.

Q. How long does it take to register a subsidiary in Mongolia?

In Mongolia, registering an LLC typically requires:

• 2-3 business days for share capital subscription.
• Up to 10 days for registration with the Legal Entities Registration Office.
• 1-2 days to get the company seal.
• Up to four weeks to set up a bank account.

Q. Can a foreigner fully own a subsidiary in Mongolia?

Yes, foreigners can fully own subsidiaries in most sectors. Mongolia allows complete foreign ownership with no restrictions in many industries, making it an attractive destination for foreign investors.

Q. What are the common challenges when opening a subsidiary in Mongolia?

Common challenges include managing bureaucracy, meeting document legalization requirements, language barriers, delays in government approvals, and understanding local labor and tax compliance laws. Having local legal support helps avoid costly mistakes.

Q. Do subsidiaries in Mongolia need a local director or representative?

Yes, subsidiaries must appoint a legal representative in Mongolia who is responsible for handling official matters. The representative does not need to be a Mongolian national but must reside in Mongolia.

Q. What are the annual compliance requirements for subsidiaries in Mongolia?

Subsidiaries must submit annual financial statements, corporate income tax returns, VAT filings, and ensure social security contributions are made for employees.

Q. Can a subsidiary hire employees directly in Mongolia?

Yes, subsidiaries can hire employees directly in Mongolia. They must comply with Mongolian labor laws, including signing labor contracts, registering employees for social security, managing payroll, and adhering to workplace safety regulations.

Q. What happens if a subsidiary fails to meet compliance rules in Mongolia?

Failure to comply can lead to penalties such as fines, late payment interest, administrative sanctions, suspension or revocation of the business license, and potential legal actions, all of which can disrupt business operations and damage reputation.