Recent CEPA Changes Make Hong Kong A More Attractive Launching Pad Into Mainland China For Foreign Investors

Monday, December 1, 2008 - 01:00

Introduction

On 29 June 2003, the Mainland government and the Hong Kong government signed the Closer Economic Partnership Arrangement ("CEPA"), which offers investors from Hong Kong a step ahead of investors from other countries to explore the Mainland market in various business sectors. In essence, CEPA is a free trade agreement between Mainland China and Hong Kong that offers Hong Kong products, companies and residents preferential access to the Mainland market.

After Mainland China's accession to the World Trade Organisation ("WTO") many of the preferences to Hong Kong investors under CEPA go beyond Mainland China's WTO concessions to other WTO members in various aspects such as implementation time, ownership proportion in Chinese enterprises, capital requirement, and business sectors open for foreign investment.

CEPA is not a closed agreement, and both sides hold regular meetings on further concessions and the details for implementation. To date, five supplementary agreements to CEPA containing further concessions have been agreed upon by the two sides.

CEPA covers three areas:

• the removal of tariffs and other barriers on trade in goods

• the opening up of the Mainland market to Hong Kong service suppliers

• measures for the promotion of trade and investment

Trade In Goods

Qualifying goods

All products of Hong Kong exported to Mainland China may enjoy tariff-free treatment except for certain types of prohibited articles on condition that the products meet the prescribed rules of origin ("ROO"). For products falling under a large number of tariff codes, the ROO have already been determined. For products that to date have no agreed upon ROO, there exists a mechanism whereby interested enterprises may apply and request to include the products in subsequent phases of ROO discussions which will be held twice a year.

To qualify for duty-free import, products must satisfy the ROO requirements. Under these requirements products are deemed to be of Hong Kong origin if they are obtained entirely in Hong Kong or have undergone substantial transformation in Hong Kong.

There are five different criteria for determining whether products have undergone substantial transformation in Hong Kong:

1. "Manufacturing or processing operations": manufacturing or processing operations carried out in Hong Kong have conferred essential characteristics to the products;

2. "Change in tariff heading": the tariff heading of the product under the Product Description and Harmonised System Code has changed as a result of manufacturing or processing operations exclusively carried out in Hong Kong;

3. "Value-added content": the total value of raw materials, component parts, labour costs and product development costs exclusively incurred in Hong Kong are at least 30 percent of the FOB value of the exported products and the final manufacturing or processing operations are completed in Hong Kong;

4. "Other criteria": other criteria than the foregoing agreed to by the two sides; and

5. "Mixed criteria": use of two or more of the above criteria to determine origin.

The two sides have also agreed not to adopt any anti-dumping or countervailing measures against the other side's products. The Mainland has undertaken not to impose tariff rate quotas on products of Hong Kong origin.

Application procedure

A Hong Kong manufacturer must first apply to the Hong Kong Trade and Industry Department ("TID") for Factory Registration. After having obtained Factory Registration, a manufacturer can lodge an electronic application for a Certificate of Hong Kong Origin - CEPA to the TID or any one of the five government-approved certification organisations. The Certificate must then be passed on to the Mainland importer who will produce the Certificate to the Mainland Customs in order to claim duty-free treatment for the imports.

Trade In Services

Service sectors

CEPA provides for liberalised market access in a wide range of service sectors ahead of Mainland's liberalisation schedule pursuant to its WTO obligations and facilitates the recognition of Hong Kong professional and technical qualifications. The most recent supplement, effective 1 January 2009, has further liberalised two new service sectors (namely, services incidental to mining and related scientific and technical consulting services) as well as 15 existing service sectors.The sectors now include: legal services; banking and financial services; securities and futures; insurance; convention and exhibition services; management consulting; market research; accounting, auditing and bookkeeping; real estate; construction; building cleaning; engineering and integrated engineering; building design; urban planning and landscaping; distribution and retail services; logistics; freight forwarding agency; transport; airport services; storage and warehousing; patent agency services; trademark agency services; information technology services; computer and related services; value-added telecommunications services; public utilities; tourism and travel-related services; translation and interpretation; audiovisual services; photographic services; printing and publishing services; cultural and entertainment services; sporting services; job referral agency and job intermediary services; social services; environmental services; advertising; medical and dental; services incidental to mining; and related scientific and technical consulting services.

In some sectors the concessions surpass Mainland's WTO commitments. Unless otherwise provided in CEPA, Hong Kong companies remain eligible to benefit from Mainland's WTO commitments in the various service sectors.

Benefits

The CEPA benefits in services relate mainly to four areas:

• earlier market access: Hong Kong service suppliers can enter Mainland China between one to five years earlier than under the WTO timetable;

• higher equity shares: Hong Kong service suppliers are permitted to hold a higher equity share (in certain service sectors even up to 100 percent) in service companies established in Mainland China;

• lower capital thresholds: capital requirements to set up in Mainland China have been reduced substantially thus opening up the field to smaller players; and

• recognition of Hong Kong qualifications: eligible Hong Kong residents are allowed to take qualification examinations for professionals and technicians in Mainland China in a wide range of specialisations and to obtain the relevant professional qualification certificates.

Qualifying criteria

Hong Kong service suppliers can be individuals or juridical persons. Where a Hong Kong individual is eligible for a benefit, the person must be a permanent resident of Hong Kong and in some cases also be a PRC national. A juridical person includes any form of organisation including corporation, trust, partnership, joint venture, sole proprietorship or association.

Except in the legal sector, a juridical person must satisfy the following criteria to qualify as a "Hong Kong service supplier":

• it is incorporated or established in Hong Kong;

• it has obtained any licence or permit for providing such services if required by law;

• the nature and scope of its business in Hong Kong encompasses the nature and scope of the services it intends to provide in the Mainland;

• it pays profits tax in Hong Kong;

• it has at least three to five years (depending on the sector) of substantive operations in Hong Kong (this requirement does not apply to real estate service suppliers);

• it owns or leases business premises in Hong Kong commensurate with the scope and the scale of its business; and

• 50 percent of its staff in Hong Kong are Hong Kong residents without limit of stay and persons from the Mainland staying in Hong Kong on a One Way Permit.

Certification procedure

To establish its status as a "Hong Kong service supplier," an enterprise must apply to the TID for a Certificate of Hong Kong Service Supplier. On the strength of this Certificate, the Hong Kong service supplier can then apply to the relevant PRC authorities for permission to set up a presence in the PRC to supply the relevant services in the Mainland under CEPA. Some of the documentation to be submitted to the TID and the relevant PRC authorities needs to be verified by a China-appointed attesting officer. There may also be additional requirements for market entry depending on the service sector.

Trade And Investment Facilitation

The two sides have agreed to further strengthen economic and trade cooperation through trade and investment facilitation in nine areas: trade and investment promotion; customs clearance facilitation; commodity inspection and quarantine, food safety, quality and standardisation; electronic business; transparency in laws and regulations; cooperation of small and medium enterprises; cooperation in Chinese traditional medicine and medical products sector; protection of intellectual property; and cooperation on branding.

Deepening Economic And Trade Co-operation With Guangdong Province

On 29 July 2008 (the date on which the latest supplement to CEPA was announced), it was announced the governments of Guangdong Province and Hong Kong had agreed to launch 25 liberalisation and facilitation measures for early and pilot implementation in Guangdong Province. It is intended that similar liberalisation and facilitation measures would be extended to the other parts of the PRC if the implementation in Guangdong Province on a pilot basis is successful.

Of these 25 measures, 17 are included under the CEPA liberalisation package, covering accounting, construction and related engineering, medical, placement and supply services of personnel, environment, social service, tourism, maritime transport, road transport, and individually owned stores. The remaining 8 measures not included under CEPA encompass tourism, education, environment, advertising and distribution services.

Opportunities Of Foreign Manufacturers And Service Suppliers Under CEPA

Although CEPA targets manufacturers and service suppliers from Hong Kong, foreign investors from other countries and areas could take advantage of CEPA as a springboard for entering the Mainland market in industries which may not otherwise be open to them as yet.

A foreign manufacturer is not required to establish itself as a presence in Hong Kong to take advantage of CEPA. It can partner up with, or outsource production to, a Hong Kong manufacturer. Whereas, for a foreign service supplier to take advantage of CEPA through a merger with, or acquisition of, a Hong Kong service supplier, it must acquire at least 50 percent of the Hong Kong entity and is required to wait one year after the merger or acquisition before it will be eligible for any CEPA benefits.

Conclusion

The liberalisation under CEPA presents genuine opportunities to Hong Kong investors (as well as foreign investors) to explore the Mainland market ahead of other foreign investors who wish to invest directly in Mainland China. Since CEPA is under continuous review by Mainland China and Hong Kong and further liberalisation is expected, the potential of the benefits that CEPA could bring to Hong Kong investors (and foreign investors wishing to invest in Mainland China through Hong Kong) cannot be underestimated or ignored.

Franki Cheung is the Head of Deacons' China practice group. He has more than 20 years of experience in China trade and investment matters. Ignatius Seu is an attorney in the Hong Kong office of Deacons. His practice is also focused on China trade and investment.

Please email the authors at franki.cheung@deacons.com.hk for more information about this article.