Member Article

WHAT IS CEPA? The Closer Economic Partnership Arrangement (“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. Many of the preferences go beyond China’s WTO concessions. CEPA is not a closed agreement and both sides hold regular meetings on further concessions and the details for implementation. To date, three supplementary agreements to CEPA containing further concessions have been agreed 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 companies • 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 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 satisfy either of the following conditions: the products are obtained entirely in Hong Kong or the goods 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% 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 by the two sides; and 5. “mixed criteria“: use of two or more of the above criteria to determine origin. The ROO requirements applicable to each type of product are set out in detailed tables. 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. Overseas manufacturers An overseas manufacturer is not required to establish itself a presence in Hong Kong to take advantage of CEPA. It can partner up with, or outsource production to, a Hong Kong manufacturer. TRADE IN SERVICES Service sectors CEPA provides for liberalised market access in a wide range of service sectors ahead of China’s liberalisation schedule pursuant to its WTO obligations and facilitates the recognition of Hong Kong professional and technical qualifications. The sectors include: • management consulting • convention and exhibition services • legal services • accounting, auditing and bookkeeping • real estate • construction • 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 • telecommunications • tourism and travel-related services • audiovisual services • cultural and entertainment services • banking and financial services • securities • insurance • job referral agency and job intermediary • advertising • medical and dental In some sectors the concessions surpass China's WTO commitments. Unless otherwise provided in CEPA, Hong Kong companies remain eligible to benefit from China's WTO commitments in the various service sectors. Benefits The CEPA benefits in services are situated mainly in four areas: • earlier market access: Hong Kong service suppliers can enter the PRC 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%) in PRC service companies; • lower capital thresholds: capital requirements to set up in the PRC 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 the Mainland 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 organization 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% 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. Overseas service suppliers An overseas service supplier can take advantage of CEPA through a merger with, or acquisition of, a Hong Kong service supplier. It must acquire at least 50% 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. TRADE AND INVESTMENT FACILITATION The two sides have agreed to further strengthen economic and trade cooperation through trade and investment facilitation in eight 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; and protection of intellectual property. HOW DEACONS CAN HELP YOU WITH CEPA Deacons is a full-service commercial law firm with a strong international presence in most major Asian cities. Our China Practice Group has advised on investments, business activities and trade transactions in Mainland China for more than 20 years. A unique feature of our China Practice Group is that, through our international network, we are the only foreign law firm officially approved to establish three representative offices in the major economic cities of Beijing, Shanghai and Guangzhou. Deacons can assist with CEPA in various ways: • qualifying as a Hong Kong service supplier: we can advise on the requirements for qualifying as a Hong Kong service supplier per business sector and on the PRC business strategy under CEPA • application to TID for the Certificate of Hong Kong Service Supplier: our China-appointed attesting officers can assist with the preparation and attend to the verification of the required documents as well as the administration of oaths of the requisite declaration • overseas service suppliers: we can assist with the legal matters for forming a joint venture or acquiring or merging with a Hong Kong service supplier • establishing the service company in the PRC: we can assist with the procedures and documentation for establishing a service company in the PRC under CEPA

 

Link to article