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, eight supplementary agreements to CEPA containing further concessions have been agreed by the two sides.

CEPA mainly covers the following 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;

• mutual recognition of professional qualifications;

• strengthening of cooperation in the areas of finance, tourism and trade and investment facilitation between Mainland China and Hong Kong.

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": with effect from 1 April 2012, refers to the total value of raw materials and component parts originating in Hong Kong, combined with labour costs and product development costs incurred in Hong Kong, being greater than or equal to 30% of the FOB value of the exporting goods, and that the final manufacturing or processing operations should be completed in the area of Hong Kong. Where Hong Kong incorporates raw materials and components parts originating in Mainland China as part of the exporting goods, such raw materials and component parts should be regarded as originating in Hong Kong in the calculation of the valued-added content of the exporting goods; the value-added content of such exporting goods should be greater than or equal to 30%, and moreover, when the value of raw materials and component parts originating in Mainland China is not taken into account, the value-added content should be greater than or equal to 15%;

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. Under the most recent supplement, as from
1 April 2012, 3 new service sectors as well as 13 existing service sectors will be further liberalised. The total number of service sectors covered by CEPA will be expanded to 47 as follows:

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 share: 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 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. With effect from 1 April 2012, apart from meeting the requirements in Annex 4 and Annex 5 of CEPA, any restrictive requirements applicable to the nature and scope of the business of foreign investment entities in PRC laws, regulations and administrative regulations shall also apply;

• 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.

Financial Cooperation

Under CEPA VIII, the two sides agreed to strengthen cooperation in the area of finance, by supporting Mainland banks to develop their international businesses via Hong Kong's international financial platform, by supporting Hong Kong insurance companies to enter into Mainland insurance market via institutional set-up or capital injection, and by enhancing bilateral cooperation in the development of insurance products, business operation and operational management etc.

Cooperation in Tourism

Under CEPA VIII, the two sides agreed to strengthen cooperation in the area of tourism as follows:

• to jointly improve the quality of tourism services and to establish a coordination mechanism for strengthening the regulatory regime for the tourism market in the Mainland and Hong Kong etc.;

• to jointly promote overseas tourism and to build up closer cooperation between Mainland and Hong Kong in this respect;

• to encourage mutual entry of tourism enterprises and investments in Mainland and Hong Kong etc.;

• to introduce measures on joint personnel training between Mainland and Hong Kong and to support Hong Kong to develop cruise tourism.

Trade and Investment Facilitation

The two sides agreed to further strengthen economic and trade cooperation through trade and investment facilitation in ten 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 industries; protection of intellectual property; cooperation on branding; and cooperation on education. Under CEPA VIII, the two sides agreed to further strengthen cooperation in commodity inspection and quarantine and food aspects. Further, the two sides agreed to strengthen collaboration in science and technology, and to support the establishment of a branch of the Chinese National Engineering Research Centre in Hong Kong as well as to set up a High-Tech Industrialization Base in Hong Kong.

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 25 years. A unique feature of our China Practice Group is that we are the first foreign law firm in Mainland China to have received official approval from the Ministry of Justice 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 Mainland business strategy under CEPA;

• application to the 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 and the administration of oaths of the requisite declaration as well as attending to the application to the TID;

• 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 Mainland China service company: we can assist with the procedures and documentation for establishing a service company in Mainland China under CEPA.