By China Practice Group, Deacons
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.
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
From 1 January 2004, the Mainland allows the duty free import of Hong Kong products falling under 374 tariff codes including:
To qualify for the duty free import, products must be of Hong Kong origin, i.e. the products must either be obtained entirely in Hong Kong or have undergone substantial transformation in Hong Kong. There are essentially three rules of origin requirements for products that are not entirely obtained in Hong Kong. The requirements are respectively that:
- principal manufacturing or processing operations carried out in Hong Kong have conferred on the products their essential characteristics
- 30% value has been added to the product in Hong Kong
- the tariff heading of the product under the Product Description and Harmonised System Code has changed as a result of manufacturing or processing operations carried out in Hong Kong
The rules of origin requirements applicable to each type of product are set out in a detailed table referred to as the "CEPA Initial Phase of Tariff Preference - Mainland 2004 tariff codes, product description and origin criteria".
The Mainland will further permit, at the latest by 1 January 2006, the duty free import from Hong Kong of a second batch of products. The products in this second batch will be based on a consolidated list drawn up by the Hong Kong government following applications made by Hong Kong manufacturers.
The two sides have also agreed not to adopt any anti-dumping, or countervailing measures against the other side’s goods. The Mainland has undertaken not to impose tariff rate quotas on goods of Hong Kong origin.
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.
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
CEPA provides for liberalisation of market access in 18 services sectors ahead of the liberalisation schedule under the WTO Protocol. The sectors are:
• management consulting
• convention and exhibition services
• real estate and construction
• medical and dental
• distribution services
• freight forwarding agency
• storage and warehousing
• audiovisual services
• legal services
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.
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: Hong Kong professionals such as legal practitioners, accountants and medical personnel are permitted to practise in the PRC, subject to passing the relevant professional local exams and satisfying local traineeship requirements.
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 (no such requirement for 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.
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. For instance, a Hong Kong service supplier wishing to provide retail services in the PRC must have had an average annual sales value of at least US$100 million in the last three years and minimum assets of at least US$10 million in the past year.
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 seven 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, and cooperation in the Chinese traditional medicine sector.
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 upplier
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.