New Milestone in Liberalisation of Trade in Services under CEPA

Under the framework of the Mainland and Hong Kong Closer Economic Partnership Arrangement (“CEPA”), several developments have been made in the area of trade in services. In this article, we take a closer look at the developments and provide a general introduction about the new record-filing mechanism applicable to Hong Kong service providers.

I. Background Information

CEPA is a free trade agreement concluded by the Mainland and Hong Kong. The main text of CEPA was signed on 29 June 2003, and subsequently ten supplements have been made by both sides (the “Supplements”). It covers three areas, namely trade in goods, trade in services, and trade and investment facilitation.

Under the framework of CEPA, several developments have been made in the area of trade in services in recent years:

• The Agreement between the Mainland and Hong Kong on Achieving Basic Liberalisation of Trade in Services in Guangdong (the “Guangdong Agreement”) was signed on 18 December 2014 and became effective on 1 March 2015. Under the Guangdong Agreement, the trade in services areas have been more liberalised. However, the liberalisation under the Guangdong Agreement is only confined to the Guangdong Province.
• The CEPA Agreement on Trade in Services (the “Agreement”) was signed on 27 November 2015 and became effective on 1 June 2016. The Agreement extends the geographical coverage to the whole Mainland. The Agreement is a new agreement which covers and consolidates commitments relating to liberalisation of trade in services provided in CEPA and its Supplements and also the Guangdong Agreement. It is a stand-alone subsidiary agreement made under the trade of services section in the CEPA framework.

II. Main Differences between CEPA and the Agreement

1. Applicable Areas: CEPA (including the Supplements) is a set of trade agreements covering the areas of trade in goods, trade in services, and trade and investment facilitation. The Agreement is a stand-alone agreement focusing on the area of trade in services under the CEPA framework.

2. Liberalisation Approach: Since CEPA’s signing in 2003 up to Supplement X, CEPA had consistently adopted the positive list liberalisation approach, which conferred preferential treatments to Hong Kong companies for conducting business in Mainland China. Unlike CEPA, the Agreement adopts both a negative list liberalisation approach and a positive list liberalisation approach, namely:

• In relation to the establishment of “commercial presence”, the Agreement sets out, in the form of a negative list, various restrictive measures stipulated by the Mainland in certain business sectors which prevent Hong Kong investors from receiving national treatment. Except for the reserved restrictive measures set out in the negative list, eligible Hong Kong service suppliers can expect to enjoy the same treatment as Mainland enterprises in terms of market access requirement, i.e. “permitted if not forbidden”.
• As for services in relation to “cross-border supply”, “consumption abroad”, “movement of natural persons”, as well as sectors of telecommunications and cultural services, the liberalisation available to eligible Hong Kong service suppliers will be listed out in a positive list. This is because these sectors have their specific trade characteristics, sophisticated laws and regulations and greater regulatory pressures, while at the same time these sectors may involve public interest and safety.

3. Level of Liberalisation: The Agreement provides for a higher, or at least equal, level of liberalisation comparing with CEPA, the Supplements and the Guangdong Agreement. Under the Agreement, there are 153 services trade sectors which the Mainland has fully or partially opened up to Hong Kong, accounting for 95.6% of all the 160 WTO services trade sectors.

4. The Provisions of National Treatment and Most-favored Treatment: Comparing with CEPA, the Agreement has newly introduced the provisions of national treatment and most-favored treatment. In other words, if there is no restrictive measure of a particular sector in the negative list, eligible Hong Kong service suppliers can expect to enjoy national treatment in that sector. As to the provision of most-favored treatment, if Mainland China accords to other economies further liberalisation measures, Hong Kong service suppliers will automatically enjoy such further preferential treatment not included in CEPA so as to assure Hong Kong’s favorable position to enjoy the most preferential liberalisation measures of Mainland China.

5. Simplified Investment Procedure: With regard to investment facilitation, for Hong Kong service suppliers in the majority of services trade sectors, filing administration is adopted in lieu of prior approval of contracts and articles of association for establishment and change of enterprises. This will be further elaborated in the following sections.

III. The Measures on the Administration of the Record-filing of Hong Kong and Macau Service Suppliers

In order to facilitate investment, Mainland China has adopted filing administration in lieu of prior approval requirement for Hong Kong service suppliers. Such simplified investment procedure is implemented by the issuance of the Measures on the Administration of the Record-filing of Hong Kong and Macau Service Suppliers Investing in the Mainland (the “Measures”) by the Ministry of Commerce (“MOFCOM”) on 18 May 2016. The Measures took effect on 1 June 2016.

Among others, the following main points of the Measures are worthy of note:

1. Record-filing Procedure: Under the Measures,save for certain restricted industries, establishment and change of a foreign investment enterprise (“FIE”) owned by Hong Kong service suppliers can now carry out a simplified record-filing procedure. Prior to the implementation of the Measures, such establishment or change required the examination and approval procedure from MOFCOM (or its local counterparts).  The record-filing procedure mainly contains the following steps, namely:

• The applicant shall complete a record-filing form on MOFCOM’s online system;
• If the record-filing is within the scope of the Measures, the authority in charge will send a record-filing completion notice to the applicant within three working days;
• Upon receipt of the record-filing completion notice, the applicant shall attend to the authority in charge to submit the relevant supporting documents and also collect the filing receipt;
• With the filing receipt, the applicant may proceed to go through other procedures, such as registering with the Administration of Industry and Commerce.

2. Applicable Subject: The Measures is only applicable to Hong Kong or Macau service suppliers. Where a Hong Kong individual is eligible for a benefit, the person must be a permanent resident of Hong Kong. If the service supplier is a legal entity, a Certificate of Hong Kong Service Supplier must be obtained before proceeding with the record-filing procedure under the Measures.

In the case of a co-investment made by a Hong Kong/Macau service supplier and a foreign investor who is not qualified as a Hong Kong/Macau service supplier; or a Hong Kong/Macau service supplier transferring its interests in an FIE to a foreign investor who is not qualified as a Hong Kong/Macau service supplier, the Measures will not be applicable.

3. Applicable Area: The Measures generally applies to the establishment of and subsequent changes to the FIEs in the area of trade in services stipulated in the Agreement. It does not apply to the following sectors:

• Companies engaged in sectors subject to restrictive measures as set out in Article 9, Chapter 4 of the Agreement (namely the restrictive measures as set out in the negative list of the Agreement); 
• Companies operating in the telecommunications and cultural sectors, and financial institutions; and
• Other forms of commercial presence besides incorporations.

4. The Authority in Charge: It is worth mentioning that,pursuant to the Measures, the authority responsible for implementing the aforesaid record-filing procedures is the Bureaus or Commissions of Commerce at the Provincial level. Given most of the examination and approval for establishment and change of FIE nowadays have been delegated to the local Bureau of Commerce at municipal or district level, it is yet to be seen whether handling by a higher level will increase the uncertainty or difficulty to complete such record-filing procedures.

IV. Conclusion

The Agreement has, to a great extent, further liberalised the trade in services between Mainland China and Hong Kong, enabling both sides to reach a new milestone after the continuous liberalisation of trade in services through CEPA over the years. However, to ensure successful implementation of the Agreement, it is important that the government of each side shall take necessary measure, whether in the form of law, regulation, rule, procedure, decision, and administrative action, etc. to ensure observance of the Agreement by its competent authorities. It is good to know that the investment facilitation under the Agreement has been swiftly implemented through the issuance of the Measures. Hopefully, there will be more and more legislations in the coming future to effectively implement the Agreement.