History and background

Mainland and Hong Kong Closer Economic Partnership Arrangement, or “CEPA”, is the first free trade agreement ever concluded by the Mainland of China and Hong Kong.  The main text of CEPA was signed on 29 June 2003.  It opens up huge markets for Hong Kong goods and services.  It adopts a building block approach: since its conclusion the two sides have been working closely to broaden and enrich the content of CEPA, and signed 10 supplements between 2004 and 2013, expanding market liberalisation and further facilitating trade and investment.

In December 2014, under the framework of CEPA, the Agreement between the Mainland and Hong Kong on Liberalisation of Trade in Services in Guangdong (《关于内地在广东与香港基本实现服务贸易自由化的协议》) (the “Guangdong Agreement”) was signed, enabling general liberalisation of trade in services in Guangdong to Hong Kong investors.

On the basis of the Guangdong Agreement, the two sides continued with discussion and on 27 November 2015, signed the Agreement on Trade in Services (《服务贸易协议》) (the “Agreement”), extending the geographical coverage from Guangdong to the whole Mainland for liberalisation of trade in services.

Against this backdrop, on 18 May 2016 the Ministry of Commerce (“MOFCOM”) issued the Measures on the Administration of the Record-filing of Hong Kong and Macau Service Suppliers Investing in the Mainland (《港澳服务提供者在内地投资备案管理办法》) (the “Measures”). The Measures has officially taken effect on 1 June 2016.  

Key points

The key characteristics of the Measures include the follows:

Replacing the existing approval system with a record-filing system

By way of background, under the current foreign investment regulatory regime, for a foreign investor (including Hong Kong investors) to set up a foreign investment enterprise (“FIE”) in China, it must obtain an approval from MOFCOM (or its local counterparts, same below).  It usually takes MOFCOM a few months even longer to review and approve the FIE’s constitutional documents, such as its joint venture contract, articles of association, etc.  Any major subsequent changes to the FIE, e.g., amendments to its articles of association, are also subject to MOFCOM’s review and approval.

In contrast, under the Measures a Hong Kong service supplier (as defined in CEPA, same below) only needs to complete a record-filing form on MOFCOM’s online system (see http://wzzxbs.mofcom.gov.cn/app/entp/approve), in order to set up an FIE or make changes to the FIE that it invested in.  MOFCOM shall handle such a record-filing within three (3) working days.

Pursuant to the Measures, the authority responsible for operating the aforesaid record-filing system is the commerce departments at the provincial level.  Upon receiving an application of record-filing via its online system, the authority in charge will send a notice to the applicant, which will inform the applicant to obtain a filing receipt and hand in relevant supporting documents.  With a filing receipt, the Hong Kong service supplier may proceed to go through other procedures, such as registering with the Administration of Industry and Commerce.

Submission document checklist

Supporting documents to be submitted by an applicant include:

  • The notice of the pre-approval of the name of the FIE or the business license of the FIE;
  • The Hong Kong Service Supplier Certificate;
  • An establishment application form signed by all investors of the FIE (or their authorized agents) or an amendment application form signed by the legal representative of the FIE (or his authorized agent);
  • A certificate of the designated representative issued by the investors;
  • A letter of authorization from the Hong Kong service suppliers or the legal representative of the FIE entrusting an other person to sign the relevant documents;
  • The qualification or identification certificates of the investors or the actual controllers (no need to provide if the amendment does not involve a change in the basic information of the investor), and;
  • Amended agreements or articles of association of the FIE. 

Qualification requirements for the Hong Kong service suppliers

“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.  A legal person includes any form of organisation including corporation, trust, partnership, joint venture, sole proprietorship or association. 

A legal 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; 
  • 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. 

Existing FIEs established by Hong Kong service suppliers

If a Hong Kong service supplier had already established an FIE in the Mainland before the Measures took effect on 1 June 2016, the FIE is required to surrender its approval certificate to the MOFCOM, and carry out an aforesaid record-filing process on MOFCOM’s online system.

Violation penalties

The Measures is given real teeth, and any failure to make a filing, or filing untrue information, will lead to the non-compliant investor being blacklisted in MOFCOM’s Credit Record System for FIEs.  This information will be shared with other government agencies, which will make it difficult, if not impossible, for the investor to operate in the Mainland

Carve-out areas 

The Measures generally applies to the establishment of and subsequent changes to the FIEs in the area of “trade in services” (服务贸易), with the following exceptions:

  • Companies engaged in sectors subject to restrictive measures as set out in Article 9, Chapter 4 of the Agreement; 
  • Companies operating in the telecoms and culture sectors, and financial institutions; and
  • Other forms of commercial presence besides incorporations.

Co-investment with non-Hong Kong/Macau investors 

The Measures does not apply to the following situations:

  • 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; and 
  • 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.  

Benefits and opportunities offered

The Measures further facilitates Hong Kong investors’ entry into the service sectors in the Mainland, mainly by greatly simplifying the establishment and amendment procedures, as well as cutting down the time needed to go through such procedures.  A number of provinces, such as Guangxi, Jiangxi and Hebei, have all promulgated local regulations and rules on how to implement the Measures.  Although these regulations and rules are largely similar, Hong Kong investors targeting these provinces shall pay attention to the local requirements, in particular those on documentation and timing, when assessing investment projects.