CEPA 2015 – Free Trade with Guangdong in Professional Services

Hong Kong is renowned for the Asian international service platform, offering a range of professional services, including legal, accounting, auditing, architecture, engineering, and management consultancy. Hong Kong is building on its strengths as an international service hub, and has also made substantial inroads into the mainland professional services market through CEPA and the related Supplements that have been implemented since 2004. Various sectors have now seen a large number of liberalisation measures added under the positive list.

The Agreement between the Mainland and Hong Kong on Achieving Basic Liberalisation of Trade in Services in Guangdong (“Guangdong Agreement”), effective from March 2015, adopts a negative-list approach to market access for Hong Kong service suppliers (HKSS) in Guangdong. This basically puts HKSS operating in Guangdong on an equal footing with their mainland counterparts, except for the reserved restrictions outlined in the negative list.

On the whole, the liberalisations under the Guangdong Agreement far exceed the measures of previous CEPA Supplements. Without exception, they cover all sub-sectors of Hong Kong’s four pillar industries: finance, tourism, trade and logistics, and professional services. To differentiate the Guangdong Agreement from other CEPA Supplements, it has been designated as a subsidiary agreement rather than a supplement. This reflects the new hybrid approach as well as the focussed market access for HKSS in Guangdong.

The following table shows the liberalised sectors established under CEPA from its inception (Phase 1) through to the Guangdong Agreement (Phase 12). The boxes in yellow and orange highlight the newly added sectors under the Guangdong Agreement, alongside the national treatment and reserved restrictive measures on the negative list for HKSS. Similarly, the boxes in green and blue show the existing liberalised sectors with, respectively, the national treatment and reserved restrictive measures for HKSS [1]. Liberalisation measures for sectors concerning cross-border services on the positive list of the Guangdong Agreement are highlighted in grey. Under the Guangdong Agreement, HKSS are given enhanced access to the professional services market in Guangdong.

Legal Services

CEPA has helped create a more attractive operating environment for Hong Kong law firms exploring the mainland market. As a result of the latest Guangdong Agreement, a hybrid approach of introducing negative-list reserved restrictions is being adopted for HKSS in Guangdong on top of positive-list liberalisations under the CEPA Supplements.

Thanks to CEPA, Hong Kong and mainland law firms have been allowed to form association arrangements since 2004. All other foreign law firms on the mainland are not allowed to do so. Currently, a Hong Kong law firm’s representative office on the mainland can enter into association arrangements with up to three mainland law firms. Cross-province association arrangements are also allowed.

As with other foreign law firms and practitioners, HKSS on the mainland are barred from engaging in any business related to practicing mainland law. Supplement X, which came into effect in 2014, introduced a ground-breaking Guangdong pilot measure – a positive-list liberalisation which says that mainland practising lawyers can be seconded to mainland representative offices of Hong Kong law firms set up in Guangdong to act as consultants on mainland law. This commitment is essentially reiterated under the Guangdong Agreement as a reserved restrictive measure on the negative list, which took effect in March 2015.

The Guangdong Agreement, however, has gone one step further. It allows Hong Kong lawyers employed by HKSS to be seconded to mainland law firms as consultants on Hong Kong law or cross-border laws. Furthermore, mainland law firms and representative offices set up by HKSS in Guangdong are allowed to co-operate in accordance with their mutually beneficial agreements. They can also commence business co-operations by dividing the work according to their respective scopes of practice and authority. The Guangdong Agreement also elevates this association arrangement to allow partnerships to be formed in Qianhai, Nansha and Hengqin, in line with specific provisions approved by the judicial administrative authority.

These latest Guangdong initiatives are consistent with the CEPA commitments enshrined under Supplement VIII, which are designed to develop closer co-operation and association between the mainland and Hong Kong legal professions. These liberalisations support the Guangdong pilot measures adopted under Supplement X in 2014. They also greatly enhance the co-operation between Guangdong and Hong Kong law firms, allowing Hong Kong lawyers to be seconded to counterpart offices in Guangdong and practice in their own area of specialty.

Currently, Hong Kong law firms operate about 110 representative offices on the mainland, while more than 20 Hong Kong firms have such offices in Guangdong. As of the end of February 2015, there were 22 approved HKSS applications in the legal services sector, with 14 Hong Kong firms having association arrangements with mainland counterparts. These firms can now advise on both mainland and international law as a result of this special association and co-operation. In the case of Guangdong Province, there is an added flexibility for HKSS considering association agreements with Guangdong-based mainland law firms - the mainland firm in question has to have operated for no less than one year, and at least one person establishing a mainland firm has to have practiced law for no less than five years.

With the Guangdong Agreement focussing on co-operation arrangements in Guangdong, it appears quite likely that similar measures to widen the business scope of HKSS on the mainland will be extended to Beijing, Shanghai and other first-tier cities next year. The Central government is expected to announce new CEPA liberalisation measures by the end of 2015, in line with its pledge to allow free services trade between Hong Kong and the mainland.

The Guangdong Agreement, as a subsidiary CEPA agreement, is confined to liberalisation measures concerning the commercial presence of HKSS in Guangdong. It does, however, touch upon the Guangdong market for Hong Kong legal practitioners on the positive list. This is in keeping with other CEPA Supplement provisions that positively support Hong Kong lawyers seeking work on the mainland. While foreign lawyers, for instance, are not allowed to practise mainland law, CEPA allows Hong Kong residents to sit the National Judicial Examination and acquire China’s legal professional qualifications, either through an internship at a Hong Kong-based mainland law firm or following intensive training (for not less than a month) with a mainland lawyer association.[2]

HKSS that hold mainland legal professional qualifications and a mainland lawyer’s practice certificate are allowed to act for clients in matrimonial and succession cases relating to Hong Kong. In addition, Hong Kong barristers can act as agents in civil litigation cases on the mainland in the capacity of citizens.[3]

The positive-list liberalisation under the Guangdong Agreement establishes that those HKSS that hold mainland lawyer qualifications are allowed, from March 2015, to act as agents in civil litigation cases relating to Hong Kong residents and juridical persons, according to the specific scope of permitted business provided for under the Notice of the Ministry of Justice of the People’s Republic of China (No. 136). They can handle matrimonial and succession cases, as well as disputes with regard to contracts and intellectual property rights, civil disputes relating to companies, securities and insurance, and cases which require applications for the recognition and enforcement of civil judgements and arbitral awards.[4]

The table below shows the access for HKSS under CEPA compared with non-CEPA service suppliers. Where it is not explicitly indicated as a liberalisation under the Guangdong Agreement, the concerned liberalisations for HKSS are reported as positive listings under the respective CEPA Supplements.

Construction Professional Services

While HKSS and other foreign-owned enterprises are allowed to establish wholly owned or joint-venture enterprises in the mainland’s construction and engineering market, HKSS are given national status in many sub-sectors and areas. This is made even more favourable if the business entities of the HKSS are set up in Guangdong, in light of the negative list adopted under the Guangdong Agreement, with new areas of liberalisations introduced alongside the stated reserved restrictions.

For instance, HKSS are now accorded national status in Guangdong in the areas of: engineering, architectural and design services (except for engineering survey services); general construction services for buildings; building completion and finishing work services; general civil engineering services (except for civilian water conservation projects such as dams and reservoirs, construction of national waterways, and dredging for waterway maintenance); installation and assembly work; urban planning and landscape architectural services (except for general urban planning services, services for general planning for national-level scenic areas, and engineering survey services); and scientific and technical consulting services (except for those related to hydraulic engineering, and engineering survey services).

Although barred from handling a limited range of construction and engineering services, HKSS are explicitly allowed to handle new business ventures under the Guangdong Agreement. For example, they can operate services related to energy distribution, though HKSS are required to enter into joint ventures as minority shareholders, as stated under the reserved restrictions.

The mainland’s construction and engineering market is often considered a challenging one, given the various requirements for qualification assessment, staffing and establishment of joint ventures, and residency requirements for engineers and technical staff. Against this background, HKSS and Hong Kong professionals clearly enjoy preferential market access compared with foreign-owned architectural and engineering enterprises and professionals. This is particularly the case in Guangdong, given the various Guangdong pilot measures under the CEPA Supplements. These markedly improve the flexibility of HKSS when it comes to seeking enterprise licensing in Guangdong through mutual recognition, examination and continuing education of concerned personnel. For example, Guangdong already gives national status to the registration and practice of Hong Kong professionals with the mainland’s Class-1 registered structural engineer or architect qualifications by mutual recognition, irrespective of whether they are registered practitioners in Hong Kong.

Under the Guangdong Agreement, which adopts a hybrid approach to laying down both negative-list restrictions and positive-list liberalisations on cross-border services, HKSS are now given greater flexibility in the assessment of enterprise qualifications. Under the positive list, construction and engineering design enterprises set up by HKSS in Guangdong are allowed, from March 2015 onwards, to employ Hong Kong-registered structural engineers and architects as their key professional and technical personnel, but not registered personnel, in enterprise qualification assessments. Wholly owned or joint-venture urban-rural planning enterprises set up by HKSS in Guangdong are allowed to deem staff, who have attained registered planner qualifications through mutual recognition, as essential registered personnel in enterprise qualifications assessments.

Currently, Hong Kong architects employed by HKSS on the mainland have to meet continuing-education requirements for mainland-registered architects, but these can be completed in Hong Kong. This is possible as long as the elective courses are either recognised by the mainland authorities, or taught by mainland teachers in Hong Kong. Under the Guangdong Agreement, similar positive-list liberalisations have been granted to enhance the flexibility of HKSS. With regard to the continuing education of class-1 registered structural engineers of HKSS set up in Guangdong, the elective courses can either be completed in Hong Kong or taught by teachers sent from the mainland, subject to the approval of the mainland authorities. Moreover, the elective courses of continuing education for supervision engineers employed by HKSS can all be undertaken in Shenzhen.

Supplement X enhances the operational flexibility of those HKSS providing architectural, engineering, integrated engineering, construction and related engineering services on the mainland by allowing their contractual service providers to provide such services in the same ways as naturalised persons.

As of the end of February 2015, there were 103 approved HKSS applications in the sector of construction professional services and construction-related services.

Real Estate Services

Real estate services are a relatively new industry on the mainland. HKSS have been renowned for their quality service standards and contribution to modernise the industry on the mainland, with local service providers gradually emerging. The mainland’s real estate services market covers three major segments: property agency, property management, and surveying, which encompasses valuation, building surveying and land surveying.

Prior to the Guangdong Agreement, all measures related to the real estate services had been on the positive list. The latest CEPA Supplement measures cover real estate project services, and better define the scope of work permissible for HKSS. Under the Guangdong Agreement, HKSS are granted national status to provide real estate services involving own or leased properties in Guangdong. The proviso explicitly states that the property management portfolios of HKSS, expressed in gross floor area (GFA) in both Hong Kong and on the mainland, will be taken into account, for the sake of clarity and to avoid doubt, in the event that their applications for property management enterprise qualification are placed under assessment on the mainland.

The new liberalisation under the Guangdong Agreement, along with the existing CEPA provisions to form wholly owned real estate services operations and employ contractual service providers via natural persons, gives greater certainty for HKSS in meeting the licensing requirements for property management enterprises and operating more flexibly in Guangdong.

* Services under this sector or sub-sector

Building Cleaning Services

Aside from liberalisation measures in the construction, real estate and related engineering sectors, CEPA allows HKSS to set up wholly owned enterprises on the mainland to provide building cleaning services. They are also allowed to employ contractual service providers in the mode of movement of natural persons in providing such services. The preferential treatment is elevated to the level of national treatment in Guangdong without any reserved restrictions under the Guangdong Agreement.

It should be noted, however, there had been no applications for HKSS certification for the sector of building cleaning services as of the end of February 2015.

Accounting Services

Hong Kong’s accounting sector has not been given as substantial preferential treatment under CEPA as other professional services in terms of commercial presence on the mainland. Therefore, it is not entirely surprising to find a very low number of HKSS applications over the years, with the number of approved HKSS certification applications for accounting services standing at three as of the end of February 2015, rising from two in August 2012.

Unlike many international accounting firms that have used Hong Kong as a springboard to extend their service coverage to the mainland, the main option for smaller Hong Kong accounting firms to serve the mainland market is via The Provisional Licence to Perform Audit-Related Services (i.e. Temporary Audit Permit or TAP). Since 2009, the validity period of the Temporary Audit Permit has been extended to five years as a result of progressive improvements to TAP arrangements under different CEPA Supplements. This has helped reduce the administrative burden for Hong Kong accounting firms, in particular the smaller operators, in light of the more stringent requirements that otherwise apply to non-CEPA beneficiaries.

A scheme of mutual exemption of examination subjects has been sought under CEPA for members of the Chinese Institute of Certified Public Accountants (CICPA) and the Hong Kong Institute of Certified Public Accountants (HKICPA) Qualification Programme graduates. This mutual exemption, however, has also been extended to those HKICPA members who were not qualified solely through the Qualification Programme. These measures, plus the arrangements to set up accounting examination centres in Shenzhen, Dongguan and Hong Kong, make it easier for Hong Kong accounting professionals to acquire mainland qualifications.

To expedite the development and highlight the role of the Qianhai Shenzhen-Hong Kong Modern Service Industry Co-operation Zone, Hong Kong professionals who have obtained the CICPA qualification get preferential treatment under CEPA and can become partners in partnership accounting firms in Qianhai. This Guangdong pilot measure, introduced in 2013, is consistent with the province’s strategies in establishing several development zones, and achieving free trade in services with Hong Kong.

In the same vein, Guangdong allows Hong Kong residents with the CICPA qualification to apply and become partners of accounting firms in the province. This move has been billed as a positive-list liberalisation under the Guangdong Agreement, as the auditing experience acquired in Hong Kong is considered equivalent to that on the mainland. However, the Guangdong Agreement stipulates under its negative list that Hong Kong residents with CICPA qualifications who become partners in partnership accounting firms in Guangdong are not allowed to have control over the firm. That control should be vested in mainland residents. Furthermore, Hong Kong partners are required to reside on the mainland and practise in the concerned accounting firms for no less than 180 days or more every year. They will also be covered by the professional indemnity insurance in accordance with the relevant requirements.

[1] The boxes in blue merely show that there are reserved restrictive measures under the negative list of the Guangdong Agreement for the concerned sector as a whole, while individual sub-sectors may attract national treatment in terms of establishing a commercial presence in Guangdong.

[2] The Measures for the Management of Residents of the Hong Kong Special Administrative Region and the Macau Special Administrative Region Having Acquired the Mainland Legal Professional Qualification to Work as Lawyers on the Mainland stipulate that practitioners must have been accredited for having passed the assessment before they may apply to practise as a mainland lawyer. These provisions should ensure that they have attained the required standard to practise as mainland lawyers.

[3] The Civil Procedure Law, under Section 2 of Chapter V, provides that a lawyer, a near relative of the party, a person recommended by a relevant social organisation or a unit to which the party belongs, or any other citizen approved by the People’s Court, may be appointed as the party’s “agent ad litem.” The person appointing the agent must submit a written appointment to the People’s Court specifying the matter entrusted and the powers conferred. The Civil Procedure Law further provides that “agent ad litem” shall have the right to investigate and collect evidence and may have access to materials pertaining to the case. The Lawyers Law, however, provides that if a person has not obtained a lawyer’s practice certificate but engages in the business of acting as agent in litigation or defending clients for the purpose of seeking economic benefit, he shall be ordered to cease the illegal practice of law.

[4] Under Notice No. 136 issued by the Ministry of Justice, the scope of business of Hong Kong residents who have acquired Mainland legal professional qualifications and hold a Mainland lawyer’s practice certificate in acting as agents in civil litigation cases relating to Hong Kong in the people’s courts of the Mainland has been expanded to cover 237 types of civil cases under five major categories, including matrimonial and family issues, succession disputes, disputes on contracts and intellectual property rights, civil disputes such as those relating to companies, securities, insurance and notes as well as cases relating to the above to which special procedures apply, including the applications for recognition and enforcement of civil judgments and arbitral awards of the courts of the Hong Kong Special Administrative Region.

[5] Hong Kong legal practitioners include both solicitors and barristers. Their years of practice are calculated in accordance with the actual number of years for which the solicitor or barrister has practised in Hong Kong, as shown on the relevant certificate respectively issued by the Law Society of Hong Kong or the Hong Kong Bar Association.

[6] High-standard real estate projects refer to those real estate projects with construction cost per unit exceeding two times that of the average construction cost per unit in the same city.