The PRC/HK CEPA: What's on Offer for Hong Kong Law Firms?

Annex 5: Definition of a CEPA Hong Kong Law Firm

Annex 5 clarifies that partnerships and sole proprietorships, among other entities, are juridical person service suppliers. A CEPA Hong Kong juridical person is a "legal entity duly constituted or otherwise organized (组建或设立的) under the applicable laws" of Hong Kong. In effect, formation or constitution in Hong Kong is required.² This threshold definition must be passed as a condition precedent to compliance with the specific criteria relating to Hong Kong law firms, which are as follows:

(i) the firm must be registered and established as a Hong Kong law firm;

(ii) it must possess a valid business registration certificate;

(iii) the sole proprietor and³ all partners are Hong Kong registered practising lawyers;⁴

(iv) the principal scope of business is provision of Hong Kong legal services;

(v) the law firm, sole proprietor or partners pay Hong Kong profits tax;

(vi) the firm has engaged in substantive business operations for at least three years; and

(vii) it owns or rents premises in Hong Kong to engage in substantive business operations.

In relation to (iii) above, it should be noted that pursuant to s. 6 (6) of the Legal Practitioners' Ordinance, Cap. 159 of the Laws of Hong Kong (LPO), it is necessary to have accumulated at least two years' bona fide employment in practice as a Hong Kong solicitor in order to become a partner or operate as a sole practitioner.

Annex 4: CEPA Concessions Available to a Hong Kong Law Firm

For a Hong Kong law firm, the principal CEPA concession available is that the firm can "operate in association with a PRC law firm,⁵ except in the form of a partnership" if it has set up a PRC representative office (RO). It appears that such an association would be permitted to share fees, profits, offices and staff. It is the closest form of collaboration to be allowed with local firms.

From a Hong Kong law perspective, it may be noted that s. 39C LPO permits a Hong Kong law firm and a foreign law firm to be registered with the Law Society of Hong Kong as an association (联营组织),⁶ provided the firms have, or intend to have, an agreement under which fees, profits, premises, management or employees are shared between the firms within two months after the registration. There are reported to be seven such associations registered to date in Hong Kong, and it would appear that Annex 4 contemplates a similar type of association between a Hong Kong law firm and a PRC law firm.

A secondary CEPA concession for Hong Kong law firms is that the representatives of the Hong Kong law firm's RO benefit, under Annex 4, from shorter PRC residency requirements. These more relaxed requirements will not be available to the representatives of other foreign law firms' PRC representative offices through the WTO agreements that China has signed.

Under Annex 4, residency requirements will be completely waived for the representatives of Hong Kong law firms' ROs located in Shenzhen and Guangzhou, and will be reduced from six months to two months per year for such ROs in other PRC locations. It has been reported that the waiving of residency requirements for Shenzhen and Guangzhou was based on the proximity of these cities to Hong Kong, which makes commuting feasible for the relevant ROs representatives. The six-month residency rule will remain in place for the representatives of other foreign law firms' ROs in all locations as per the PRC's WTO commitments in this area.

With respect to individuals involved in legal services, the following aspects of Annex 4 are noteworthy:

· Any Hong Kong solicitors working in their law firm's RO are precluded from handling PRC law matters. CEPA does not extend the right to practise PRC law to Hong Kong solicitors.

· Annex 4 permits Hong Kong permanent residents with Chinese citizenship to qualify as PRC lawyers and thereafter to practise PRC law (thus obtaining PRC practising rights) in any area except litigation. In the event that they do so qualify, however, they still will not be able to be employed as practising PRC lawyers by an RO or by a Hong Kong law firm. PRC practising rights are therefore purely individual rights that do not benefit Hong Kong law firms as a whole. Annex 4 does, however, permit PRC law firms to employ HK barristers and solicitors, as long as they do not handle PRC law matters.

· With respect to Hong Kong permanent residents with Chinese citizenship who are permitted to qualify as PRC lawyers and obtain PRC practising rights the general definition of a natural person HKSS contained in Annex 5 (the annex that defines the persons that benefit from Annex 4 concessions), merely requires Hong Kong permanent resident status. Annex 4, however, overrides the basic definition by adding the requirement of Chinese citizenship, as permitted by Clause 4 of Annex 5. Even though a non-Chinese citizen, who is a Hong Kong permanent resident, fulfils the basic definition of a natural person HKSS, he can never qualify as a PRC lawyer and obtain PRC practising rights. Neither will permanent residents of any other jurisdictions be permitted to do this through the PRC's WTO commitments. PRC practising rights remain the exclusive domain of PRC citizens, resident in the PRC (including Hong Kong).

The only possibility for a non-ethnic Chinese person to become a Chinese citizen (中国公民) is contained in Article 7 of the PRC Nationality Law. The person can become a PRC citizen if he fulfils certain stipulated conditions, including being the close family member of a Chinese national, having settled in the PRC, or for an "other legitimate reason".

Procedure for Obtaining Treatment in the PRC as an HKSS

Annex 5 sets out a general procedure for HKSS to obtain CEPA treatment. It lists the documents that are to be submitted to the Hong Kong Trade and Industry Department (TID) in order to obtain an HKSS certificate. It has been reported that the TID has made a commitment to respond within 14 days. The HKSS should submit the required documents, together with the HKSS certificate, to the PRC examining authority. The PRC examining authority will examine the application and verify the qualifications of the HKSS. It is required to inform the HKSS "within a stipulated period" and notify the PRC Ministry of Commerce (the MOC) in the event that it holds a different view on the qualification of the HKSS. The MOC will inform the TID and give reasons for the divergent views. The HKSS may request the MOC to reconsider, via the TID and with the provision of written justification. The MOC "is required to give a written reply to the TID within a stipulated period". (Note that the "stipulated periods" mentioned in the procedure have not yet been stipulated.)

The general procedure described above, overseen by the TID in Hong Kong and the MOC in the PRC, is clearly not tailored to law firms. The PRC Ministry of Justice is expected to issue regulations on CEPA legal services implementation in November 2003 and will likely stipulate the particular documents that a Hong Kong Law Firm must produce and the procedures it must follow in order to obtain CEPA treatment. Presumably the Law Society of Hong Kong will have a role in the issuance of the HKSS certificate for Hong Kong law firms. Detailed general application procedures for the issuance of HKSS certificates are also expected to be promulgated in Hong Kong in November 2003.

What does CEPA represent for Foreign Law Firms with established Hong Kong offices?

Prior to the actual implementation of CEPA, it is impossible to say exactly how its definitions and concessions will be applied in practice to law firms and lawyers. Nevertheless, it should not be overlooked that Annex 4 stipulates that it is the "Hong Kong law firms that have set up ROs" (在内地设立代表机构的香港律师事务所) that can obtain the benefit of the relevant Annex 4 concessions.

It appears that international law firms' ROs have, in the majority of cases, been established by their home jurisdictions' partnerships, rather than the local Hong Kong partnerships. To take a hypothetical example, let's assume that Worldwide Law Firm has its head office in the UK, which is a UK partnership and which controls satellite local partnerships around the globe. Those partners of the UK partnership who are also Hong Kong solicitors establish a Hong Kong partnership. The UK partnership sets up a PRC representative office (a UK RO).

With a literal reading of Annex 4, it would appear that Worldwide Law Firm is effectively precluded from establishing an association with a PRC firm under CEPA, since it is a UK partnership, rather than a Hong Kong partnership, which has set up the UK RO. On the same basis, the UK RO's representatives cannot benefit from Annex 4's reduced residency requirements, since they are not representatives of an RO set up by a Hong Kong partnership, even if they happen to be Hong Kong permanent residents and also work for a Hong Kong partnership. A Hong Kong partnership may fit all of Annex 5's juridical person requirements, as well as the specific criteria for a Hong Kong partnership, including substantive business operations for three years, but it has not "set up a representative office" as required by Annex 4.

The corollary of the above reasoning, if it is correct, would be that only a Hong Kong originating local firm, which is the product of a Hong Kong partnership between registered, practising Hong Kong solicitors, and which has directly set up an RO, can obtain treatment under CEPA. (Please see the box below for a breakdown of the issue of the status of UK versus Hong Kong representative offices in China.)

Synthesis of CEPA Legal Services Concessions Benefits

Hong Kong's legal services are surely among its most important assets as the territory forges its new role as a service provider within the fast developing PRC economy. Hong Kong's rule of law, independent judiciary, sophisticated range of international legal practitioners and variety of legal services have equipped it to provide a strong base for international corporate commercial legal advice, as well as for dispute resolution both in litigation and arbitration. CEPA could have been a vehicle to strengthen this range of services in Hong Kong. It has, however, failed to address this prime strength of Hong Kong. Instead it has focused on Hong Kong law firms' and lawyers' services in the PRC, through associations with local firms, and facilitation of residency requirements for RO representatives and permission for certain individuals to qualify as PRC lawyers and acquire PRC practising rights.

It is hoped that CEPA will be given a liberal interpretation that will not exclude Hong Kong's foreign law firms and lawyers that have established themselves, have conducted substantive business and paid tax here for many years. They are local in that they are a vital feature of Hong Kong's character and have played a role in building Hong Kong's reputation for the quality of its legal services. Of equal importance is the fact that they are able to contribute to the development of the PRC's legal system in the future and should be allowed to do so, both for the benefit of the PRC and those foreigners wishing to invest and do business in the PRC, and whom the PRC wishes to attract.

Endnotes

1 See Lavender, "Who Benefits from CEPA? Let's Wait and See," China Law & Practice, September 2003, 17(7), pp. 15-18.

2 The Chinese text, which is the only authoritative text, makes this fairly clear.

3 In English, this should probably be rendered "or" instead of "and".

4 The English courtesy translation of Annex 5 refers only to "registered practising lawyers". The Chinese authoritative version reads 香港注册执业律师, i.e. "Hong Kong registered practising lawyers" (emphasis added). It is therefore not sufficient to be a registered practising lawyer in a jurisdiction other than Hong Kong. Moreover, one may ask exactly what is intended by the word "practising" (执业).

5 The authoritative Chinese text uses a phrase meaning "running business jointly/in cooperation".

6 The same Chinese terms are used to describe the CEPA Annex 4 association between a Hong Kong law firm and a PRC law firm.