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| Jul 2007, Issue 14 |
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CEPA - Supplement IV between the Mainland and Hong Kong
On 29 June 2007, the Mainland and Hong Kong signed a Supplement IV to CEPA on further liberalization of trade in services in 28 sectors with effect from 1 January 2008. This again gives Hong Kong companies a first mover advantage as the overall liberalization measures under CEPA are ahead of the Mainland's commitments to the WTO.
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Hong Kong Companies or practitioners in the 28 services sectors may benefit from further or new liberalization measures:
- 17 existing CEPA services areas including legal, medical, property management, job intermediary, convention and exhibition, travel agency, etc.;
- 11 new services areas including market research, building-cleaning, photographic, printing, translation and interpretation, environmental protection, etc.; and
- Hong Kong individuals who operate individually owned stores (个体工商户) in China.
The highlights of this round of liberalization measures are:
- WFOE allowed in software implementation and data processing, project management services other than construction, job-intermediaries, building-cleaning, photographic, printing and binding services for packaging materials, translation and interpretation, organizing overseas exhibitions, environmental protection, insurance agency, organising group tours to Hong Kong and Macao in selected PRC locations, performing art agency and sports services;
- Cross border supply allowed in project management services other than construction, organising exhibitions in Guangdong and Shanghai, and performing arts agency services in Guangdong and Shanghai; and
- Lower entry threshold in setting up medical EJV and CJV, acquisition of Mainland bank and setting up travel agency.
PwC observation
CEPA offers favourable liberalization measures to Hong Kong Service Suppliers in various sectors and also further enhances Hong Kong's attractiveness as a spring board for foreign investors to enter the Mainland market. Investors that fall under the 28 services sectors covered by this round of liberalization may wish to revisit their current structure and evaluate how they can benefit from CEPA. Most of the sectors are newly opened to foreign investment and may therefore lack well-defined regulations or implementation rules. Some of these sectors may also be subject to special licensing requirements. An overall review of the group structure, careful research on the specific PRC requirements and navigating the appropriate application channel would be recommended in order to formulate and implement an optimal structure in China.
Latest PRC regulatory framework on franchising
The Ministry of Commerce ("MOFCOM") issued the Administrative Measures on Commercial Franchise Operation in 2004 ("the Measures"). It was the first regulation on commercial franchise promulgated after China's accession to the WTO. It superseded the old regulation issued by the former Ministry of Internal Trade in 1997.
On 6 February 2007, the State Council promulgated the Regulations on the Administration of Commercial Franchise Operation ("the Regulations") to better regulate franchise operations in China. Shortly afterwards, MOFCOM issued the Administrative Measures on Record Filing of Commercial Franchise Operation ("the Record Filing Measures") and the Administrative Measures on Information Disclosure of Commercial Franchise Operation ("the Information Disclosure Measures") on 30 April 2007 to supplement the Regulations by providing detailed implementation guidelines. The Regulations, the Record Filing Measures and the Information Disclosure Measures became collectively effective from 1 May 2007 and form the basic regulatory framework governing commercial franchising activities in China for both domestic and foreign players.
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The following are the salient points of the Regulations, the Record Filing Measures and the Information Disclosure Measures:
- Cross-border franchising
According to the Record Filing Measures, overseas franchisors are allowed to engage in franchising activities within China. This clarifies the major uncertainty inherent in the Measures of 2004, and opens the gate to cross-border franchising arrangement in China by allowing foreign enterprises ("FEs") to enter into franchise agreements with PRC franchisees directly.
- Filing requirement
Both the Regulations and the Record Filing Measures stipulate that franchisors are required to file franchising arrangements with MOFCOM (or its local branches) within 15 days upon conclusion of the first franchise agreement with a PRC franchisee. Accordingly, application for record filing should be submitted to MOFCOM at state level in case of cross-province franchise while franchising activities conducted within the same province should be submitted to local MOFCOM at provincial level.
MOFCOM or its local branches at provincial level should complete the record filing within 10 days upon receipt of the full set of application documents. The results of the record filing will be posted on MOFCOM's official website for public access.
- Requirements on "directly-operated outlets"
The Regulations require a franchisor to have operated at least two directly-owned outlets for more than one year, amongst other prerequisites for operating franchising activities in China. It is not a must that these two outlets be located in China. The Record Filing Measures further stipulate that in case the two directly-operated outlets are located overseas, the franchisor should submit copies of their business certification (with Chinese translation) for filing purpose. These copies should be duly notarised and attested by the Chinese Embassy in the jurisdiction where the outlets are located.
- Requirements on information disclosure
According to the Regulations and the Information Disclosure Measures, the franchisor should provide the PRC franchisee with the rather detailed information in writing, ranging from the background, capability of the franchisor, business plans, prices and conditions of the offerings to the franchisee, to the material litigation and arbitration, at least 30 days prior to the conclusion of the franchise agreement.
PwC observation
The regulatory framework governing franchising in China has become more well-defined with the Regulations, the Record Filing Measures and the Information Disclosure Measures coming into effect in May this year. Commercial franchise provides another solution for retailers to speed up market penetration in China.
It has now become clear that FEs can directly engage in franchising activities within China without first setting up an entity in China. When deciding whether to use an FE or a foreign investment enterprise as the franchisor to carry out franchising in China, foreign investors have to carefully compare the two modes of operation in respect of their tax implications, methods of collecting franchise fees and royalties, level of disclosure, and the effectiveness of providing support and training to franchisees, etc.
It seems that the Regulations and the Information Disclosure Measures have enhanced the protection of franchisees. For instance, a franchisee may terminate the franchise agreement if the franchisor fails to disclose the information required, and the franchisee may also unilaterally terminate the agreement after a certain period of time upon conclusion of the agreement. Unfortunately, there is no clear definition on how long such period of time should be. Amongst other terms, foreign investors should fully communicate with the proposed PRC franchisees the implications of the "exit" clauses before executing a franchising arrangement in China.
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