1 Hong Kong as the Preferred Platform for Doing Business in China Huen Wong President The Law Society of Hong Kong Prague, Czech Republic.

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Hong Kong as the Preferred Platform for

Doing Business in China

Huen WongPresident

The Law Society of Hong Kongwww.hklawsoc.org.hk

Prague, Czech Republic20 January 2011

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Hong Kong Attractiveness

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• Well-established legal system

- under ‘One Country Two Systems’, the Hong Kong legal system is separate and distinct from that of

Mainland China

- the Hong Kong common law system is widely accepted by the international business community as reliable

• Independent Judiciary

• Simple and low tax regime

• Leading capital market and financial centre

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• Regional trading hub with global connections

• Quality manpower and professional services

• Proximity to Mainland China

• Efficient government

• Corruption-free

• Free trade and free market economy

• Logistics centre with efficient transportation network

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Using the Hong Kong platform to trade in Greater China

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• Hong Kong is a preferred platform to trade and do businesses in the Greater China

• Opportunities under Closer Economic Partnership Arrangement ("CEPA") between Mainland China and Hong Kong

– Zero tariff for HK origin products exported to Mainland China

– R&D facilities / Production of proprietary products with high IP value in Hong Kong (effective IPR protection regime)

• Opportunities for tax planning

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• Hong Kong – a base for brand/merchandise licensing business in China and the Asian region

• A hub for trading with Asia-9 Economies

- Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand

• Regional headquarters for exports of OEM, ODM or OBM products from Mainland China to the world

• A Hong Kong base for overseeing your regional business operations in Greater China and Asia

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Managing your ongoing relationship with your equity partners in Mainland China

through a joint venture structure in Hong Kong

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• Czech businesses investing directly in Mainland China invariably face relationship problems with their local equity partners. But, local partners are essential for their business operations on the ground in Mainland China

• One common structure for relationship management is to incorporate a joint venture with your Chinese equity partners in Hong Kong, and to use this JV (HK Hold Co) for setting up a Wholly Owned Foreign Enterprise (“WOFE”) in Mainland China

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• For instance, managing JV relationship by

- appropriately drafted shareholders agreement- stock option plan- asset/business management agreement- providing for dispute resolution by arbitration in Hong Kong- choosing Hong Kong as governing law, etc.

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Strategies for Domestic Sales in China and Manufacturing

Processing for Exports

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• Domestic Sales of your manufactured products in China

- By using your HK Hold Co. to set up a WOFE to operate your China factories for production of your products.

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• For export of your products to the world- you may enter into OEM, ODM or OBM Processing

Agreement with China manufacturing processing factories of your products for export to the world by your HK Hold Co.

- Hong Kong only taxes on profits arising from or derived in Hong Kong. For manufacture processing in Mainland China, there may be 50% deduction of the usual profit tax rate of 16.5%- Generally, no customs duties for machineries and raw materials imported to your processing factory in

Mainland China

• Obtaining trade and equipment financing from local Hong Kong banks by your HK Hold Co.

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Hong Kong as a Gateway for Chinese Outbound Investments

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• Hong Kong is an ideal platform for expanding cross-border investment activities of the Mainland:

- familiarity with the investment and trading environment globally and the trading and investment in the Mainland

- excellent global commercial connectivity

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• In 2008, the total outward direct investment of the Mainland amounted to over US$50 billion, out of which Hong Kong was the largest recipient taking up 69.1% (US$38.64 billion) of the total investment flowing mainly to business servicing, wholesale and retail industries.No. Country (Region) Amount ﹝US$ billion﹞

1Hong Kong, China 38.642 South Africa 4.8083British Virgin Islands 2.1044Australia 1.8925 Singapore 1.5516Cayman Islands 1.5247Macau, China 0.6438Kazakhstan 0.4969USA 0.46210Russia 0.395

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Managing contractual / commercial disputes by arbitration in Hong Kong

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• Cross-border transactions invariably give rise to contractual and commercial disputes. Czech companies trading / investing in Mainland China may minimise the risk of uncertainties in foreign law and foreign judicial system; and the danger of home-town justice acting in their disfavour by providing an appropriate arbitration clause in the contract

• Dealing with your trading / investment partners in China, it always works if you negotiate for a clause for arbitration in Hong Kong, and a choice of Hong Kong law as the governing law of contract

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• The arbitration law in Hong Kong has also been recently reformed. Hong Kong now adopts a unitary regime of arbitration on the basis of UNCITRAL Model Law for all types of arbitration, abolishing the distinction between domestic and international arbitrations

• The Model Law is widely accepted by many jurisdictions around the world and is familiar to practitioners from civil law as well as common law jurisdictions

• This further reinforces Hong Kong as a leading centre for international arbitration and dispute resolution

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• With a Hong Kong arbitration clause, there are established regimes under Hong Kong laws to protect your rights in case of disputes:

(1) Stay of proceedings in the local Mainland Chinese court, thereby minimising the danger of home-town justice

(2) Appointment of arbitrator of your choice or by the President of the Law Society of Hong Kong or by Hong Kong International

Arbitration Centre in case of deadlock of such appointment in the absence of consent between the parties

(3) Enforcement of Hong Kong arbitration awards against defendants in Mainland China under the established reciprocal enforcement arrangements between Hong Kong and Mainland China (same as the New York Convention)

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• Under the Mainland Judgments (Reciprocal Enforcement) Ordinance:

- by the choice of the parties, certain commercial judgments by either the Mainland Chinese courts or the Hong Kong courts may be enforced reciprocally by the other court

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Thank you !