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China Updates — June 2023

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Hong Kong Launches Public Consultation on Proposed Corporate Re-Domiciliation Regime

The Hong Kong Special Administrative Region (“HKSAR”) Government has recently launched a public consultation relating to the introduction of a new regime, allowing companies incorporated elsewhere to re-domicile to Hong Kong.  

Under the proposed new regime, a non-Hong Kong incorporated company would be allowed to relocate its place of incorporation to Hong Kong while retaining its legal identity as a corporate entity. This process ensures seamless continuity of business operations during the relocation. In contrast to alternative methods of relocation to and incorporation in Hong Kong, the administrative burden involved in re-domiciliation is significantly lighter.  

In the absence of a re-domiciliation regime, foreign companies would have to undergo the process of winding up their original incorporation and subsequently setting up a new one in Hong Kong. This would usually incur substantial legal costs and disrupt operations. Further, it may lead to the loss of assets, intellectual property and other property rights, contractual relationships, and corporate history.  

The proposed re-domiciliation regime is aimed at the following five types of entities (or their equivalents in the home jurisdiction):  

  • private companies limited by shares; 
  • public companies limited by shares; 
  • companies limited by guarantee with a share capital; 
  • private unlimited companies with a share capital; and 
  • public unlimited companies with a share capital.

Upon re-domiciliation, the entity will be subject to the same obligations and hold the same rights as any other company incorporated in Hong Kong. In other words, it must comply with the provisions as set out under the Companies Ordinance.  

Hong Kong and Guangdong Province to Further Deepen Cooperation

Hong Kong and Guangdong Province are committed to enhancing cooperation and deepening cross-boundary ties to foster greater integration of the economies within the Greater Bay Area (“GBA”). With the axing of travel restrictions and resumption of cross-boundary travel, the HKSAR Government has pledged to make more frequent visits to Guangdong Province and enhance dialogue with local officials. 

According to the Guangdong provincial government, the province’s commitment to high-quality development presents plentiful business opportunities for domestic and international investors, including companies based in Hong Kong. Additionally, Hong Kong businesses are encouraged to contribute capital, technology, and managerial expertise to bolster cooperation efforts.  

To this end, Guangdong is focused on nurturing strategic industries, including digital technology, new materials, and renewable energy, while simultaneously consolidating its role as a key manufacturing hub in the country. 

Guangdong is already home to 210,000 entities that are affiliated with Hong Kong-based enterprises, which constitute 70 per cent of non-mainland Chinese companies in the province. Over 9,000 Guangdong-based businesses have, in turn, set up operations in the international metropolis. 

Hong Kong to Abolish Mandatory Provident Fund Offsetting Arrangement

Last year, the Hong Kong Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (“Bill”). The Bill provides for the abolition of the Mandatory Provident Fund (“MPF”) offsetting mechanism. The HKSAR Government has recently confirmed the legislation’s effective date, which will be 1 May 2025.  

As the law currently stands, employers are permitted to reclaim their contributions made to employees’ MPF schemes to offset against their severance or long-service payment obligations. As a consequence, the staggering amount of contributions being offset has led to curtailed retirement protection, whereby pension funds are diminished or even depleted after the offsetting arrangement. 

Under the Bill, employers will no longer be allowed to recover the mandatory contributions that they have paid towards employees’ MPF schemes to cover severance payments or long-service payments. The offsetting of voluntary contributions and gratuities based on years of employment can, however, still be applied.  

To lighten employers’ financial burden as a result from having to dig into their own purse, the HKSAR Government has announced plans to introduce a 25-year subsidy scheme to the tune of HKD 33 billion. During the first three years of the scheme, an employer’s liability for severance and long-service payments shall be limited to HKD 3,000 per employee, with total liability capped at HKD 500,000 per annum.

Starting from the fourth year, the amount to be shouldered by employers will gradually increase, while the subsidy amount will correspondingly decrease. The ceiling in respect of the maximum aggregate amount payable for severance and long-term payments remains unchanged at HKD 390,000 per employee.  

China Introduces Support Measures to Promote Innovation in SMEs

The Ministry of Industry and Information Technology, the National Development and Reform Commission, and the Ministry of Science and Technology, together with seven other departments, have jointly issued the Special Action Plan for the Intelligent Empowerment of Small and Medium-sized Enterprises through Research Results (2023-2025) (“Plan”). 

The Plan highlights the central role played by SMEs as engines of economic growth and social development. They are considered an important force in driving innovation, creating employment, and improving people’s livelihoods.  

In addition, the Plan delineates ten measures to promote scientific and technological innovation in SMEs, and to enhance their core competitiveness. These measures include: 

  • Encouraging SMEs to commercialise research outputs; 
  • Helping SMEs in effective value chain mapping; 
  • Introducing tax incentives to promote the commercialisation and industrialisation of research endeavours; 
  • Improving the innovation capabilities of SMEs; 
  • Facilitating the full leveraging of government investment funds by SMEs; 
  • Increasing the scope of direct investments in high-quality SMEs.  
Northbound Swap Connect Officially Launched

The much-awaited Swap Connect scheme has been rolled out in Hong Kong. Initially, the scheme will only be open for northbound trading. It will serve as an efficient and secure channel for foreign investors who wish to trade interest rate swap products in the mainland’s interbank financial derivatives market. 

Eligible products under the Swap Connect include renminbi interest rate swaps benchmarked to 7-day Repo, SHIBOR 3-Month, and SHIBOR Overnight.  

The scheme’s introduction signifies a major step towards the progressive liberalisation of mainland capital markets. The significant milestone comes after the successful launch of predecessor connect programmes in stocks, bonds, exchange-traded funds, and wealth management products over the past decade.  

According to the Hong Kong Exchanges and Clearing, during the first quarter of this year, 1,082 foreign institutional investors traded to the tune of RMB 37 billion in mainland bonds on average every day. The figure represents a nine per cent increase from the same period last year.  

The Chief Executive of the Hong Kong Monetary Authority observed that the scheme “will create favourable conditions for global investors to increase their participation in the onshore bond market, and carries special significance for enhancing the recognition of and confidence in RMB bonds in the international market… It will also provide new opportunities for Hong Kong’s financial institutions and strengthen Hong Kong’s role as a global risk management centre and offshore RMB hub.” 

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