ChAFTA Case Study: Professional Services (Legal) - King & Wood Mallesons

Professional Services (Legal) - King & Wood Mallesons (KWM)

KWM background and China operations

King & Wood Mallesons (KWM) is the world's first and only global law firm headquartered in Asia.

KWM was established in March 2012 by the combination of Australia's leading law firm Mallesons Stephen Jaques and China's leading law firm King & Wood. In November 2013, KWM combined with leading European firm SJ Berwin, providing regional and international clients with unrivalled inbound and outbound expertise and execution capability. KWM is run on an integrated basis, making it one of the few genuine Australian–Chinese integrated businesses.

KWM is the only firm in the world able to practise PRC, Hong Kong, Australian, US, English and European law. It has 32 offices on a global basis with approximately 2,700. It has 10 offices in China and approximately 1,200 lawyers, with a further 5 offices in Australia and approximately 700 lawyers. On a global basis, 71 per cent of KWM (in terms of revenue and headcount) is in the Asia–Pacific and approximately 30 per cent of its global revenue is generated in China.

KWM is a full-service commercial law firm delivering a full range of transactional, financial and litigation capability. Its clients include many of the major State-Owned Enterprises and privately owned Chinese companies, Chinese-based financial institutions, international companies operating and expanding into the region, as well as major multinational corporations and enterprises.

China strategy

As China continues to internationalise and open up its markets, KWM has set a clear strategy to support Chinese organisations investing or doing business on a global basis, and international companies looking to expand into the region and, in particular, China. It is focused on becoming the ‘firm of choice’ for inbound and outbound Chinese investment and growing its global corporate, capital markets, securities and funding practices with a focus on China and Asia. Its global network and capability provides the platform, products and people that support the local depth of its practices in Australia and China, and which will be required to successfully execute this business plan.

With its leading positions in the legal profession and business communities in China and Australia, it has a specific regional strategy relating to China–Australia trade, investment and capital flows, and has an integrated business platform across China and Australia to support its clients to execute their business transactions.

Impact of ChAFTA on KWM business operations in China 

KWM welcomes the liberalisation of restrictions on international law firms which is provided by ChAFTA for operations in the Shanghai Free Trade Zone. ChAFTA allows Chinese and Australian law firms to establish commercial associations within the Shanghai FTZ that can offer advice on Australian, Chinese and international law across China.

While it sees this as a positive development, there will not be significant impact for KWM as they are already able to practise Chinese law and international law as a combined law firm. KWM has depth of domestic and international capability in China. It will observe with interest in what form some firms may choose to set up associations in the Shanghai FTZ. It  welcomes competition which vindicates its strategy and it will continue to use its first-mover advantage to facilitate a stronger long-term relationship between clients in Australia and in China.

KWM also welcomes the liberalisation of visa requirements for the transfer of employees within and across integrated businesses between China and Australia which is provided by ChAFTA. The integration of a Chinese and Australian business requires people-to-people connections and the establishment of personal relationships of trust, respect and confidence.  This is achieved by spending time in each other's countries and places of business, working together on combined transactions for clients, understanding each other's way of business and thinking, and getting to know each other.  

KWM has started to implement a significant transfer program across the firm with the sole purpose of driving this type of integration across the combined business.  As this is an intra-business transfer, and does not replace or affect the employment of local lawyers or other staff in any of its operations in China or Australia, a more flexible visa system that supports the transfer of people on this basis in a time and cost efficient manner (together with the simplification of the individual tax position of each such transferred person, so that they are not subject to double taxation in China and Australia) is a significant support for a business such as KWM.

ISDS

KWM understands that the investment obligations contained in ChAFTA are still to be developed fully, and that negotiations between Australia and China over the next few years will likely result in a more detailed and specific regime for investors. The ISDS mechanism in ChAFTA provides Australian investors in China with the ability to enforce investment protection obligations contained in ChAFTA, and which partly mitigates any risks of investing in China. As a consequence, Australia is required to provide the same protections to Chinese investors in Australia. As such, KWM supports the inclusion of the ISDS provisions in ChAFTA as an appropriately balanced protection for mutual investment between Australia and China.

An ISDS provision is for a specific purpose and, in ChAFTA, is subject to some limitations.  Its provisions are also yet to be developed fully. ISDS provisions are only one consideration that an investor should take into account when making a cross-border investment.  ISDS provisions do not take the place of sensible precautions that an investor should take to mitigate risks in a commercial transaction, and should be viewed on that basis.

Areas for improved market access

ChAFTA will give Australian companies unparalleled access in the developing services markets in China, and the government, with the support of business, should now focus on the measures needed to ensure that the agreement is able to meet its desired objectives in practice. A key part of this is a review of how tax between the two countries will operate following the ratification of the agreement.

Under ChAFTA Australia and China have agreed to review bilateral taxation arrangements to improve trade and investment conditions following implementation of the agreement. The review will take into consideration mutual economic objectives and international taxation standards and will cover existing double taxation and prevention of tax evasion.

While there is no certainty as to what the specific areas for negotiation will be, based on recently negotiated agreements, some of the areas for discussion should include:

•    reducing the rate of dividend withholding tax on unfranked dividends from 15% to either 10%, 5% or even zero in specific circumstances

•    reducing the rate of interest withholding tax to nil where it is paid to a resident financial institution in the other contracting state

•    providing for an exemption from capital gains tax where the interest being disposed of is a non-controlling interest in a company (an exemption from tax where the ownership interest in a non-land-rich company is less than 25% has been negotiated elsewhere)

•    possible negotiation of a Double Taxation Agreement with Hong Kong.

KWM fully supports the built in agenda that includes a set review to be held within three years of entry into force and every five years thereafter to consider ‘deepening liberalisation and further expansion of market access’. The reviews are an open channel to pursue further gains for Australia in the context of trade with China.