Home
published on 3 November 2025 | reading time approx. 8 minutes
The objective is to establish a unified, open, and fair government procurement market and to ensure equal participation of all business entities. The Circular is based on the Government Procurement Law and the Foreign Investment Law. It aims to harmonize the rules governing participation of both domestic and foreign enterprises in public tenders and to ensure that procurement decisions follow clear and transparent criteria. At the same time, it explicitly prohibits discrimination on the grounds of ownership form, organizational structure, or investor nationality.
From 1 January 2026, where both domestic and non-domestic products compete in a tender, products meeting the domestic standard will receive a 20 % price-evaluation discount.
This means that, for evaluation purposes, the bid price of qualifying products is reduced by 20 %, without changing the actual transaction price.
If a supplier offers multiple products under one procurement package and the total cost of qualifying domestic products accounts for 80 % or more of the total product cost, the 20 % discount applies to the supplier's total quoted price.
A product qualifies as domestic if it meets the following conditions:
Suppliers must submit a “Declaration of Compliance with the Domestic Product Standard" or other proof documents approved by the MOF. Where a compliant declaration is provided, the procuring entity may not require any additional documentation.Submitting false declarations or falsified proof to win a bid will entail liability under the Government Procurement Law and may result in exclusion from future tenders.
The Circular expressly provides for equal treatment of all types of enterprises—state-owned, private, and foreign-invested. Procuring entities must not restrict participation by brand, place of registration, ownership structure, or investor nationality, and may not impose unreasonable or discriminatory conditions. Where international treaties or agreements to which China is a party provide otherwise, those provisions shall prevail.
Disputes related to the application of the domestic product standard will be handled within the existing complaint and supervision procedures of the MOF. The MOF or designated professional institutions may verify whether production occurred in China and whether the component-cost ratios were calculated in accordance
with the prescribed rules. All authorities and entities involved must keep business secrets confidential.
Implementation will proceed gradually from 1 January 2026. Within five years, product-specific ratios and requirements will be issued for each sector. Each new rule will include an additional three- to five-year transition period to allow enterprises to adjust their supply chains and production arrangements.
Foreign-funded enterprises will be able to enjoy the benefits under the Circular which expressly also mentions State-owned and private enterprises. It does not matter whether the subsidiary is a wholly foreign-owned enterprise (WFOE) or a Sino-foreign joint venture company (JV). The foreign-funded enterprise does not have to be a production entity. If it only carries out trading activities like import/export and wholesale, it may potentially still be able to enjoy the benefits as long as the products sold qualify as domestic products under the Circular. But it may be easier in practice for a production company to evidence and manage the requirements. Foreign investors can consider to “upgrade" existing trading companies to fully licensed production companies, including purchasing, production, and distribution functions. Company relocations, e.g. into China's designated industry parks and free-trade zones, have been made easier in 2025. Different localities are competing for respective investment projects, in particular if the project also involves research and development.A representative office in contrast will not be sufficient, since it is not a foreign-invested enterprise and also cannot carry out trading activities.
The holding of respective intellectual property (IP) is not a precondition for enjoying the benefits under the Circular. But starting local manufacturing or increasing the extent of local manufacturing may involve an IP license from abroad to China. It may in particular involve the licensing of registered patents, as well as unregistered technology and know-how. Under a localization approach, IP may also be concentrated in a China-subsidiary. An advantage could be that the local company owns the IP by itself including (registered) trademarks, patents, utility models, designs, and copyrights. If needed, the IP could also be licensed back to overseas affiliates.License fees charged between related parties currently face a strong audit focus of both tax and customs authorities. The respective transfer-pricing policy needs to be carefully designed. Companies should also check the overall business model, including whether the licensed IP might bring excessive profits to the licensor and whether key components will still be purchased from related parties.
In order to achieve the required cost ratio of components produced in China, companies may choose more local suppliers. This will increase the related risk exposure. It is important to upgrade respective diligence processes, including regular basic checks regarding the legal existence, legal representative, legal and potentially deviating physical address, status of paid-in registered capital, shareholders and beneficial owners (consider also sanction controls), conspicuous registry content. Depending on the individual case, companies may also need to carry out more in-depth checks. The respective processes can ideally be optimized to also meet future requirements under, e.g., EU law like the CSDDD. Companies should review their existing supply contracts, especially whether they contain all required supporting obligations. It is crucial that local suppliers provide all information necessary for the company to provide evidence of compliance with the Circular. Respective (automated, digitized) processes may need to be set up.
All collected data will be subject to China's stringent data protection regime. China has formulated and enacted more than 150 pieces of legislation related to cyberspace. This framework is comprised of laws, administrative regulations, departmental rules, local regulations, and local government ordinances. The three fundamental laws are the Cybersecurity Law (CSL), the Data Security Law (DSL), and the Personal Information Protection Law (PIPL).Companies need to make sure that the data processed in connection with the Circular meets all respective statutory requirements. In particular in case of the involvement of important data, (sensitive) personal information, and data exports to outside China, companies should assess their legal exposure.
In case production is shifted to China, this may lead to a function transfer from overseas. This may require a compensation by the Chinese subsidiary to its foreign headquarter. Without an appropriate compensation, significant tax risks can arise in Germany. On the other hand, a one-off compensation in the name of function/business transfer may be difficult to be implemented in practice, which is unlikely to be accepted by the Chinese tax authority and the Foreign Exchange Bureau. Structuring the compensation requires careful tax and legal design. This may be done e.g. via a split into various components such as tangible assets transfer, license of intangible assets, provision of support services.The transfer pricing (TP) policies for different types of transactions is a further issue. The one for intangible assets transfer will often be the most challenging. Differences in the tax regulations of the two jurisdictions may further complicate the issue. For example, the German tax authority may view the success of the Chinese subsidiary to be mainly attributed to the advanced technology licensed. The Chinese tax authority may emphasize the further development, enhancement, exploitation of the technology according to the specific needs of the Chinese market. The Chinese tax authority may further claim that location specific advantages such as location savings and market premiums also account for a significant proportion for the part of the success of the Chinese subsidiaries. The profit attributed to the efforts made by the Chines subsidiaries as well as those location specific advantages shall therefore be taxed in China. If the Chinese subsidiary still purchases part of the key component from overseas related parties, it needs to convince the Chinese customs authority that the licensed intangible assets do not include those used for the manufacturing of the key components. Otherwise, additional customs duties may also arise.In summary, one needs to find a balanced solution from both the Chinese tax, customs and German tax perspective, trying to mitigate the risks from all aspects as much as possible.
This Circular introduces, for the first time, a binding national definition of “domestic products" in China's government procurement system. While it formally guarantees equal treatment of all enterprises, in practice it will strongly favor goods produced within China and/or with significant local content. For suppliers from multi-national groups, local manufacturing and a higher share of Chinese-made components will become critical factors for maintaining competitiveness in public tenders.
Ralph Koppitz
Partner
Send inquiry
Frances Gu
