China reforms VAT: What companies need to bear in mind now

​​​​​​​​published on 9 september​ 2025 | reading time approx. 5 minute​s

​​

 

Tax liability for services: place of consumption becomes decisive

The VAT Law redefines taxable transactions for the sale of services and intangible assets. In future, the decisive factor will be whether consumption takes place within the territory of China. This new regulation presents companies with the challenge of clearly determining the place of consumption – an aspect that is often complex in practice.

What is considered non-taxable?

• are provided by foreign companies or persons,

• a​re sold to Chinese companies or individuals,
• and are consumed/used on site abroad.​

What is subject to tax?

Sales of services and intangible assets are taxable if they:

• are provided by foreign companies or individuals,
• and are directly related to domestic goods, real estate or natural resources.​

These services are considered to be consumed within China and are therefore subject to Chinese VAT.

Special features of cross-border transactions​

When Chinese companies purchase services abroad and also consume them there, the VAT chain remains entirely abroad. This ensures tax neutrality. The situation becomes more complex in the case of transactions between foreign companies relating to domestic goods. In such cases, it is very likely that the services will be classified as taxable transactions, even if the recipient of the services is not based in China.

The exact interpretation of the term "directly related" is still open and will be clarified in later regulations. Foreign companies in particular should carefully review this article of the draft. An early assessment of one's own service relationships can help to avoid tax risks and ensure compliance with the new regulations.

Input tax deduction in China: new restrictions and clarifications​

The implementing provisions for the new Chinese VAT law specify which input taxes will not be deductible in future. The aim is to increase tax transparency and sharpen the distinction between business and private expenses.

Finance-related services remain excluded

Article 20 of the draft confirms that input tax on the following services may not be deducted:

• Loan services
• Investment and financing advice and processing and consulting costs related to loans and paid to lenders​

This confirms that loan services will continue to fall outside the scope of non-deductible input tax.

Entertainment expenses are considered personal expenses​

Article 21 of the draft clarifies that even business-related entertainment expenses fall under the category of personal consumption and are therefore not eligible for input tax deduction. This regulation creates a clear basis for the tax treatment of such expenses.​​

New rules for mixed-use assets

In future, differentiated requirements will apply to long-term assets with mixed use, i.e. those used for both deductible and non-deductible purposes:

• Value below CNY 5 million: full input tax deduction possible
• Value above CNY 5 million: initially full deduction, later annual adjustment based on the depreciation or amortization period
  

​

This regulation replaces previous flat-rate approaches and requires a more precise allocation of use. The new provisions on input tax deduction provide greater clarity – but also introduce new requirements. 

Companies should:​

• Review their cost structure for non-deductible items
• Reassess entertainment and financing services for tax purposes
• Carefully document and allocate investments over CNY 5 million​

Early analysis helps to avoid incorrect entries and ensure compliance with the new VAT framework.

Distinguishing between ancillary transactions and mixed sales: new assessment criteria ​

The new VAT law in China stipulates that for transactions involving multiple services and different tax rates, the tax rate of the main activity applies – but only under certain conditions.

According to the draft, for this to apply:

1. The transaction must involve several activities with different tax rates, and
2. There must be a clear main-ancillary relationship between the activities. The main activity must characterize the purpose and content of the transaction, while the ancillary activity is merely a supplement.​
   

If these conditions are not met, the services are considered secondary activities. In this case, sales must be reported separately. If no separation is made, the higher or highest tax rate is applied. 

VAT refunds on exports: note the new deadline​

Previously, companies could apply for VAT refunds on exports even after the regular deadline had expired – provided that a foreign currency payment receipt report was available. There was no legal deadline for treatment as domestic turnover.

The draft introduces a clear rule here: Export sales are considered domestic and are taxable if the VAT refund or exemption is not applied for within 36 months – calculated from the date of the export declaration or the sale of cross-border services. Companies should adapt their internal processes accordingly to avoid tax losses due to missed deadlines. 

ANTI Tax avoidance: General provision introduced​

Article 56 of the draft introduces a general rule to combat tax avoidance in the Chinese VAT system. The aim is to strengthen tax fairness and ensure the integrity of the tax system. The regulation allows the tax authorities to make appropriate adjustments if transactions are carried out without an economically comprehensible purpose and thereby:​

• reduce, defer or avoid the payment of VAT, or
• accelerate or increase VAT refunds.​

The focus is on artificially constructed arrangements that serve solely to optimize taxation and have no substantial economic background. This provision aims to prevent the erosion of the tax base and the shifting of profits. It creates a legal basis for correcting abusive structures and ensuring that taxpayers do not circumvent their obligations through formal but economically unjustified arrangements.

Internationally active companies in particular should review their transaction structures with regard to economic substance and tax objectives. Transparent documentation and comprehensible economic justification are crucial to avoid tax risks and adjustments by the authorities.

VAT reform in China: classification, impact and need for action

The implementing provisions for the new Chinese VAT law create a clear and more systematic framework for the application of VAT in cross-border transactions. They specify key terms, close previous regulatory gaps and strengthen the enforceability of the law in practice.

At the same time, they increase the requirements for companies – particularly with regard to documentation, deadline control and the economic substance of transactions. The planned regulations affect not only operational processes, but also strategic decisions in the structuring of services, investments and supply chains.

Companies with links to China should in particular:

• Check service relationships for tax relevance
• Reassess the input tax deductibility of financing and entertainment costs
• Adapt export processes to the new refund period
• Analyse transactions for economic substance and tax objectives
• Document and correctly allocate investments exceeding CNY 5 million​

​​The final version of the implementing provisions remains to be seen. However, it is foreseeable that the Chinese tax authorities will pay even greater attention to economic reality and substance in future. Those who deal with the details at an early stage can not only avoid risks, but also identify scope for manoeuvre – and in case of doubt, it is worth taking a second look at your own structure.