China: New VAT Law passed – Companies must adapt | RÖDL

On 25 December 2024, the Thirteenth Meeting of the Standing Committee of the Four­teenth National People’s Congress passed the Value-Added Tax Law of the People’s Republic of China (the “VAT Law”) and determined that it will become effect­ive on 1 January 2026, and that the existing Interim Regulations of the People’s Republic of China on Value-Added Tax (the “Regulations”) will be repealed at the same time.

Throughout the VAT Law, the main content of the existing VAT Regulations has basically been continued, but there are still a few noteworthy highlights, and individual provisions have substantially changed the content of the existing Regulations, to which enterprises should pay attention.

• Adjustments to taxable transactions »

• Updated definition of domestic taxable transactions »

• Clarification of the scope of non-taxable items »

• Potential relaxation of the scope of input tax credits »

• Narrowing of the concept of “deemed sales” »

• Legalization of the tax credit refund »

• Improvement of the sales adjustment mechanism »

• Continued advancement of tax rate simplification »

• Our observations »

Adjustments to taxable transactions

The VAT Law redefines the scope of taxable transactions as the sales of goods, services, intangible assets and real estate within China. It is worth noting that the separate item of “processing, repair and replacement services” previously listed in the Regulations has been integrated into the category of “services”, which helps to simplify the categorization criteria of taxable transactions and make the tax provisions clearer and easier to understand.

Updated definition of domestic taxable transactions

Article 4 of the VAT Law redefines taxable transactions for the sales of services and intangible assets by limi­ting them to those where the services or intangible assets are consumed within the territory of China or where the seller is a domestic unit or individual. Compared to the current Regulations, which rely on whether either the seller or the buyer is located in China, the new VAT Law defines the term in a way that focuses more on the place of consumption and the nature of the seller. However, the key concept of “consumption within the terri­tory of China” is expected to be further clarified in subsequent regulations to provide a practical basis for relevant tax collection and administration.

Clarification of the scope of non-taxable items

The VAT Law provides a clearer list of non-taxable items and removes the item of “other circumstances stip­ulated by the competent departments of finance and taxation of the State Council” as “catch-all” clause in the original Regulations. This change means that in the future, non-taxable items will be recognized strictly in ac­cordance with the provisions of the law and will no longer rely on additional regulations of the finance and tax­ation authorities. For enterprises, especially those involved in asset restructuring, they need to focus on whet­her the transfer of goods, real estate and land use rights can still be regarded as non-taxable items. If not, enterprises will face higher financial pressure during reorganization and need to prepare tax planning and finan­cing in advance. This part needs to be further clarified by subsequent regulations.

Potential relaxation of the scope of input tax credits

Article 22 of the VAT Law lists the non-deductible input tax, which does not include loan services, which may indicate that the input tax generated by loan interest is expected to be included in the scope of input VAT deduction in the future. In addition, for catering services, life services and entertainment services, the new VAT Law adds the criterium of “purchased and directly used for consumption” to the non-deductible input tax amount. This seems to indicate that if these services are not directly used for consumption, their corresponding input tax may be allowed to be deducted. However, due to the frequent occurrence of these services in practice and the variety of circumstances, the precise definition of “directly used for consumption” still needs to be fur­ther clarified, so that enterprises can accurately grasp the criteria for deduction in actual operation.

Narrowing of the concept of “deemed sales”

In the current VAT Regulations, “deemed sales” is a broad concept covering a wide range of situations. The VAT Law redefines it as “deemed taxable transactions” and imposes stricter limits on the circumstances. For ex­ample, the transfer of goods across counties (cities) is regarded as sales in the current Regulations, but the new VAT Law does not include it in the scope of deemed taxable transactions. This means that in the future, VAT invoices may no longer be required for the transfer of goods between different organizations of the same com­pany, thus simplifying the relevant tax treatment process. However, this may also lead to a situation where the organization transferring the goods has a large amount of input tax but no output tax, while the organization to which the goods are transferred has output tax but no input tax, and how to properly deal with this situation requires attention to the specific provisions of the subsequent regulations.

In addition, the VAT Law also clarifies that “providing services to other units or individuals without compen­sation” is no longer deemed as taxable transaction. This adjustment may have an impact on the VAT treatment of common businesses such as the provision of free services, interest-free loans and the free use of real estate within the Group. Enterprises are required to review the tax compliance of these businesses and make corres­ponding adjustments in accordance with the requirements of the new regulations.

Legalization of the tax credit refund

Article 21 of the VAT Law clearly stipulates the mechanism of input tax credit refund, whereby taxpayers can choose to carry forward the tax credit or apply for refund in accordance with the provisions of the State Council if the current input tax amount is higher than the current output tax amount. This provision elevates the tax refund from policy level to legal level, provides taxpayers with more stable tax expectations, helps enterprises rationally arrange the use of funds, and reduces the financial pressure brought about by the occupation of funds due to input tax credit remained.

Improvement of the sales adjustment mechanism

Article 20 of the VAT Law adds new provisions on sales adjustment, specifying that the tax authorities have the right to verify the sales revenue when the sales are obviously low or high without justifiable reasons. The exis­ting provisions only apply in the case of obviously low sales, while this adjustment of the new VAT Law provides a more comprehensive legal basis for the tax authorities in the face of unreasonable behaviors such as over­inflated sales revenue. This helps to regulate the tax behavior of enterprises and prevent them from manipu­lating sales through improper means, thus maintaining tax fairness and order.

Continued advancement of tax rate simplification

Simplification of VAT rates has been an important direction of tax reform in recent years. The VAT Law stipu­lates that the levy rate applicable to the calculation of VAT payment by the simplified tax method is 3 percent, but it does not mention the current levy rate of 5 percent under the simplified tax method applicable to labor dispatch services, human resource outsourcing, sale of real estate, real estate leasing and other services. This may indicate that the VAT burden for these services will be reduced in the future. Enterprises need to pay close attention to the specific provisions of the subsequent regulations to adjust their tax planning strategies in time to fully enjoy the dividends brought by the tax reform.

Our observations

The VAT Law has made a lot of substantive updates under the premise of taking into account the stable im­plementation of the existing laws and regulations, some of which need to be followed up to ensure a smooth transition after the implementation of the new VAT Law. We will continue to pay attention to the advancement of the new VAT Law and regulations and share with you the interpretations and treatments of the relevant issues by the tax authorities in practice.