New Tax Administration Regulations Supporting the New VAT Law

Recently, the Chinese State Taxation Administration (“SAT”) has issued a series of tax administration regulations to support the implementation of the new Value-Added Tax Law, including:

• Launching the new version of “VAT and Surtaxes Return Form (Trial)” in five provinces and municipalities, i.e. Hebei, Jiangsu, Hubei, Shaanxi and Shanghai
• SAT Announcement [2026] No. 25, clarifying the rules for input tax credits on “non-taxable transactions”
• MOF and SAT Announcement [2026] No. 28, formally establishing a tax administration mechanism for domestic entities to withhold and remit VAT on behalf of natural person.

This series of supporting regulations, on the one hand, clarifies the input tax credit rules for “non-taxable transactions” introduced by the new VAT Law. On the other hand, it further refines the practical administration rules for VAT from two key dimensions: the restructuring of the tax return form system and the withholding obligations for taxable transactions involving natural person. Below, we outline the core changes in this regulation series and highlight some risks to be aware of in practical implementation.

Input tax credit rules for “non-taxable transactions”

“Non-taxable transactions” is a new concept set under the new VAT Law, while the Implementing Regulations of the VAT Law further introduce the rule of “non-creditable non-taxable transactions” explicitly stating that input tax incurred for such transactions is not eligible for deduction. However, the Implementing Regulations only establish the principle without specifying concrete applicable scenarios, leading to divergent interpretations in practice regarding whether input tax on various types of non-taxable transactions is deductible or not.

Announcement No. 25, through positive and negative list, clearly defines which non-taxable transactions belongs to “non-taxable transactions for which the input tax is not deductible. Then the criteria for input tax deduction are unified, which significantly enhances compliance certainty for taxpayers.

Six non-taxable transactions for which the input tax can be deducted (positive list)

Input tax attributable to the provision of services free of charge is fully deductible (e.g. shared services provided free of charge within group).

Input tax on non-monetary asset donations received by an enterprise is also fully deductible if the donating enterprise issues special VAT invoice to the recipient enterprise.

Input tax on income received by an enterprise from other “non-taxable transactions” including:

• Insurance claims received as the insured party;
• Penalty payments received due to non-performance of a contract where no taxable transaction has occurred;
• Transfer of receivables and other claims (excluding securities) related to the enterprise’s own taxable transactions;
• Fiscal subsidies received in accordance with relevant provisions that are not directly linked to the revenue or volume of the enterprise’s sales of goods, services, intangible assets, or real estate.

In practice, it is common for enterprises to purchase legal, tax, and other consulting services (such as drafting agreements, issuing legal letters, and preparing subsidy application documents) to obtain this non-taxable income. Announcement No. 25 clarifies that the input VAT incurred on these purchased services is fully deductible.

Three scenarios where input tax is not deductible (blacklist)

Income from share transfer (excluding securities) with consideration does not belong to taxable income. However, when engaging in share transfer transactions, enterprises typically incur specific expenses for financial, tax, and legal consulting services. In the past, enterprises often claimed input tax credits for these expenses as general consulting fees.

Similarly, dividends and bonuses received by enterprises from shareholding (excluding securities) and from holding common stock in joint-stock companies (including securities) do not belong to taxable income. Input VAT on related expenses (such as consulting fees and brokerage custody fees) incurred by enterprises to lawfully obtain such income is explicitly non-deductible. Enterprises with significant holdings of financial assets should pay particular attention to this provision.

For sales of goods, services, intangible assets, or real estate, which does not constitute taxable transactions occurring within the territory, the corresponding input tax credits are not deductible as no VAT liability arises.

Announcement No. 25 officially takes effect on 1 September 2026. The announcement also specifies that any unresolved matters that occurred between 1 January 2026 and 31 August 2026 shall be treated in accordance with this announcement. Consequently, for the scenarios listed in the aforementioned “blacklist”, input VAT on such expenses incurred after 1 September 2026 will be non-deductible and must be transferred out. If such expenses are incurred between January and August of this year, which invoices are not yet obtained or which input tax credit are not claimed, the input tax will no longer be permitted to be deducted.

Restructuring of the VAT return form system

As a key supporting tax administration measure for VAT Law and its Implementing Regulations, the new version of “VAT and Surtaxes Return Form (Trial)” was piloted in June in five provinces and municipalities (i.e. Hebei, Jiangsu, Hubei, Shaanxi and Shanghai). Announcement No. 6 clarifies the transitional filing rules for the old version of the return forms in non-pilot regions. This restructuring of the filing system aligns with the logic of the new tax regime, resulting in systematic changes to reporting criteria and column-filling rules.

Enterprises should pay close attention to the following key differences:

Differences in reporting input tax transfer-out

General VAT taxpayers in non-pilot regions will continue to use the old return form. Non-deductible input tax arising from non-taxable transactions, annual settlement adjustments, and long-term assets shall be uniformly reported in Column 23b of “Schedule (II)” titled “other circumstances requiring input tax transfer-out”. In contrast, the new return forms provide separate columns for reporting each of these three categories.

It is important to note that annual settlement adjustments apply only to situations where purchased goods or services are used for multiple taxable and non-taxable transactions which input tax cannot be allocated. In such cases, an annual settlement must be carried out based on the proportion of annual sales. It shall be noted that not all non-deductible input tax can be subject to an annual settlement adjustment in January of the following year.

Newly added schedule for un-invoiced revenue

The new form includes the new appendix of “Details of Un-invoiced Revenues” in “Schedule (I)”, where the positive and negative un-invoiced sales amounts must be reported separately. When issuing invoices retroactively for prior-period un-invoiced transactions, offsetting negative amounts must be linked to the corresponding previously reported tax period. If the absolute value of the negative offset exceeds the historical positive balance of un-invoiced revenue, the system will display a validation prompt. The previous practice of directly offsetting positive and negative net amounts when reporting un-invoiced revenue will no longer be applicable.

Integration of deduction items and simplified taxation forms

The new form integrates contents related to price deductions into “Schedule (II): Details of Deduction Items” consolidating all data for tax calculation based on the difference and price deductions. At the same time, a new “Schedule (III): Simplified Taxation Details” has been added to specifically record taxable information for simplified taxation items.

Withholding administration mechanism for taxable transactions of natural person

The obligation to withhold VAT for individual taxpayers has been legally established in the Implementing Regulations. But there have been no supporting operational rules or tax return forms. Announcement No. 28, as a supporting administrative document for the implementation of the new VAT Law, specifies the applicable scope, calculation rules and administrative requirements for the withholding of VAT.

It stipulates that, effective from 1 November 2026, enterprises that receive and pay for R&D services, software services, design services, consulting services, broadcasting and film/television program production services, cultural services and educational services provided by domestic individuals shall withhold and remit VAT and surtax on behalf of the individuals.

The tax filing system has simultaneously launched the “Return Form for Domestic Enterprise Withholding VAT and Surtax for Natural Persons” to facilitate the process. Enterprises that fail to fulfill their withholding obligations will face corresponding administrative penalties. The following three points deserve special attention from corporate taxpayers:

1. When an individual provides the above taxable transactions to enterprise, the taxation is based on a transaction-by-transaction basis, with a sales revenue threshold of CNY 1,000 per transaction (per day). Even if the sales amount does not reach the threshold and the transaction qualifies for a VAT exemption, the withholding agent is still required to file a tax return but is not required to withhold VAT.
2. If the enterprise has already withheld VAT, it may send an invoice issuance reminder to the individual. After the individual confirms this, enterprise may apply to the competent tax authority for the issuance of an invoice on behalf of the individual. In other words, applications for invoices issued on behalf of individuals may now be initiated by the enterprise and confirmed by the individual, which greatly streamlines the process for enterprises to obtain invoices and eliminates the need for excessive cooperation from individuals. Additionally, for taxable transactions described above, individuals may only apply to the tax authority for the issuance of ordinary VAT invoices on their behalf. This means that the VAT withheld by the enterprise cannot be claimed as input tax credits.
3. In addition to VAT and surtaxes, when enterprises pay for services provided by individuals, they must still withhold and remit individual income tax in accordance with the Individual Income Tax Law. Otherwise, the enterprise may still face administrative penalties. It is believed that the system will likely impose restrictions on subsequent applications for invoice issuance from enterprises that have failed to report and remit the withheld individual income tax.

Summary

With the implementation of the new VAT Law, several supporting tax administration rules have been successively introduced, clarifying certain practical disputes. Five provinces and municipalities have also launched a completely restructured VAT return form, which includes new modules such as enterprise information, non-taxable transactions, and input tax adjustment on fixed assets. The filing model has shifted from traditional result-based declaration to a business-tag-driven approach, laying a solid foundation for subsequent nationwide rollout and digital supervision.

It is recommended that all enterprises – whether currently included in the pilot program for the new VAT return or not – monitor changes to the new regulations, refine the tax records in accordance with pilot guidelines, standardize data collection in advance, and ensure compliance in preparation for the subsequent nationwide rollout and tax audits.

In the meanwhile, effective from 1 November 2026, enterprises will be officially required to withhold and remit taxes when purchasing taxable services from individuals. This change will have substantial compliance implications for enterprises’ external payment processes, contract terms, invoice management, and tax calculations. Affected enterprises should review their operations in advance and prepare corresponding measures at the institutional and procedural levels.