China’s New VAT Rules: What Companies Need to Know Now

The Chinese VAT Law and its Implementing Rules will officially enter into force on 1 January 2026. In February, the State Administration of Taxation (SAT) followed up with several supporting regulations (Announcements No. 9–15/2026) to clarify transitional issues and harmonise implementation standards.

For companies – particularly foreign-invested enterprises in China – these updates do not represent fundamental changes. Instead, they refine, unify and clarify existing requirements. Due to the large number of detailed provisions, companies should assess at an early stage whether internal processes must be adapted to ensure compliance.

This article covers:

• VAT threshold
• Tax exemptions, simplified taxation, taxation on difference, and other tax incentives
• Stricter requirements for export VAT refunds
• Input tax credit
• Timing of tax liability for instalment‑based services
• Input VAT on long-term assets
• Our observations

VAT threshold

Sales of real estate are no longer excluded from the calculation of the sales threshold.

For small-scale taxpayers filing on a per-transaction (daily) basis, the sales threshold has been raised from RMB 500 to RMB 1,000. Concerning that the natural persons act as the primary taxpayers under the per-transaction system, the relevant tax administration announcement specifies three reporting methods:

• declaration when applying for an invoice issued by the tax authority,
• withholding declaration
• self-declaration

Therefore, if a natural person engages in taxable transactions meeting the prescribed criteria and the domestic enterprise paying the consideration has not received an invoice issued by the tax authorities on behalf of the natural person, the enterprise is obligated to act as the withholding agent and file a withholding declaration on behalf of the natural person.

Tax exemptions, simplified taxation, taxation on difference, and other tax incentives

Tax exemptions

The tax-exempt items remain largely consistent with previous regulations but are now categorized into two groups:

• permanent exemptions (from 1 January 2026)
• temporary exemptions (valid until the end of 2027)

Enterprises should pay particular attention to the following temporarily tax-exempt items:

• technology transfer, technology development, and related technical consulting and technical services
• direct or indirect international freight forwarding services
• interest income from unified borrowing and repayment operations

Simplified taxation

General taxpayers may continue applying the 5% simplified rate until the end of 2027 for specific legacy transactions, such as:

• leasing or selling real estate acquired before 30 April 2016
• transferring land‑use rights acquired before 30 April 2016

From 1 January 2026, simplified taxation will no longer apply to construction services involving owner‑supplied materials. Other business activities may remain subject to special rates such as 2%, 1.5% or 1%.

Taxation on the difference

Announcement No. 10 extends the option for taxation on the difference until the end of 2027.

It applies, among others, to:

• financial leasing
• subcontracted construction services, and
• labor dispatch services

It is worth noting that labor dispatch services are no longer subject to taxation on difference with levy rate at 5%. However, general taxpayers providing labor dispatch services could still be subject to the taxation on difference with the difference portion taxed at 6% and eligible for issuance of special VAT invoices.

Small-scale taxpayers, on the other hand, must be taxed on the full amount.

Stricter requirements for export VAT refunds

The new VAT Implementing Regulations impose time limits on VAT refunds on export. Failure to file within the prescribed period shall result in VAT being levied as domestic sales.

Announcement No. 11 specifies:

• Refund application deadline: The tax refund on export must be filed during the declaration period ending on 30 April of the following year and relevant foreign exchange shall be collected as required.
• Non-collected foreign exchange: For cases where foreign exchanges are not collected by 30 April of the following year and cannot be deemed as collected, the refunded (exempted) tax must be repaid. However, within the period specified in the contract and no later than the filing period within 36 months from the export date, enterprises may collect all relevant supporting documents, provide foreign exchange collection receipts, and file for tax refunds (exemptions) in accordance with regulations.
• Missed 36‑month deadline: Failure to file for tax refunds (or exemptions) within the 36-month period shall be deemed as domestic sales of goods. The above-mentioned period is calculated based on calendar days and is not extended due to holidays.

Additionally, the Announcement reiterates the regulations on the applicability of tax refund policies for export operations. Certain export activities shall not be qualified for VAT refund or exemption and must be subject to VAT as required. This includes common shell companies that do not substantively participate in export operations but instead accept and engage in other exports introduced by intermediaries while still exporting under their own name. This provision further eliminates business models involving non-substantive companies from the VAT perspective.

Input tax credit

Announcement No. 13 clarifies the deduction vouchers and administrative requirements for passenger transportation services, stipulating that special invoices must be obtained except under three specific circumstances. Therefore, when employees use ride-hailing services for business purposes, they must select an invoice containing their personal identification information to qualify as an input tax deduction voucher.

Additionally, the announcement clarifies the conditions under which asset restructuring does not constitute a “VAT-taxable transaction” or a “not-deductible non-taxable transaction”:

• The target assets must constitute an independently operable business
• Assets, bonds, liabilities, and employees must be transferred as a bundled package
• The transaction must have a reasonable commercial purpose
• Both parties must be general taxpayers

However, whether other common non-taxable transactions – such as government subsidy income, donation income, insurance claim income, and contract penalty income – should be classified as business activities or non-business activities, and whether input tax should be transferred out accordingly as “not-deductible non-taxable transactions” remains to be further clarified.

Timing of tax liability for services provided in instalments

According to Announcement No. 13, when taxpayers provide services by first collecting payment and then delivering services in installments or phases, the tax liability arises on the earlier date of the actual commencement date of the first service provision or the date specified in the contract. Taxpayers shall declare and pay VAT on the full amount of payment received. Enterprises must closely monitor the tax obligation timing for this type of transaction.

Input VAT on long-term assets

The VAT Implementing Rules introduces a RMB 5 million threshold rule for input tax credits on long-term assets (including fixed assets, intangible assets, and real estate) which are not specifically used for general taxation items. As a supporting policy, the Interim Measures for Input Tax Credit Deduction on Long-Term Assets systematically clarifies the scope of long-term assets, input tax credit deduction and adjustment procedures, and relevant administration rules.

The above measures apply only to new long-term assets with an original value exceeding RMB 5 million acquired after 1 January 2026, or to long-term assets that are completed with renovation for capitalization after 1 January 2026, with the original value after renovation exceeding RMB 5 million (but the measures apply solely to the input tax corresponding to the renovation part).

The Chinese E-Tax system has now launched a new administration module for long-term asset input tax, enabling full-process control over asset-invoice reconciliation, credit deduction, and adjustment.

Key takeaways

With the intensive implementation of a series of supporting VAT regulations in February 2026, the Chinese VAT legal framework has formally transitioned from “legislative completion” to a new phase of “precise execution”. Enterprises could take the following steps to mitigate the compliance challenges brought by the new VAT law.

Conduct a tax health check

• Cross-reference with Announcements No. 9-15 to systematically identify all business types relevant to the enterprise.
• Pay particular attention to the preferential periods in Announcement 10 and the revised credit rules for “long-term assets over RMB 5 million” in Announcement 15 and adjust tax calculation models accordingly.
• For export enterprises without substantive operations, consider injecting operational substance.

Strengthen internal controls

In response to withholding obligations for transactions with natural person (Announcement No. 9) and standardized requirements for input tax credit vouchers such as passenger transportation service invoices (Announcement No. 13), enterprises must embed compliance requirements at the business frontend to ensure fulfillment of withholding obligations and proper input tax credits.

Closely monitor export VAT refund deadlines

Exporting companies should:

• implement dynamic document and deadline tracking
• monitor the 30 April and 36‑month deadlines
• ensure timely foreign‑exchange collection

The goal is to avoid tax penalties resulting from late filing or unverifiable foreign currency transactions.

Closely manage complex transactions

For open issues not yet fully clarified, such as determining non-business activities (e.g., whether government subsidies or penalty fees constitute non-deductible non-taxable transactions), enterprises should closely track the implementation interpretations of local tax authorities or consult with competent tax authorities prior to major transactions to mitigate potential dispute risks.

For any questions regarding China’s new VAT rules and their implications for your business, our tax specialists in China will be happy to assist you.