The Chinese Value-Added Tax Law officially takes effect

We will summarize the major changes in the newly implemented VAT Law and the Implementing Regulations, effective from 2026, compared to previous VAT regulations.

Definition of taxable transactions

The most significant amendment to the scope of the VAT-taxable items under the new VAT legislation involves the redefinition of the taxable transactions for the sales of services and intangible assets. The definition is amended from “either the seller or the buyer is located in China” to “where the services or intangible assets are consumed within the territory of China or where the seller is a domestic entity or individual”. This change aligns with global standards for attributing VAT revenue to the location where final consumption occurs, thereby preventing double taxation and eliminating the different interpretation on “consumption within the territory of China”.

For non-taxable transactions where domestic entities or individuals are required to consume services purchased overseas on-site outside China, this ensures that the VAT chain is fully realized overseas.

According to the Implementing Regulations, it should be further noted that services and intangible assets sold by overseas entities to other overseas entities that are directly related to domestic goods, etc., are deemed as taxable transactions consumed within the territory of China and subject to the Chinese VAT. However, the definition of “directly related to” requires further clarification through subsequent regulations.

Tax rates

The new VAT Law retains the three-tiered tax rates of 13 percent, 9 percent and 6 percent, and stipulates that the levying rate applicable to the calculation of VAT payment by the simplified tax method is 3 percent. But the applicability of the 5 percent levying rate under the simplified tax method and the taxation method on difference basis is expected to be further clarified in subsequent supporting regulations.

According to Public Notice No. 17 2025, which was issued jointly by the Ministry of Finance (“MOF”) and the State Taxation Administration (“STA”), the VAT collection rate for individuals selling real estate has been officially adjusted to 3 percent. Enterprises need to pay close attention to the specific provisions of subsequent regulations and transitional period policies, and in the meanwhile to revise core tax-related clauses in contracts – such as tax rates and prices – to mitigate contract performance risks and fully enjoy the benefits brought by the tax reform.

Furthermore, it is also stipulated in the new VAT Law that the tax rate applicable to the primary activity of a taxable transaction shall be applied if a taxpayer engages in a taxable transaction involving two or more tax rates. The Implementing Regulations impose additional restrictions on the preconditions: There is a clear principal-auxiliary relationship between the transactional activities. The principal activity plays the dominant role and reflects the substance and purpose of transaction; and the auxiliary activity is a necessary supplement to the principal activity and is conditional upon the occurrence of the principal activity. According to this provision, taxpayers shall calculate and pay VAT based on the applicable tax rate or levying rate corresponding to the primary business activity of the taxable transaction.

Therefore, it is advisable for taxpayers to conduct a thorough review of the business operations. For business models involving multiple tax rates, it is essential to assess whether a principal-auxiliary relationship exists between activities based on contract terms and commercial substance to ensure compliance with VAT filing obligations. Taxpayers are prohibited from artificially splitting transactions to obscure tax categories or reduce tax liability.

Taxpayer identification management

The VAT Law and the Implementing Regulations clearly define that individuals shall be considered as small-scale taxpayers and stipulate that a taxpayer already registered as general taxpayer may not revert to small-scale taxpayer status later.

It is worth noting that the new law stipulates that enterprises and individual businesses with annual taxable sales exceeding RMB 5 million must calculate and pay VAT using the general taxation method starting from the period when exceeding the small-scale taxpayer threshold. The STA has further clarified the rules in Announcement No. 2 2026 as follows:

• The calculation of taxable sales is determined on a rolling basis during a continuous operating period of 12 months or 4 quarters rather than on a calendar-year basis.
• Where sales revenue is adjusted due to reasons such as self-initiated supplementation or correction, risk control review, or tax audit and assessment, the corresponding adjusted sales revenue shall be included in the sales revenue of the corresponding tax period based on the time at which the VAT liability arises.
• Where a taxpayer has already filed VAT returns as small-scale taxpayer on or after the effective date of general taxpayer status, the taxpayer shall correct the VAT filings on a period-by-period basis in accordance with the rules applicable to general taxpayers. And VAT deduction vouchers obtained on or after the effective date of general taxpayer status are allowed to be confirmed with the use as input credit on a period-by-period basis.

The aforementioned regulatory revisions aim to address loopholes in tax administration where the cost of tax evasion was even lower than the cost of compliance under the old rules. For current small-scale taxpayers, it is essential to promptly review the actual business operations, complete taxpayer status registration and filing in accordance with regulations to mitigate potential tax risks at the source.

Circumstances of “deemed taxable sales”

The new VAT law has significantly streamlined the circumstances of deemed taxable sales, retaining only three of the original eight statutory scenarios:

1. The use of self-produced or commissioned-processed goods by entities and individual businesses for collective welfare or personal consumption;
2. The gratuitous transfer of goods by entities and individual businesses; or
3. The gratuitous transfer of intangible assets and real estate by entities, individual businesses and individuals.

Furthermore, the gratuitous transfer of financial products by entities, individual businesses and individuals is newly added as deemed taxable sales.

Comparing to the old VAT regulations, the following transactions are no longer deemed as taxable sales: the provision of services without consideration (including interest-free loans and rent-free leasing), the transfer of goods between head offices and branch offices, the use of self-produced or commissioned-processed goods for non-taxable purposes, as well as consignment sales are no longer treated as deemed taxable transactions. Meanwhile, although the use of self-produced, commissioned-processed, or purchased goods as investments or distributions to shareholders is no longer explicitly included in the scenarios of deemed taxable transactions, such arrangements actually meet the definition of a transfer with consideration under the new VAT Law. Consequently, they will be directly recognized as taxable transactions and subject to VAT.

Time limit for VAT refund on export

Prior to 2020, an export enterprise was required to collect all relevant supporting documents and apply for VAT refund on export within the filing period till 30 April of the following year. Otherwise, the relevant export would be regarded as “tax exempted without refund” or treated as “domestic sales” subject to VAT. Yet, Public Notice No. 2 2020 of the MOF and the STA has repealed the restrictions, stipulating that “if foreign exchange receipts are not collected or the procedures for non-collectability are not completed within the prescribed time limit, tax refunds (exemptions) may still be declared and processed after the foreign exchange is collected or the non-collectability procedures are completed”.

However, the new VAT Implementing Regulations specify a time limit for declaration again. If a declaration is not made within the timeframe, the export transaction shall be deemed as domestic sales and consequently VAT will be levied in accordance with regulations. The final version removed the specific “36-month” time limit requirement in the draft version, replacing it with “within the prescribed period”. This means that highly operational details such as specific deadlines and foreign exchange collection requirements have been delegated to more flexible departmental regulations or announcements for subsequent stipulation. Therefore, enterprises must closely monitor the issuance of supporting documents to clarify new reporting deadlines, document requirements, and legal liabilities.

Input tax credit

The amendment regarding the input tax credit is one of the most significant changes under the new VAT regulations. The amendment encompasses the following provisions:

• It is newly added that the corresponding input tax amount for “non-deductible non-taxable transactions” shall not be deducted.
  A critical amendment has been introduced in the Implementing Regulations, specifically regarding the limitation in “business activities”. It means that only non-taxable transactions that are not legally excluded from taxation and are attributable to business activities are subject to the non-deductibility of input VAT.
  In practice, it is necessary to clarify the classification of transactions such as income from share/assets transfers, government subsidies, donations, insurance claims, and contract penalty payments. Further clarification is expected to determine whether these transactions should be classified as non-taxable transactions arising from business activities or non-business activities.
• For catering services, life services and entertainment services, the new VAT Law adds the criterium of “directly used for consumption” to the non-deductible input tax amount, which allows the input tax credits for relevant services used for resale.
• For fixed assets, intangible assets, or real estate (“long-term assets”) which are used for both deductible and non-deductible items (such as simplified taxation method, VAT-exempt items, non-deductible non-taxable transactions, collective welfare, or personal consumption), the input tax credits have been modified from full deductibility to a new rule with cap of RMB 5 million, i.e.:
  • If the original value of the individual long-term asset does not exceed RMB 5 million, the corresponding input VAT could be fully deducted;
  • if the original value exceeds RMB 5 million, the input VAT shall firstly be fully deducted upon acquisition, and during the blended-use period, the portion corresponding to the non-deductible items shall be calculated based on the depreciation or amortization period and shall be transferred out annually.

• When a general VAT taxpayer purchases goods or services for use in items subject to the simplified taxation method, VAT-exempt items, or non-deductible non-taxable transactions, and the non-deductible portion of the input tax amount cannot be identified separately, the non-deductible input tax amount for the current period shall be calculated based on the share of sales amount or income, with annual consolidated settlement to be made within the tax filing period in January of the following year.

Additionally, under the new VAT Law, loan services continue to be classified as non-deductible input taxes. However, the Implementing Regulations, while retaining the provisions of the draft version, have added a “research and evaluation” clause, thereby preserving policy flexibility for future adjustments.

Under the new VAT regulations, the method for deducting input tax credits has become more complex, and the responsibility for settlement has been transferred from tax authorities to taxpayers. This places higher demands on enterprise daily tax compliance management.

Administration on taxable transactions of individuals

The Implementing Regulations have added a provision stating that “where a natural person engages in taxable transactions meeting specified criteria, the domestic entity making the payment shall be the withholding agent”. However, the term “taxable transactions meeting specified criteria” remains undefined. Broadly speaking, this may imply that enterprises bear the obligation to withhold VAT whenever they make payments (such as service fees) to any individuals – whether foreign individuals or domestic individuals – provided the transaction falls within the scope of VAT taxation.

Additionally, the Implementing Regulations extend the filing deadline for per-transaction taxation from the 90-day period proposed in the draft version to 30 June the following year. This deadline corresponds to the final filing date for comprehensive income tax settlements, indicating the purpose is to offer filing convenience for individuals who occasionally engage in taxable transactions. This allows taxpayers to consolidate and complete multiple tax-related matters within a unified timeframe.

Tax benefits

The Implementing Regulations clarify the scope of tax-exempt medical services and extend the tax exemption threshold only applicable for individuals in the old concept to all small-scale taxpayers now. The tax exemption policy for small-scale taxpayers with monthly sales not exceeding RMB 100,000 or quarterly sales not exceeding RMB 300,000 had been periodically extended through STA Announcements. Henceforth, this policy will be formally incorporated into the regulatory framework for permanent implementation.

General anti-tax-avoidance rule

The Implementing Regulations introduce a general anti-avoidance rule at the VAT regulatory level for the first time. This rule stipulates that “where a taxpayer arranges transactions without reasonable commercial purposes that result in the reduction, exemption or deferral of VAT payment, or the increase or acceleration of VAT refund, the tax authority reserves the right to make adjustments in accordance with the tax collection and administration law”. Enterprises should ensure that the transaction arrangements are underpinned by solid commercial substance rather than structured solely for tax optimization purposes when designing such arrangements.

Our suggestions

The new VAT Law and the Implementing Regulations encompass multiple significant policy adjustments. Enterprises are required to conduct a systematic assessment of the taxability and applicable tax rates for their own business operations in accordance with the latest policy requirements. Concurrently, it is suggested to establish and improve mechanisms for dealing with input VAT credits and managing long-term assets. Starting from the procurement phase, enterprises should accurately identify the actual purpose of relevant assets and services. This ensures the precise allocation of input tax credits for projects subject to the simplified taxation method, VAT-exemption, or non-VAT taxable projects, while also accurately calculating input tax credits that cannot be precisely allocated and must be apportioned according to regulations, as well as the accuracy of year-end input tax credit settlement. For business involving the procurement of services from individuals, enterprises are advised to concurrently review the compliance of tax-related clauses in contracts starting from the contract signing. They should also establish and improve internal control management mechanisms covering the entire process for withholding taxes.

Additionally, enterprises shall focus on improving their documentation management systems, particularly including:

• Conducting compliance reviews on cross-border service contract terms;
• Systematically collecting and properly retaining proof of performance location;
• Standardizing the archiving of documents that support the economic substance of transactions;
• Fully preserving adjustment calculation working papers for input tax credits on mixed-use long-term assets; and
• Comprehensively reviewing and strengthening the basis for demonstrating the reasonableness of the transfer pricing of related-party transactions.

For small-scale taxpayers, it is essential to promptly review the actual business operations and strictly comply with regulations to complete taxpayer status registration and filing procedures in a timely manner.

Regarding the regulations that remain unclear and require subsequent detailed clarification rules, enterprises must prioritize tax compliance management during the transition phase to effectively mitigate potential tax risks. We will continue to pay attention to the progress of supporting regulations releases and promptly share with you the official interpretations and treatments from tax authorities on relevant issues in practice.