The Value-Added Tax Law of the People's Republic of China (Presidential Order No. 41) and its Implementation Regulations (State Council Order No. 826) (the “New VAT Law”) came into effect on 1 January 2026, replacing the former provisional VAT regulations.
While the New VAT Law largely preserves the existing value‑added tax (“VAT”) framework, it consolidates numerous rules previously scattered across regulatory announcements and introduces refinements in areas such as withholding obligations, taxable scope, taxpayer classification, input VAT credit rules, tax incentives and anti-avoidance. The reform reflects China’s broader legislative standardisation efforts and, prioritises the place of consumption principle and increasing alignment with international tax governance practices.
This article outlines key VAT Law changes to help foreign-invested enterprises (FIEs) understand differences between the old provisional regime and the new statutory framework. It also aims to assist senior executives and tax professionals in evaluating current VAT compliance practices, internal controls and documentation and identifying areas requiring adjustments at an early stage.
In this article, we discuss:
- Changes to VAT taxpayers and withholding agent rules
- Determination of taxable scope and consumption principles
- Deemed taxable transactions
- Input VAT credit rules and long-term asset adjustments
- VAT incentives and preferential policies
- Time of tax liability, filing deadlines, and place of tax payment
- VAT collection administration and anti-avoidance enforcement
- Transitional policies and supporting announcements
- Frequently asked questions
Changes to VAT taxpayers and withholding agent rules
Under the New VAT Law, overseas entities and individuals conducting taxable activities within the Mainland of China (“China”) are uniformly subject to VAT withholding arrangements, regardless of whether they have established a business presence in China. In such cases, the purchase in China is designated as the VAT withholding agent.
In addition, the eligibility for electing small-scale taxpayer status has been further restricted. Only non-enterprise entities that do not frequently engage in taxable activities and whose primary business falls outside the taxable scope may opt to be treated as small-scale taxpayers.
Considerations for FIEs
These changes directly affect cross-border transactions. Misalignment between commercial contracts, and withholding obligation may lead to disputes with customers, cash flow impacts or potential tax audit exposure.
In addition, enterprises that previously relied on small-scale taxpayer arrangements should periodically review whether such treatment remains permissible under the tightened eligibility criteria.
How we can support
We help FIEs review cross-border transaction arrangement and related contracts to ensure VAT withholding responsibilities are clearly defined and operationally feasible, and support Chinese entities in setting up compliant withholding and filing processes.
Determination of taxable scope and consumption principles
For the sale of services and intangible assets (excluding financial products, real estate leasing, and transfer of natural resource use rights), the new VAT Law clarifies that a transaction is deemed to occur within China where the services or intangible assets are consumed within China, provided the seller is a domestic entity or individual.
The law also refines the treatment of non-taxable items. Only the four categories of non-taxable items explicitly listed in Article 6 of the New VAT Law allow for corresponding input VAT credits. Input VAT related to other non-taxable activities that generate economic benefits is no longer creditable.
The New VAT Law maintains the existing VAT rate structure, including the 13%, 9%, and 6% tax rates, the 3% levy rate, and the zero-rated VAT regime.
Considerations for FIEs
The clarification of the “place of consumption” principle increases the importance of documenting where services or intangible assets are actually used. This is particularly relevant for management services, IT support and IP licensing arrangements, where the place of consumption may not be obvious.
In addition, certain costs previously assumed to be recoverable may now result in irrecoverable VAT, increasing the effective tax cost.
How we can support
We assist FIEs in assessing consumption locations, preparing supporting documentations and reviewing cost structures to identify VAT leakage risks and support defensible VAT positions.
Deemed taxable transactions
Three statutory scenarios are identified where transactions are deemed taxable, including the newly added category of gratuitous transfer of financial products. At the same time, the previously deemed taxation of gratuitous service provision has been removed.
The terminology of "extra-charges" has been replaced by "consideration received in relation thereto," and new rules clarify how mixed sales and concurrent operations should be assessed, focusing on whether multiple activities constitute a single taxable transaction.
Considerations for FIEs
The revised deemed taxable transaction rules require closer attention to non-standard transactions, such as complimentary supplies, bundled offerings, or internal transfers involving financial products. FIEs should assess whether existing practices could now fall within the expanded deemed taxation scope.
The new focus on “consideration received in relation thereto” also increases scrutiny on how consideration is allocated across mixed transactions.
How we can support
We support FIEs in identifying potential deemed taxable transactions and reviewing pricing and consideration allocation to ensure VAT treatment is aligned with statutory definitions and audit expectations.
Input VAT credit rules and long-term asset adjustments
The scope of non-creditable input VAT has been restated under the new law. Input VAT related to loan interest and associated fees remains temporarily non-creditable, subject to future policy adjustments.
A new RMB 5 million threshold applies to long-term assets. Where the original value of a single asset does not exceed RMB 5 million, VAT input may be fully credited upon acquisition. For assets exceeding this threshold, input VAT is initially credited in full, with potential annual adjustments required if the asset is used for specified non-creditable purposes during the adjustment period.
The refund mechanism for excess input VAT credits has also been formally incorporated into the New VAT Law.
Considerations for FIEs
Asset-intensive FIEs, particularly in manufacturing, logistics, and trading sector need to ensure that fixed asset usage is tracked accurately over the adjustment period, as changes in use may trigger VAT adjustments. While VAT refunds may improve cash flow, they also increase documentation and compliance requirements.
How we can support
We assist FIEs in reviewing input VAT credit eligibility, setting up practical asset tracking mechanisms, and managing VAT refund applications and ongoing compliance.
VAT incentives and preferential policies
The New VAT Law clarifies the tax levy threshold and adjusts the scope of VAT-exempt items in line with industry developments. It also relaxes the rules for small-scale taxpayers opting out of preferential treatment and establishes targeted VAT incentives to support key industries, innovation, employment, and charitable activities.
Considerations for FIEs
While updated VAT incentives may create tax-saving opportunities, incorrect application or insufficient substantiation may increase tax audit risk. FIEs should assess whether they meet the substantive conditions for preferential treatment and whether internal controls are sufficient to support incentive claims.
How we can support
We help FIEs assess incentive eligibility and implement preferential treatments in a controlled and compliant manner, supported by appropriate documentation.
Time of tax liability, filing deadlines, and place of tax payment
The law clarifies when VAT liability arises for deemed taxable transactions and introduces declaration deadline for VAT paid on a per-transaction basis. It also specifies rules for determining the place of tax payment.
Considerations for FIEs
This may require adjustments to internal reporting calendars, especially for enterprises with decentralised operations or high transaction volumes. Misalignment between accounting recognition and VAT liability timing could result in late filings or penalties.
How we can support
We support FIEs in aligning VAT reporting calendars, filing processes and assisting in addressing practical issues related to tax payment locations and coordination across multiple locations within China.
VAT collection administration and anti-avoidance enforcement
The New VAT Law introduces explicit anti-avoidance provisions allowing tax authorities to make adjustments where transactions lack reasonable business purpose and result in reduced, deferred or improperly refunded VAT.
An information-sharing mechanism between tax and customs authorities further enhances data-driven tax administration, particularly in relation to export VAT refunds and exemptions.
Considerations for FIEs
Enhanced anti-avoidance provisions and increased data sharing between tax and customs authorities mean that complex transaction structures and export-related activities are more likely to be challenged where commercial substance or documentation is insufficient.
How we can support
We assist FIEs in conducting VAT health checks and risk assessments and support FIEs in preparing for tax authority reviews and managing regulatory communications.
Transitional policies and supporting announcements
As of 14 February 2026, multiple supporting announcements have been issued by the Ministry of Finance and the State Taxation Administration, covering taxable scope clarification, transitional preferential policies, export-related matters, taxpayer registration, VAT declaration, and input VAT management. The scope of relevant supporting announcements is as follows:
| Scopes | Related regulations |
|---|---|
| VAT policy for individual sales of housing | MOF, STA Announcement No. 17 [2025] |
| Taxable scope notes | MOF, STA Announcement No. 9 [2026] |
| Preferential policy transition | MOF, STA Announcement No. 10 [2026] |
| Taxable transaction sales calculation standards | MOF, STA Announcement No. 12 [2026] |
| Policies on VAT and consumption tax for export business | MOF, STA Announcement No. 11 [2026] |
| Unified export tax rebate requirements and operational procedures | STA Announcement No. 5 [2026] |
| Adjustment of the export tax rebate policy for products such as photovoltaic products | MOF, STA Announcement No. 2 [2026] |
| Taxpayer registration and management | STA Announcement No. 2 [2026] |
| Matters related to the administration of VAT, including the threshold standard | STA Announcement No. 4 [2026] |
| Adjustment of relevant matters concerning VAT tax declaration | STA Announcement No. 6 [2026] |
| Matters related to the credit of input VAT | MOF, STA Announcement No. 13 [2026] |
| Management of VAT prepaid taxes | MOF, STA Announcement No. 14 [2026] |
| Management of installment deduction of input VAT on long-term assets | MOF, STA Announcement No. 15 [2026] |
Conclusion
China’s New VAT Law marks a shift towards clearer principles, tighter compliance and stronger enforcement. For FIEs, this increases both compliance complexity and the importance of proactive VAT risk management.
Rather than addressing issues on a reactive basis, FIEs are strongly encouraged to conduct a structured review of their VAT positions, including cross-border transactions, input VAT recovery, asset usage, and incentive eligibility, to ensure alignment with the new requirements.
If you would like to understand how the New VAT Law affects your China operations or require practical support in reviewing and strengthening your VAT compliance framework, we can provide tailored services and ongoing compliance support to meet your business needs.
Frequently asked questions
What is the new VAT rates in China?
China did not introduce new VAT rates but formally enacted its first-ever VAT Law, which took effect on 1 January 2026. This law elevates VAT rules from administrative regulations to national legislation, strengthening enforcement and legal certainty. It consolidates previously scattered rules into a unified statutory framework and introduces refinements in areas such as taxable scope, taxpayer and withholding agent definitions, input VAT credit rules, preferential policies, filing requirements, and anti-avoidance administration.
China maintains its current three-tier VAT rate system:
- 13% – Sale and import of most goods; processing, repair, and replacement services
- 9% – Transportation, construction, real estate, utilities, agricultural products, publications
- 6% – Modern services (IT, consulting, R&D), financial services, intangible assets
- 0% (zero-rated) – Qualified exports of goods and services
- 3% simplified method – Certain industries and small-scale taxpayers (no input VAT credit)
What are the key VAT compliance requirements for foreign businesses operating in China?
Foreign businesses operating in China are generally required to comply with China’s VAT rules through their China entities or, in certain cross-border transactions, through VAT withholding mechanisms.
Key VAT compliance requirements include:
- Proper determination of VAT taxpayer status and applicable VAT rates
- Correct classification of taxable transactions, including mixed sales and deemed taxable transactions
- Accurate issuance, receipt, and management of VAT invoices (fapiao)
- Timely VAT filing and tax payment in accordance with statutory deadlines
- Correct calculation and documentation of input VAT credits and adjustments
- Compliance with withholding VAT obligations for cross-border services or intangible asset transactions, where applicable
Under the New VAT Law, tax authorities place increased emphasis on transaction substance, documentation consistency, and data-based administration, particularly for foreign-invested enterprises with complex business models.
What are common VAT compliance challenges for trading businesses in China?
Trading businesses in China, including foreign-invested trading companies, commonly face VAT compliance challenges in the following areas:
- Correct VAT rate application for different categories of goods
- Input VAT credit eligibility, especially where documentation is incomplete or transactions involve multiple parties
- Management of VAT invoices (fapiao), including timing mismatches between goods delivery, invoicing, and payment
- VAT treatment of bundled transactions, rebates, discounts, or complimentary items
- VAT implications of cross-border procurement, import VAT, and export VAT refund or exemption procedures
Under the New VAT Law, clearer rules on mixed sales, deemed taxable transactions, and input VAT adjustments increase compliance transparency but also require trading businesses to strengthen internal controls and documentation processes.
What are the penalties for non-compliance with VAT regulations in China?
Non-compliance with VAT regulations in China may result in administrative penalties under the Tax Collection and Administration Law and related regulations.
Depending on the nature and severity of the non-compliance, potential consequences may include:
- Payment of outstanding VAT and late payment surcharges
- Administrative fines imposed by tax authorities
- Denial or claw back of input VAT credits or VAT refunds
- Increased scrutiny, audits, or risk classification by tax authorities
Under the New VAT Law, tax authorities are explicitly empowered to make adjustments where transactions lack reasonable business purpose and result in reduced, deferred, or improperly refunded VAT. Enhanced data sharing between tax and customs authorities further strengthens enforcement, particularly in relation to export VAT refund matters.
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