China VAT Law : challenges and opportunities

Announced in December 2024, the new Value Added Tax Law will come into effect in China on January 1st, 2026.

China first introduced VAT in 1994, maintaining a dual taxation system for goods and services. The initial VAT regime was progressively unified and simplified through various tax reforms, including the end of Business Tax for services in 2016. While the 2024 law does not bring major changes, its goal is to consolidate the tax system into a more structured framework, aligning it with the OECD’s international VAT guidelines.

VAT Rates in China

The VAT Law, effective from 2026, retains the existing rates but introduces clearer definitions of taxable transactions subject to VAT.

• 13% for goods
• 9% for services
• 6% for specific services
• 3% for the simplified calculation method

The current 5% rate is expected to be abolished or replaced by the 3% rate.

Main Changes in the 2026 VAT Law

The new VAT Law introduces several clarifications and changes, including:

• Place of consumption rule: The place of supply for services and intangible assets will generally be considered as China if the service is consumed there or if the service provider is established in China.

• Deemed taxable transactions: The VAT Law refines the definition of “deemed taxable transactions,” excluding several scenarios from being classified as deemed sales.

• Mixed Sales: The VAT Law now requires businesses to determine the applicable VAT rate based on the principal component of a mixed sale, rather than the taxpayer’s main business activity, ensuring more accurate taxation.

• Input VAT Deduction: Updates to input VAT deduction rules, particularly regarding the deductibility of expenses related to loan interest, catering, daily services for residents, and entertainment services. The last three categories of expenses are deductible, provided they are purchased for resale and not for personal consumption.

• VAT refunds: Taxpayers can now officially request a refund of excess input VAT credits for the concerned tax period. The specific procedures for these refunds (at the national or regional level) still need to be clarified.

• Reduction of tax return periods: The tax periods of 1, 3, and 5 days will now be removed.

Impact for Non-Resident Businesses

Based on the place of consumption principle, non-resident companies may be involved in taxable supplies in China. Generally, domestic purchasers act as VAT withholding agents for foreign sellers. For simplifying and securing the VAT collection, specifically for B2C sales, the foreign sellers can designate a domestic withholding agent.

This provision ensures that foreign entities selling goods or services in China comply with the VAT regulations, though further clarifications from the State Council are expected.

Further steps

China’s new VAT Law, effective January 1, 2026, represents a significant step forward in aligning the country’s VAT system with international standards while maintaining key provisions that support domestic businesses. The updated legislation provides more clarity on issues such as cross-border taxation, VAT deductibility, and the treatment of mixed taxable transactions. With these reforms, businesses will need to adjust their operations to ensure their VAT compliance. As China prepares for the full implementation of this law, businesses must stay informed about the additional guidance and regulations that will follow to ensure a smooth transition.

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