Unlocking China’s New VAT Law: Key Changes, Business Impacts, and Compliance Tips

China’s New Value-Added Tax (VAT) Law marks a major milestone in the country’s tax legislation. Set to take effect on January 1, 2026, the law refines VAT regulations, clarifies taxable transactions, simplifies tax rates, and enhances compliance procedures. This article breaks down the key changes, their implications for businesses operating in China, and what enterprises should do to adapt to the evolving tax landscape.

On December 25, 2024, the 13th meeting of the Standing Committee of the 14th National People’s Congress officially passed the People’s Republic of China Value-Added Tax Law (hereinafter referred to as the “New VAT Law”), which will come into effect on January 1, 2026. This marks an important milestone in elevating China’s VAT system, transforming it from administrative regulations to national legislation. The law enhances legal certainty, improves tax governance, and reinforces the principle of statutory taxation, creating a more stable and transparent tax environment—particularly for foreign enterprises operating in China.

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By clarifying the scope of taxation, optimizing the tax rate structure, and simplifying tax processing procedures, the New VAT Law aims to reduce tax risks and administrative burdens for enterprises. For companies operating in China, particularly their finance and tax teams, understanding these key changes and their implications is of utmost importance. This article compares the New VAT Law with the previous “Interim VAT Regulations on Value-Added Tax” (hereinafter referred to as the “Interim VAT Regulations”) across six key aspects to help businesses navigate the evolving tax landscape.

Legislative advancement: Stable VAT framework with detailed refinements

The former Interim VAT Regulations existed as administrative regulations, offering a relatively flexible tax framework but with lower legal authority. The New VAT Law elevates the VAT system to national legislation while keeping its core structure intact. Notably, VAT rates of 13 percent, nine percent, and six percent remain unchanged, ensuring stability for businesses. This legal shift enhances the predictability of the tax system, strengthens tax enforcement, and streamlines compliance for enterprises operating in China.

Scope of Taxation: Clarification of domestic taxable transactions

Article 3 of the New VAT Law clearly defines the scope of taxable transactions as those involving the sale of goods, services, intangible assets, and real estate within China. Compared with the Interim VAT Regulations, the key change here is the removal of “processing, repair, and assembly services (hereinafter referred to as “labor services”)” and now incorporating them into the category of general services.

Additionally, Article 4 details clear criteria for domestic taxation, refining cross-border transaction rules, and reducing tax ambiguities for foreign businesses.

Compared to the more general definition of domestic taxable transactions in the Interim VAT Regulations, which had certain ambiguities in the scope of taxation for cross-border transactions, the clarity in the New VAT Law minimizes compliance risks and improves certainty for enterprises engaged in international trade.

Tax rates and levy rate adjustments: Simplification for businesses

The New VAT Law retains the current VAT rates—13 percent, nine percent, and six percent—while streamlining the simplified taxation levy rate to three percent.

Previously, the levy rate for the simplified taxation method was in two tiers – three percent and five percent – with some industries subject to the higher rate. The five-percent rate appears to be eliminated in the new framework. If confirmed in upcoming regulatory guidance, this adjustment could reduce tax burdens on small businesses and specific industries. Further clarifications on transitional policies are expected in forthcoming tax documents.

In the long term, we believe the simplification of the levy rates will directly enhance competitiveness and optimize the tax environment, particularly for SMEs and specific industries.

Revised “deemed taxable transactions” and non-taxable items and sales price determination

Reduction in the scope of “deemed taxable transactions”

Article 5 of the New VAT Law replaces the term “deemed sales” with “deemed taxable transactions”. The law consolidates previous rules into three main categories:

• Self-produced or processed goods used for collective welfare or personal consumption
• Transfers of goods, intangible assets, or real estate without compensation
• The addition of transferring financial products without compensation

Another key update is the deletion of “goods consignment, sale of consigned goods, inter-branch transfers of goods, investment in goods, distribution of goods to shareholders, and deemed sale of services” from the scope of “deemed taxable transactions”. This change is expected to reduce disputes between tax authorities and businesses, ultimately lowering compliance risks.

Additionally, “transferring financial products without compensation” is added to “deemed taxable transactions”.

Overall, these changes streamline tax processing procedures for enterprises and lower compliance costs, particularly for multinational companies, by reducing the tax burden on internal transactions.

Adjustments to non-taxable items

Article 6 of the New VAT Law consolidates the “four non-operating activities” and the “five non-taxable items” from the Interim VAT Regulations and Caishui [2016] No. 36 into four non-taxable items, which include:

• Services provided by employees to their employer in obtaining wages or salaries;
• Administrative and institutional charges, and government funds;
• Compensation received in accordance with the law for expropriation or requisition; and
• Interest income from deposits.

Sales price determination

Article 20 of the New VAT Law stipulates that for all taxable transactions if the competent tax authority considers the sales price to be significantly low or significantly high, it has the right to adjust the sales price. This fills the gap in the Interim VAT Regulations—which only allowed tax authorities to adjust prices when goods or taxable services were significantly underpriced—and standardizes the adjustment criteria as “without legitimate reasons.” However, the definition of “without legitimate reasons” remains unclear, and the local tax authority may have its own interpretation and discretion in practice.

Expansion of input VAT deductions and legalization and optimization of VAT credit refunds

In the input VAT deduction phase, the scope of deductible input VAT is expanded, and the restriction from the Interim VAT Regulations and Caishui [2016] No. 36  that “loan services are not allowed to deduct input VAT” has been removed. Only three non-deductible items—catering services, residents’ daily services, and entertainment services—are retained and refined.

Some opinions believe this means that in the future, input VAT related to loan interest payments may be allowed as a deduction, which would help reduce financing costs, especially significant for capital-intensive industries (such as manufacturing). However, specific details still need to be clarified by subsequent documents from the State Council. Given the global trend of strengthening capital dilution management, future policies warrant close attention.

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Historically, there has been a significant divergence between China’s and Europe’s VAT credit refund policies. In previous years, the VAT credit refund policy existed only in the form of normative documents, lacking legal enforceability and resulting in uncertainty in implementation. The New VAT Law formally incorporates the VAT credit refund system into law, clearly stating that taxpayers may choose to either carry forward excess input VAT for future deductions or apply for a refund, thereby further alleviating enterprises’ cash flow pressures.

This change aligns with international practices, providing legal guarantees for VAT credit refunds, and enhancing policy stability and operability, particularly benefiting enterprises with significant cash flow pressures, such as those with large VAT credits arising from bulk procurement or project construction. This flexibility is especially advantageous for asset-intensive industries and start-ups.

Meanwhile, in response to previous issues with local governments bearing excessive refund burdens, the State Council has also issued policy adjustments to improve the sharing ratio between the central and local governments, effectively alleviating pressure on grassroots finances. Therefore, in accordance with the “Decision of the Central Committee of the Communist Party of China on Further Deepening Reform and Promoting Chinese-Style Modernization”, we expect this policy will be effectively implemented.

Simplification of tax administration and filing procedures

The New VAT Law promotes the management of electronic invoices, encouraging enterprises to use electronic invoices and clarifying the legal basis for invoice circulation, thereby reducing the complexity of manual tax filings and the management of paper invoices. This initiative facilitates the sharing and digitalization of VAT-related tax information, promoting a transformation in VAT administration from an “invoice-based tax control” model to a “data-driven tax management” approach.

Digital management reduces the compliance burden on enterprises, enhances operational efficiency, and aligns with global tax administration trends. Particularly, multinational enterprises can more easily share financial data with their headquarters to achieve unified management. However, the New VAT Law also requires enterprises to ensure the integrity and compliance of data when using electronic invoices.

Conclusion

Overall, compared with previous drafts, the New VAT Law introduces relatively limited structural changes but formalizes existing policies into law. It prioritizes legislative standardization and tax policy transparency, ensuring stability while allowing for future regulatory refinement. Supporting implementation guidelines and industry-specific policies are expected to be released gradually, addressing remaining uncertainties. Businesses should stay informed and prepare for compliance as the new law takes effect.

Also read:

• China Passes Its First Value-Added Tax Law
• VAT Refund for Hiring Disabled Employees: An Explainer
• Empowering Your China Business with Successful ERP Implementation
• Tax Incentives for Manufacturing Companies in China

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