VAT China: New law for a clearer tax system

On 1 January 2026, China will implement its new value-added tax (VAT) law, replacing the interim VAT regulations. The new regulations include the definition of taxable and non-taxable sales, expanded input tax deduction, and the refund of VAT credits. The Ecovis tax advisors explain the details.

With the new VAT law, the Chinese government is aiming to ensure more consistency, legal authority, and predictability in the country’s tax system.

Key changes in the new Chinese VAT law

1. Clearer criteria for domestic taxable transactions
   The previous definition of domestic taxable transactions was unclear and confusing. The new law clarifies that taxable transactions include the sale of goods, services, intangible assets, and real estate. Processing, repair, and assembly services are now categorised as general services, reducing compliance risks, particularly for international businesses.
2. VAT rates: basic tax rates remain unchanged, but benefits for SMEs
   The basic VAT rates (13%, 9%, and 6%) and the zero tax rate remain unchanged. However, the simplified tax declaration system for small and medium-sized enterprises (SMEs) has been improved. Under the new VAT law, the collection rate for small-scale taxpayers has been uniformly adjusted to 3%, replacing the previous 5% rate. This adjustment reduces the tax burden on SMEs, simplifies the tax declaration process, and enhances their market competitiveness and growth potential.
3. Simplified definitions of taxable and non-taxable transactions
   The new law replaces “deemed sales” with “deemed taxable transactions.” It clearly defines three categories:
   1. Self-produced or processed goods for welfare or personal consumption.
   2. Transfers of goods without compensation.
   3. Transfers of intangible assets, real estate or financial products without compensation.

   The law removes consignment, inter-branch transfers, and deemed sales of services from the scope of tax, improving clarity.

4. Adjustments to sales prices
   The new VAT law empowers tax authorities to adjust sales prices deemed excessively high or low. However, the term “without legitimate reasons” is not fully defined, which could create compliance complexities due to varying local interpretations.
5. Expanded input VAT deductions
   The law broadens the scope of input VAT deductions. The VAT policy explicitly stated that the input VAT on loan services was not deductible. However, the VAT law has removed this explicit provision, replacing it with “other input VAT as stipulated by the State Council.” This means that whether the input VAT on loan services can be deducted is still subject to further clarification from the State Council. If no further clarification is provided, allowing the input VAT on loan services to be deductible would benefit capital-intensive industries.
6. VAT credit refunds
   The new law formalises the VAT credit refund process, allowing businesses to claim refunds if VAT paid on purchases exceeds VAT due on sales. Businesses can carry forward excess VAT or apply for a direct refund, improving cash flow.
7. Simplified tax filing with electronic invoices
   The new law encourages the use of electronic invoices, streamlining tax filings and reducing paperwork. This shift supports global trends in data-driven tax management and simplifies tax reporting for multinational businesses.

We will discuss with you the advantages the new Chinese VAT system.

Pingwen Hu, Senior Partner and Certified Public Accountant, ECOVIS Ruide Certified Public Accountants Co., Ltd, Shanghai, China

China’s new VAT law represents a significant move towards a more transparent, predictable, and efficient tax system. When the law comes into effect in 2026, it will benefit both domestic businesses and foreign companies operating in China by providing a more stable tax environment.

For further information please contact:

Pingwen Hu, Senior Partner and Certified Public Accountant, ECOVIS Ruide Certified Public Accountants Co., Ltd, Shanghai, China
Email: pingwen.hu@ecovis.cn