China has issued detailed VAT Implementation Regulations to accompany its new VAT Law, setting out clearer definitions, tax rates, deduction rules, and administrative measures to ensure uniform nationwide application from 1 January 2026.
China’s State Council has released the Regulations for the Implementation of the Value-Added Tax (VAT) Law on 30 December 2025, marking a significant milestone in the nation’s fiscal modernisation.
The VAT Implementation Regulations (VATIR) comprise six chapters and 54 articles and are designed to define key terms and clarify the new VAT Law, ensuring consistent application across the country.
The law provides precise definitions for taxable activities, including the exchange of goods, services, and intangible assets, while identifying the specific entities and individuals responsible for payments. It details the tax rate structures for domestic and cross-border transactions, specifically highlighting scenarios where a 0% rate applies to exported services.
Following its approval on 19 December 2025, both the VAT Law and the VATIR are scheduled to take effect on 1 January 2026.
The key measures of the VATIR are as follows:
Defining the scope of taxation
The regulations provide clear definitions for taxable items, categorising them into goods, services, intangible assets, and real estate. Notably, “goods” now explicitly include electricity, heat, and gas, while services encompass everything from financial and information technology to cultural and domestic services.
For cross-border activities, a 0% tax rate remains a critical incentive for services such as R&D, software development, and international transport, provided they are consumed entirely outside of China.
Key financial benchmarks and rates
- Cost-plus margin: The regulations set a standard 10% cost-plus margin for tax authorities to determine fair market value when sales prices are unavailable, though this may vary by industry.
- Long-term asset threshold: To streamline capital investment, the VATIR introduces a RMB 5 million threshold for “long-term assets” (fixed assets, real estate, and intangibles). This threshold changes how businesses manage “mixed-use” investments—assets used for both taxable and exempt activities:
- Below RMB 5 million: Taxpayers can fully deduct input tax immediately, even if the asset is used for mixed purposes.
- Above RMB 5 million: While full input tax can be offset at the time of purchase, businesses must undergo annual recapture adjustments based on actual usage and depreciation.
- Opting out period: Taxpayers who choose to waive their right to tax exemptions or refunds for export business are locked into that choice for 36 months before they can reapply for those benefits.
Deductions and exemptions
The regulations clarify “non-normal losses,” such as theft or spoilage due to poor management, stating that associated input taxes cannot be deducted. Additionally, input taxes for entertainment expenses and interest payments on loans (including related consulting fees) remain non-deductible.
The VAT implementation law also reinforces exemptions for primary agricultural products, non-profit medical institutions (excluding for-profit beauty clinics), old books, and educational services provided by registered schools.
Streamlined Administration
On the administrative front, the law reinforces a clear divide between general taxpayers and small-scale taxpayers. Significantly, once a business crosses the sales threshold to become a “general taxpayer,” it is prohibited from reverting to small-scale status.
However, for large-scale enterprises, the burden is eased through consolidated tax filing. With provincial approval, a head office can now file on behalf of multiple regional branches, drastically reducing the compliance paperwork for nationwide operations.
