The new draft VAT law aligns with existing VAT policies while introducing key adjustments, organised into six chapters covering provisions, rates, payable taxes, incentives, administration, and supplementary rules.

China’s Ministry of Finance has announced public consultation on the draft regulations for implementing the new Value Added Tax (VAT) Law, effective 1 January 2026, following its adoption on 25 December 2024.

The consultation on the draft legislation is open until 10 September 2025.

While the law aligns with existing VAT policies, it introduces key adjustments and clarifications.

The regulations are organised into six chapters: general provisions, tax rates, tax payable, tax incentives, collection management (tax administration), and supplementary provisions.

The main provisions are:

Scope of taxable transactions

The draft regulations refine the definition of taxable activities, covering goods, services, intangibles, and immovable property. For services and intangibles, the decisive factor is whether they are consumed within China. This applies when Chinese entities use deliverables, services are connected to domestic assets such as real estate or natural resources, or in other cases designated by the Ministry of Finance or the State Taxation Administration.

Zero-rating eligibility for exported services

A formalised list of exported services qualifies for VAT zero-rating, meaning they are taxed at 0% but still allow input VAT recovery. Eligible categories include R&D and product design, software and IT services, technology transfers, international transport, and certain consulting and professional services. To qualify, services must be consumed entirely outside China, supported by contracts, payment evidence, and proof of overseas benefit, and must not be directly linked to Chinese assets unless specifically exempted.

Composite transactions

For transactions combining multiple taxable elements, such as goods bundled with installation or support services, the principal vs. ancillary rule applies.  The principal activity determines the VAT rate, with ancillary services treated as inseparable from the main supply.

VAT treatment of long-term fixed assets

A two-tier system governs input VAT deductions on long-term fixed assets. Assets costing up to CNY 5 million are eligible for immediate full deduction. For assets exceeding CNY 5 million, a full upfront deduction is also allowed, but with annual adjustments if the assets are later used for exempt or non-taxable purposes.

Rules for non-deductible input VAT

The regulations exclude certain expenses from deduction. These include costs related to exempt or non-taxable transactions, spending on personal consumption, entertainment, and staff welfare, as well as losses from theft, damage, or demolition that fall outside normal business operations.

Input VAT deduction documentation

Standardised documentation is required to substantiate input VAT deductions. Acceptable evidence includes VAT invoices issued following Chinese standards, customs import certificates for imported goods, and payment records for cross-border services.

Anti-avoidance measures

Tax authorities may adjust arrangements that lack commercial substance and are designed to avoid VAT.