China has issued new VAT guidance clarifying which non-taxable transactions qualify for input tax deductions, alongside rules on discounts, exemptions, invoicing, and waiver procedures, effective 1 September 2026 with transitional application to certain earlier transactions.
China’s Ministry of Finance and State Taxation Administration released Announcement No. 25 of 2026 on 27 August 2026, effective 1 September 2026, establishing definitive guidance on input tax deduction eligibility under the Value-Added Tax Law of the People’s Republic of China and its Implementing Regulations.
Transactions eligible for input tax deduction
Six categories of non-taxable transactions permit taxpayers to deduct corresponding input tax from output tax under Article 22 of the Value-Added Tax Law Implementing Regulations. These include insurance compensation received, donations of monetary or non-monetary assets, liquidated damages from broken contracts, free services (excluding financial products), transfers of accounts receivable linked to taxable transactions, and fiscal subsidies unrelated to sales volume or income.
Transactions ineligible for input tax deduction
Four categories remain non-deductible under the same provisions: sales of goods, services, intangible assets, and real estate outside Article 4’s territorial scope; equity transfers (excluding securities); dividends from equity holdings (including common stock); and commodity futures transactions without physical delivery.
Pricing and discount treatment
The announcement establishes specific rules for invoice documentation. When a single invoice separately itemises price and discount amount in the Amount column, the taxable sales amount equals the price after discount, excluding tax. If the invoice does not separately identify the discount amount, the full listed price applies as the taxable sales amount, and no deduction occurs. Telecommunications service providers offering complimentary goods must separately account for prices and apply appropriate tax rates to each item.
Administrative clarifications and policy scope
Agricultural product invoices under exemption policies refer only to ordinary invoices issued by agricultural producers selling their own products. Technical schools, senior technical schools, and technical colleges eligible for exemption include those established with approval from provincial or higher-level human resources and social security departments, or provincial governments.
Venue admission ticket revenue eligible for exemption covers only first-gate entry fees, excluding revenue from special exhibitions, performances, or temporary events held within specific areas.
Asset restructuring transactions retain the transferring party’s original purchase price for financial products involved. Real estate and land use rights acquired through purchase, donation, investment shares, self-construction, debt settlement, or asset restructuring all qualify within the scope.
Waiver procedures and retroactive application
General taxpayers choosing to waive VAT preferential policies must submit written waiver declarations indicating the effective date to the competent tax authority.
The announcement repealed Article 1 of Notice Cai Shui [2007] No. 127 and related documents. Unprocessed transactions occurring between 1 January 2026 and 31 August 2026 are handled under these new provisions, ensuring consistent treatment during the transition period.
