New VAT Law 2026: Implementation Regulations

The new VAT Law of the People's Republic of China took effect on 1 January 2026, maintaining the existing tax framework without increasing the tax burden on businesses. To support its implementation, the State Council approved the draft Implementation Regulations on 19 December 2025, with Premier Li Qiang signing State Council Decree No. 826 on 25 December 2025 to formally promulgate the Regulations. The final text was published on 30 December 2025 and took effect concurrently with the VAT Law on 1 January 2026.

The Regulations comprise six chapters and fifty-four articles, providing detailed rules on VAT rates, taxable activities, incentives, and administrative procedures. They are intended to support the practical application and effective enforcement of the VAT Law.

The Implementation Regulations provide clearer guidance on taxable transactions under the VAT Law, defining the scope and application of tax to goods, services, intangible assets, and immovable property. They also refine preferential policies, specifying eligibility for zero-rated VAT on certain exports and clarifying conditions for zero-rated treatment on cross-border sales of services and intangible assets. Additionally, the regulations standardize VAT deduction practices by detailing acceptable deduction vouchers and input VAT deduction methods. They also outline specific criteria for VAT exemptions as stipulated in the law.

Key Changes in the Implementation Regulations

Services Consumed Within China

Article 4 sets out the criteria for establishing whether services or intangible assets are considered consumed within China. Three situations qualify. First, overseas sellers providing services or intangible assets to buyers located in China, except where the service is physically performed and consumed entirely outside Chinese territory. Second, overseas sellers providing services or intangible assets that have a direct connection to goods, real estate, or natural resources situated in China. Third, any additional circumstances designated jointly by the Ministry of Finance and the State Taxation Administration.

The previous rules under Circular Caishui (2016) No. 36 generally exempted cross-border supplies from Chinese VAT when the service was performed overseas or the intangible asset was used overseas. The new VAT Law replaces that approach with a consumption-based test. The Regulations bring China's framework closer to the OECD International VAT and GST Guidelines, offering greater clarity for cross-border transactions.

Two practical consequences follow. Services such as hotel accommodation or haircuts received and consumed entirely outside China face no Chinese VAT liability. Meanwhile, even transactions between two overseas parties may attract Chinese VAT if the subject matter involves goods, property, or resources physically located within China.

Zero VAT Rate to Exported Services

Article 9 lists the categories eligible for zero rating when domestic entities sell cross-border. These include research and development services, energy performance contracting and related design services, radio and television production and distribution, software services, integrated circuit design and testing, information systems, business process management, and offshore service outsourcing. In each case, the buyer must be located overseas and the service must be fully consumed outside China. Technology transfers to overseas recipients that are used entirely abroad also qualify for zero rating, as do international transportation, aerospace transportation, and outward repair and processing services.

The definition of "fully consumed outside China" follows established principles: the service recipient is located abroad, the service has no connection to Chinese goods or real estate, and the intangible asset is used exclusively outside China with no link to domestic property.

Tax Treatment of Mixed Sales

Article 10 defines a mixed sale as a single transaction meeting two conditions. The transaction must include at least two distinct activities subject to different VAT rates or levy rates. Additionally, a clear principal-ancillary relationship must exist, where the principal activity drives the transaction's economic purpose and the ancillary activity serves only as a necessary supplement.

The VAT Law expanded the concept of mixed sales beyond the old goods-plus-services formulation. Any combination of items subject to different rates now falls within the definition. The applicable rate is determined by the principal activity. Article 10 provides the criteria for identifying which activity is principal in any given transaction.

Total Consideration

Article 15 specifies what the term "total consideration" excludes. Government funds, administrative charges collected for public institutions, consumption tax on consigned processing of taxable consumer goods, vehicle purchase tax, vehicle and vessel tax, and amounts collected on behalf of a principal using invoices issued in the principal's name are all outside the scope of total consideration.

The Regulations deliberately drop the former concept of "additional charges outside price." Previous rules treated handling fees, subsidies, rebates, penalties, late payment interest, packaging fees, storage charges, transportation fees, and amounts collected for third parties as separate add-ons. Because the VAT Law now defines the sales amount as all monetary and non-monetary economic benefits received from a taxable transaction, a separate category for additional charges has become redundant.

Methods for Assessing Sales Value

Article 18 sets out a three-tier method for tax authorities to assess sales values when a taxpayer falls under the relevant provisions. First, the authority looks to the taxpayer's own recent average price for identical goods, services, intangible assets, or immovable property. Second, if that is unavailable, the authority uses other taxpayers' recent average prices for the same type of items. Third, the authority calculates a composite taxable price using the formula: cost multiplied by one plus the cost profit margin, plus any consumption tax amount. The standard cost profit margin is 10 percent, though the State Taxation Administration may adjust this based on industry conditions.

Article 20 of the VAT Law already empowers tax authorities to adjust sales values when prices are abnormally low or high without valid justification. The Regulations preserve the same assessment methodology from the prior provisional rules, ensuring continuity while strengthening enforcement.

Irrecoverable Input VAT

Article 21 states that input VAT on interest expenses from purchased loan services is not creditable against output tax. The same applies to directly related lender fees, including investment and financing advisory fees, handling fees, and consulting fees. The Ministry of Finance and the State Taxation Administration commit to studying and evaluating this policy's implementation effects, with the term "temporarily" signaling potential future changes.

The provision confirms the existing prohibition on deducting input VAT from loan-related costs. However, the language leaves open the possibility of revision after the authorities complete their assessment.

Irrecoverable Input VAT Due to Out-of-Scope Use

Article 22 addresses input VAT incurred on purchases used for non-taxable transactions. Two conditions must both be met for the disallowance to apply. The taxpayer must be engaged in business activities outside those covered by the VAT Law's taxable provisions while receiving economic benefits in monetary or non-monetary form. Additionally, the activity must not fall within the four categories of non-taxable items listed elsewhere in the VAT Law, such as interest income from deposits.

Previous regulations did not explicitly list non-taxable transactions as a separate category of non-deductible input VAT. The Regulations create a clear definition, referring to business activities that generate economic benefits but do not qualify as taxable or deemed taxable transactions under the law.

Annual Reconciliation for Unallocated Non-Deductible Input VAT

Article 23 imposes a new obligation on general taxpayers who purchase goods, excluding fixed assets, or services used across simplified-tax projects, VAT-exempt items, and non-taxable transactions where deduction is not permitted. When the taxpayer cannot precisely apportion the non-creditable amount, a periodic calculation must be made based on the proportion of sales or income attributable to each category. An annual settlement must then be completed during the January tax filing period of the following year.

Under the prior framework, tax authorities had discretion to perform such reconciliations annually using year-end data. The Regulations transfer this responsibility entirely to taxpayers, raising compliance standards and requiring more rigorous financial record-keeping.

Input VAT Treatment for Long-Term Assets

Article 25 introduces the concept of long-term assets, covering fixed assets, intangible assets, and immovable property. When such assets serve both general-method VAT activities and any of five non-creditable categories, simplified-tax projects, VAT-exempt items, non-deductible non-taxable transactions, collective welfare, or personal consumption, they are classified as mixed-use long-term assets.

For any individual asset with an original value not exceeding RMB 5 million, the taxpayer may credit the full input VAT amount. For assets exceeding RMB 5 million, the full input VAT is credited at the time of purchase. However, during the period of mixed use, the portion attributable to the five non-creditable categories must be calculated and adjusted annually over the asset's adjustment period. The Ministry of Finance and the State Taxation Administration will issue detailed operational measures.

Previously, input VAT was disallowed only when assets were used exclusively for non-deductible purposes. Mixed-use assets generally allowed a full credit. Article 25 maintains that treatment for lower-value assets but introduces annual adjustments for higher-value assets.

Statutory Exemption Criteria for Medical and Educational Institutions

Article 27 defines medical institutions eligible for VAT exemption as those established under relevant laws and holding proper practice qualifications, including military and armed police medical facilities. For-profit cosmetic medical institutions are expressly excluded from the exemption.

Article 30 defines schools as institutions providing academic education under relevant laws, as well as technical schools, advanced technical schools, and technician colleges.

The VAT Law lists nine statutory exemption categories, with the State Council empowered to set specific criteria. Articles 26 through 31 provide these details, largely following existing practice but with two notable changes. For-profit cosmetic medical services lose their exempt status, while technical and vocational institutions gain explicit recognition as exempt educational providers.

Withholding Obligations for Taxable Transactions Conducted by Individuals

Article 35 designates domestic payment entities as withholding agents when natural persons engage in qualifying taxable transactions. The Ministry of Finance and the State Taxation Administration will issue detailed filing and payment procedures. Separately, overseas entities or individuals leasing Chinese immovable property to individuals must appoint a domestic agent to handle VAT filing and payment.

The current self-declaration system for individuals has created collection gaps as the volume of such transactions has grown. Businesses making payments to individuals often cannot obtain valid deduction vouchers, preventing input VAT claims and corporate income tax deductions. The new withholding mechanism aims to close these loopholes, improve collection efficiency, reduce individual compliance burdens, and give enterprises proper documentation. The specific transaction types subject to withholding and detailed operational rules await supplementary guidance.

Filing Deadline for Taxpayers Declaring VAT on a Per-Transaction Basis

Article 44 requires taxpayers using the per-transaction declaration method whose sales reach the applicable VAT threshold to file and pay tax from the date the obligation arises. The filing must be completed no later than 30 June of the following year.

This deadline matches the annual Individual Income Tax final settlement date, simplifying compliance for individuals who must file both types of tax.

Declaration Requirements for Export Business

Article 48 mandates that taxpayers must file within the prescribed time limit for export transactions eligible for VAT refund or exemption. Failure to meet the deadline results in the transaction being treated as a domestic sale, requiring VAT payment at the standard rates. Where goods are exported through a commissionaire arrangement, the commissionaire must complete export formalities according to State Taxation Administration rules. The principal then applies for refund, exemption, or VAT payment. If the commissionaire fails to handle the required formalities, the consignor of the exported goods bears the filing and payment obligation.

Under previous rules, notably Announcement (2020) No. 2, taxpayers who missed deadlines could still apply after obtaining all necessary documentation and electronic information. Late foreign exchange collection could similarly be cured after the fact. Article 48 eliminates such flexibility. Deadlines are now strict, and missing them converts the export into a domestic taxable sale.

The Implementation Regulations of the VAT Law introduce meaningful refinements while preserving the existing tax framework. Key changes include a consumption-based test for cross-border services and intangible assets, expanded zero-rating categories for exported services, clarified rules for mixed sales, elimination of the separate "additional charges outside price" concept, a shift of annual reconciliation responsibilities to taxpayers, differentiated treatment of mixed-use long-term assets based on value, clarified exemption boundaries for medical and educational institutions, new withholding obligations for payments to individuals, a fixed filing deadline for per-transaction declarants aligned with individual income tax, and strict time limits for export declarations that eliminate prior cure provisions. These measures are designed to enhance administrative efficiency, close collection loopholes, and support consistent application of the VAT Law across all taxable transactions.