VAT law China: A new era for tax compliance in China

The long-awaited VAT law, which represents a comprehensive modernisation of the Chinese tax system, will come into effect on 1 January 2026. It will align more closely with global standards such as the OECD VAT Guidelines. This will have implications for businesses.

As VAT brought in almost CNY 6.9 trillion in 2023, which is around 38% of China’s total tax revenue, these legal updates will significantly impact both local and international businesses operating in China.

Maintaining structure, enhancing clarity

The new VAT law retains the familiar three-tier tax rate structure:

• 13% for general goods and imports
• 9% for essential services such as utilities, publishing, and transportation
• 6% for modern service sectors, including IT, finance, and consulting

However, it builds upon the previous regulations by offering enhanced legal clarity and a codified statutory basis, superseding the prior provisional regulations that have governed the VAT system since 1994.

Defining taxable transactions and jurisdiction

A major change is the clearer definition of taxable transactions. Article 3 includes the sale of goods, services, intangible assets, real estate dealings, and imports within China, which are all considered taxable. This also applies to individuals and sole proprietors.

Additionally, the law adopts the place-of-consumption principle to define cross-border tax jurisdiction. Instead of the service location, the focus is now on where consumption occurs, aligning with OECD standards.

Cross-border transactions: Clearer rules

The law sets clear tests for when VAT applies to cross-border services and intangible assets, such as when the consumer is in China, the product is issued in China, or the seller is domestic. In these cases, Chinese VAT rules apply.

For overseas providers, especially in digital services, a withholding agent in China may be required. This ensures VAT compliance without forcing foreign companies to register with Chinese tax authorities.

Companies should review contracts and invoicing now to ensure compliance with the new rules before 1 January 2026.

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

Financial products and market-oriented pricing

Financial services are now clearly defined as taxable, using the place of issuance or the seller’s registration to determine jurisdiction. Even free financial products count as deemed sales, maintaining tax obligations.

The law also broadens the definition of sales revenue to include non-cash benefits. Market value will guide taxation for such exchanges, and authorities may reassess prices if they seem abnormally low or high.

Administrative and compliance updates

The new VAT law removes ultra-short filing periods and aligns import tax declarations with customs timelines, simplifying compliance and reducing costs for businesses.

Additionally, the removal of the “fallback clause” increases clarity by limiting authorities’ discretion to redefine taxable items, making tax rules more predictable.

Preparing for 2026 and beyond

The new VAT law is a step toward modernisation, but many details such as refund procedures and input VAT rules will be clarified in future regulations before 2026.

In the meantime, businesses engaged in cross-border trade, finance, or digital services should start reviewing how the changes may affect their operations, invoicing, and compliance.

Conclusion

China’s updated VAT law keeps the core tax rates but offers a clearer framework, greater global alignment, and more legal certainty, explain the Ecovis experts. It adopts principles such as place-of-consumption and refundable credits to support both domestic and cross-border growth.

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