Key Changes in the New Implementation Regulations of the China Value-Added Tax Law

On December 25, 2025, the China State Council adopted and promulgated the “Implementation Regulations of the People's Republic of China on the Value-Added Tax Law” (the Implementation Regulations). The new Value-Added Tax Law and the Implementation Regulations (together as the New Legislation) officially came into effect on 1 January 2026. The New Legislation has optimized and adjusted the VAT collection and administration system in multiple dimensions. These changes are closely related to the business activities of market entities and have a broad and far-reaching impact. This article interprets the core changes of the New Legislation to help companies grasp key policy points and adjust compliance arrangements in a timely manner.

 

I. Application of the Consumption-Place Rule for Tax Jurisdiction over Cross-Border Services

The New Legislation has refined the definition of the VAT taxation scope. Regarding the tax jurisdiction over services provided by overseas entities to domestic entities, it replaces the ambiguous wording in the original Circular.  The legislation now formally establishes the “consumption place principle.” Under this principle, for services provided by overseas entities to domestic entities, the domestic paying party is obliged to withhold and file VAT, unless the services are overseas on-site consumption (such as catering, tourism, exhibitions and other services requiring on-site participation). For example, if an overseas consulting firm provides cross-border market consulting services to a Chinese company and none of its consultants enters China, these services would be deemed as domestic consumption. The Chinese company must withhold and file the corresponding VAT when paying the service fees to the overseas consulting firm. Companies should clarify withholding and filing responsibilities in contracts to avoid potential tax disputes.

This change directly impacts cross-border businesses: Domestic companies must re-examine their cross-border service procurement lists, clarify the scope of overseas services for which withholding and filing obligations may apply, and prevent tax underpayment due to misunderstandings of the policy. On the other hand, for overseas service providers, the tax compliance costs in the Chinese market have become more explicit and increased to a certain extent.

 

II. Streamlining the Deemed Sales Rules

Under the original Interim Regulations on VAT, there were eight deemed sales rules for goods and three for services, intangible assets, and real estate, totaling 11 rules including a catch-all clause. The New Legislation has drastically streamlined these rules to only three and has eliminated the catch-all clause. This adjustment has significantly reduced the operational burden on companies. The core changes include two aspects:

• Firstly, the deemed-sales rules for consignors and consignees have been removed, bringing the tax treatment back to the economic substance of the transaction. In practice, this simplifies the tax handling process for consignment businesses. Companies no longer need to conduct complex deemed sales declarations for the transfer and sale of consigned goods, thereby reducing tax compliance costs. However, it should be noted that false consignments (e.g., affiliated companies transferring goods through fabricated consignment contracts without actual consignment business substance) may be viewed as taxable sales by tax authorities, therefore companies must retain sufficient documents to prove the authenticity of such transactions.
• Secondly, the deemed sales rule for services at no charge has been abolished. Acts such as interest-free inter-company fund lending and free property leasing within a company are no longer subject to VAT as deemed sales. This will significantly ease the capital pressure on companies, especially expanding the tax space for fund dispatching and resource sharing among group companies. However, two points require attention: Firstly, interest-free lending may be classified as a non-taxable transaction, and the deduction of input tax needs to comply with the relevant requirements of the New Legislation. Companies need to re-evaluate the input tax treatment plans for such businesses. Secondly, although transactions without consideration between related parties are not deemed sales, tax authorities may, in accordance with Article 53 of the Implementation Regulations, adjust arrangements that lack reasonable business purposes and result in reduced or delayed tax payment in accordance with the Tax Collection Administration Law and relevant regulations. This reminds companies to ensure reasonable business backgrounds when conducting gratuitous transactions with related parties to avoid triggering tax adjustment risks.

 

III. Redefining the Eligible Entities for Small-Scale Taxpayers

Under the original Interim Regulations on VAT, companies that do not frequently engage in taxable activities could apply to be taxed as small-scale taxpayers even if their annual sales exceeded the threshold. The New Legislation has adjusted this rule: only “non-business units that do not frequently engage in taxable activities” may choose to be taxed as small-scale taxpayers after exceeding the sales threshold; companies are no longer eligible for this exception.

This change directly affects companies' choice of organizational form and business planning: For companies that occasionally engage in large-value taxable transactions, exceeding the sales threshold will result in the loss of small-scale taxpayer preferential policies (such as lower tax rates), requiring them to pay tax as general taxpayers. This means companies need to conduct advanced tax planning and reasonably predict their sales volume. If exceeding the threshold is anticipated, companies should improve the input tax deduction chain in advance to avoid an increased tax burden due to the sudden conversion to general taxpayer status. Additionally, this forces companies to standardize their operations, eliminating the practice of evading general taxpayer obligations under the pretext of “not frequently engaging in taxable activities” and safeguarding the fairness of tax collection and administration.

 

IV. Tightening the Tax Calculation Rules for Small-Scale Taxpayers Exceeding the Sales Threshold

The New Legislation clearly stipulates that small-scale taxpayers who exceed the sales threshold must calculate and pay VAT using the general tax method from the period in which the threshold is exceeded. For example, for goods sales (subject to a 13% VAT rate), construction services (subject to a 9% VAT rate), or modern services (subject to a 6% VAT rate), output tax shall be calculated at the corresponding general tax rate with input tax deduction, instead of applying the original 1% collection rate. This tightening of rules has a significant practical impact on small-scale taxpayers: Under the original policy, companies exceeding the threshold were required to complete general taxpayer registration within 15 days after the end of the corresponding declaration period, with the option of taking effect immediately or from the next month. Some companies may obtain a transition period of up to 4 months by delaying their registration and consultation with the local tax authority. With the abolition of the transition period under the New Legislation, companies must switch their tax calculation method in the period when the threshold is exceeded. This requires companies to strengthen real-time monitoring of sales value. Once signs of exceeding the threshold are detected, immediate preparations should be made to switch the tax calculation method to avoid declaration errors due to delayed adjustments.

 

 

V. Simplified Tax Calculation Rate Unified at 3%

The New Legislation has eliminated the 5% collection rate for simplified tax calculation, unifying it to 3%, except for Sino-foreign cooperative exploitation of offshore oil and natural gas, which shall retain the original 5% collection rate as stipulated by the State Council. This adjustment will significantly reduce the tax burden on relevant industries and have a positive practical impact on sectors such as real estate transactions, leasing, and labor dispatch:

• For businesses such as real estate transfer, real estate leasing, and labor dispatch that choose simplified tax calculation, the collection rate has been reduced from 5% to 3%, directly reducing companies' tax liabilities and improving cash flow.
• Companies providing human resource outsourcing services, security services, and property management services have high labor costs (usually 70%-80%) that cannot be deducted. The reduction of the collection rate from 5% to 3% will ease their operational pressure.
• Some general taxpayer companies that previously chose simplified tax calculation (including modern service companies providing public transportation services, construction services, film screening, warehousing, and receiving and dispatching services) will also apply the 3% collection rate. Although these companies are general taxpayers, they face difficulties in obtaining sufficient input tax deductions due to business characteristics. The unification of the simplified tax calculation rate enhances tax burden stability and reduces overall tax burden，helping to improve business profitability.

These companies need to promptly adjust their tax declaration data to ensure accurate application of the new collection rate and avoid declaration errors caused by continuing to apply the old policy.

 

VI. Expanding the Scope of Mixed Sales and Adjusting the Principal Business Judgment Standard

Although the New Legislation has abolished the official term “mixed sales”, companies still need to pay attention to the tax calculation rules for relevant businesses in practice. The core changes have a key impact on companies' business accounting and tax rate application. The core adjustments include two aspects:

• Firstly, expanding the scope of mixed sales. The original rules only covered the combination of “goods + services”, while the New Legislation includes all combinations of items with different tax rates/collection rates (such as combinations of goods with a 13% VAT rate and goods with a 9% VAT rate, services with a 9% VAT rate and services with a 6% VAT rate, and goods with a 13% VAT rate and real estate with a 9% VAT rate). This requires companies to more accurately allocate sales value among items with different tax rates when conducting multi-type business combinations, avoiding underpayment or overpayment of taxes due to tax rate confusion.
• Secondly, adjusting the principal business judgment standard. The original rules were based on the “company's main business” (business scope or annual sales proportion), while the New Legislation is based on the “transaction's main business”, emphasizing judgment based on the primary-secondary relationship of the business — where the main business reflects the substance and purpose of the transaction, and the auxiliary business is a necessary supplement to the main business and premised on the occurrence of the main business. This change aligns the tax rate application for mixed sales more closely with the actual transaction, but also increases the subjectivity of judging the principal business.

In practice, companies need to clarify the primary-secondary relationship of businesses in contracts and retain relevant evidence to avoid disputes with tax authorities. For example, construction companies undertaking 'turnkey projects' often combine construction services (subject to a 9% VAT rate) with construction material sales (subject to a 13% VAT rate). Even if material procurement accounts for a larger share, the core of the transaction is providing construction engineering services to the client, with material sales serving only as an auxiliary part of project execution. Therefore, the entire income should be subject to VAT at the 9% tax rate applicable to construction services. Construction companies need to clarify the core content of engineering services in construction contracts and retain corresponding vouchers for material procurement and project use to avoid being deemed as separate taxation due to separate invoicing and ensure compliance with tax handling.

 

VII. Input Tax on Loan Services Remains Non-Deductible

Although the new Value-Added Tax Law has deleted the clause prohibiting the deduction of input tax for loan services, the Implementation Regulations have reaffirmed this rule and added a “factual research and evaluation” clause to reserve space for future policy adjustments. This provision has a continuing impact on the calculation of companies' financing costs: In practice, input tax for various extra-charge fees related to loans (such as service fees, consulting fees, and management fees) cannot be deducted. Companies must fully consider this tax cost in financing decisions to avoid deviations in financing cost calculations due to ignoring the non-deductibility of input tax. However, if guarantee fees are paid to third-party guarantee companies for direct financial services, the input tax can be deducted. This provides certain tax incentives for companies to obtain financing through third-party guarantees. Companies can optimize their financing plans accordingly and choose financing models with more tax advantages. At the same time, companies need to strengthen the voucher management of loan-related fees, accurately distinguish between deductible and non-deductible items, and avoid tax declaration errors.

 

 

VIII. Relaxed Rules for Deducting Input Tax on Catering, Daily and Entertainment Services

The original Interim Regulations on VAT prohibited the deduction of input tax for catering services, resident daily services, and entertainment services. The New Legislation has added restrictive conditions: input tax is only non-deductible for such services “purchased and directly used for consumption”. This optimization has brought significant benefits to industries such as tourism, conferences, and weddings, with notable practical impacts: If companies purchase such services for external provision (such as travel companies providing catering and entertainment services to tourists, conference hotels providing catering services to guests, and wedding companies outsourcing wedding banquets), the input tax can be deducted normally and directly reducing operational costs. For example, travel companies were previously unable to deduct input tax for catering expenses paid on behalf of tourists; under the New Legislation, such deductions are allowed, which will increase the profit margin of travel companies and help promote the recovery and development of the tourism industry. Companies need to accurately distinguish between “self-use” and “external provision”, retain relevant business contracts, service lists, and other evidence, and avoid input tax deduction risks due to unclear classification.

 

 

IX. Adjusting Non-Taxable Items

The New Legislation has clarified the distinction between VAT non-taxable items (statutory transactions outside the VAT taxation scope) and VAT-exempt items (tax preferences within the taxation scope): VAT exemption is a tax preference within the taxable scope, requiring normal declaration of income; non-taxable VAT items are outside the VAT taxation scope, and no income needs to be declared in tax returns. This distinction standardizes companies' tax declaration processes, avoiding declaration errors caused by confusing the two concepts. In practice, companies need to compare the list of statutory non-taxable VAT items, sort out their own businesses, accurately distinguish between taxable and non-taxable transactions, and standardize the filing of tax returns.

It should be noted that the New Legislation only lists 4 statutory non-taxable VAT items: wages and salaries, administrative fees, expropriation compensation, and deposit interest. Compared with the original Circular 36:

• Firstly, the non-taxable VAT recognition for “services provided by units to employees (such as canteens, dormitories, and training)” has been deleted. This requires companies to re-evaluate the tax treatment of such internal services. If they fail to meet other tax-exempt or non-taxable conditions, VAT will need to be paid.
• Secondly, “expropriation compensation” has been reclassified as outside the scope of VAT (non-taxable), resolving the previous dispute over input tax transfer when movable property expropriation is associated with land expropriation. For companies involved in expropriation compensation, this avoids cost increases caused by input tax transfer and protects their legitimate rights and interests.

At the same time, the New Legislation has for the first time divided non-taxable transactions into “deductible non-taxable transactions” and “non-deductible non-taxable transactions”, clarifying that input tax corresponding to non-deductible non-taxable transactions cannot be deducted. This is a major change in the policy. According to the New Legislation, a non-taxable transaction is non-deductible if it meets both of the following conditions:

• It involves business activities other than taxable VAT transactions or deemed taxable transactions, and relevant economic benefits are obtained in monetary or non-monetary forms.
• It does not fall under any of the above four statutory non-taxable item scenarios.

Conversely, a deductible non-taxable transaction must meet any of the following conditions:

• It falls under a statutory non-taxable scenario.
• It does not involve business activities.
• No relevant economic benefits are obtained.

The scope of non-taxable transactions is extensive, including equity transfer, debt transfer, offshore trading, insurance indemnity, acceptance of gifts, debt forgiveness, cash discounts, exchange gains, asset surpluses, packaged transfer of assets during restructuring, liquidated damages for unfulfilled contracts, government subsidies not linked to income volume, and gratuitous services no longer deemed as sales. The definition of “business activity” is ambiguous and awaits clarification in supporting announcements, which brings certain uncertainties to companies' practical operations and may become a high-risk area for tax disputes. For example:

• Firstly, liquidated damages received by companies due to unfulfilled contracts: Company A signs an equipment procurement contract with Company B. Later, Company B breaches the contract, leading to its termination, and Company A receives 100,000 yuan in liquidated damages. This liquidated damage constitutes a non-taxable transaction. If the tax authority determines that Company A's receipt of liquidated damages is related to its daily business activities (e.g., Company A's core business is equipment sales, and such contract breaches are common in operations), the special invoice input tax for legal service fees paid by Company A to handle the contract dispute cannot be deducted. If the company can prove that the breach is not directly related to business activities, the input tax may be deductible. The determination result directly affects the company's costs.
• Secondly, government subsidies received by companies that are not linked to income volume: Company C, a manufacturing company, obtains a job stabilization subsidy from the government (unrelated to the company's income scale, only assessing employment stability). This subsidy is a non-taxable transaction. If the subsidy is deemed as supporting the company's normal operations (falling under the scope of business activities), the input tax for audit fees, data collation fees, etc., incurred by the company to apply for the subsidy cannot be deducted. If the subsidy is deemed as a gratuitous government support (non-business activity), the input tax can be deducted.

This policy change requires companies to retain contract agreements, subsidy documents, expense vouchers, and other materials to clearly demonstrate the relevance of the business to operational activities. At the same time, companies need to closely monitor subsequent supporting announcements, strengthen communication with tax authorities, and avoid tax risks due to misunderstandings of the policy.

 

X. Implementing Annual Reconciliation for Apportioning Shared Input VAT

If companies purchase goods (excluding fixed assets) or services for simultaneous use in general tax calculation projects, simplified tax calculation projects, VAT-exempt projects, and non-deductible non-taxable projects, the common input tax shall be allocated and deducted based on the proportion of sales volume. The original Interim Regulations on VAT allowed tax authorities to conduct annual reconciliation for inaccurate input tax allocation caused by unbalanced monthly purchases and sales. The New Legislation has explicitly assigned this obligation to taxpayers, requiring them to conduct a consolidated reconciliation of annual data in January of the following year. This change strengthens the main responsibility of taxpayers and imposes higher requirements on companies' tax accounting capabilities.

In practice, companies need to establish and improve the input tax allocation and accounting system, accurately record the sales volume and input tax of each project, and avoid large-scale tax supplements or refunds during the annual reconciliation due to monthly data deviations. Companies should conduct preliminary preparations for input tax reconciliation at the end of the year to ensure the smooth completion of consolidated reconciliation in January of the following year.

 

XI. Adjusting the Input Tax Deduction Rules for Common Use of Long-Term Assets

The New Legislation has adjusted the input tax deduction rules for long-term assets (fixed assets, intangible assets, real estate) used simultaneously in general tax calculation projects, simplified tax calculation projects, VAT-exempt projects, non-deductible non-taxable projects, collective welfare, or personal consumption. The original policy allowed full deduction (including leased long-term assets). The New Legislation has abolished the separate application rules, incorporated leasing into the scope of services, and adopted the following standards: For individual long-term assets costing no more than RMB 5 million, full deduction is still allowed. For those exceeding RMB 5 million, full deduction is allowed first, and then the input tax corresponding to non-deductible projects shall be transferred out annually during the service life based on depreciation and amortization.

This adjustment has important implications for companies' long-term asset investment decisions and tax accounting: For investments in long-term assets with an amount not exceeding 5 million yuan, companies can still enjoy the full deduction preference, reducing short-term tax costs and encouraging companies to update small-scale fixed assets. For long-term assets exceeding 5 million yuan, phased transfer-out processing is required. This requires companies to strengthen the depreciation and amortization accounting of long-term assets, accurately distinguish between deductible and non-deductible parts, and avoid tax declaration errors.

It should be noted that the transfer-out of common input tax for goods/services only applies to 3 types of projects (simplified tax calculation projects, VAT-exempt projects, non-deductible non-taxable projects), while long-term assets cover 5 types of projects (adding collective welfare and personal consumption). Companies need to distinguish the deduction rules for different asset types to avoid confusion.

 

XII. Strengthening the Administration of VAT for Natural Persons and Clarifying Withholding Obligations and Declaration Deadlines

The New Legislation has added provisions on the administration of VAT for natural persons, which have important practical impacts on both natural persons' tax payment and companies' withholding obligations:

• Firstly, it clarifies that onshore payers are solely responsible for withholding for taxable transactions involving natural persons (primarily targeting B-to-C scenarios, excluding cases where natural persons complete self-declaration and invoice issuance in accordance with relevant provisions), addressing the long-standing industry pain point where paying parties cannot claim pre-tax deductions due to natural persons' refusal to issue invoices. In practice, companies need to establish a withholding management mechanism for taxable transactions involving natural persons and fulfill the withholding and remittance obligations simultaneously when making payments to avoid tax risks and obstacles to pre-tax deductions due to failure to withhold. However, the specific scope of taxable transactions awaits clarification in supporting announcements. Companies need to closely monitor policy developments to avoid over-withholding or under-withholding.
• Secondly, it stipulates that individuals paying tax on a transaction-by-transaction basis (typically individual taxpayers) must complete a tax declaration by June 30 of the following year, aligning with the deadline for the final settlement of individual income tax on comprehensive income. This simplifies the tax declaration process for natural persons and reduces their tax compliance costs.

It should be noted that, except for scenarios where platforms handle VAT declarations on behalf of hosts as specified in Announcement Caishui [2025] No. 16, individuals generally need to apply for invoice issuance and pay taxes in person. When cooperating with individuals, companies should inform them of their tax obligations in advance to avoid business disputes due to poor communication.

 

XIII. Unifying the Criteria for Determining the Time of Tax Liability Occurrence and Simplifying Goods Sales Scenarios

The New Legislation has incorporated the interpretation of “the date of obtaining the proof of collection of sales proceeds (i.e., the date of acquiring the right to collect payment)” from the original Circular 36 and extended it to goods sales scenarios, unifying the criteria for determining the time of tax liability occurrence. This standardizes companies' sales contract management and tax declarations. The specific rules are: If there is a written contract with an agreed payment date, the date of acquiring the right to collect payment shall be the agreed payment date. If there is no written contract or no agreed payment date, the date of goods delivery shall prevail. All seven rules for determining the time of tax liability occurrence for goods sales scenarios (such as direct payment, installment payment, and advance payment) under the original Implementation Rules for the Interim Regulations on VAT have been deleted, and the above standards shall apply uniformly. This simplifies companies' tax accounting processes and reduces the risk of declaration errors due to unclear scenario classification.

In practice, companies need to clarify the payment date in sales contracts to avoid disputes over the time of tax liability occurrence due to ambiguous contract terms. At the same time, they should standardize the voucher management for goods delivery, accurately record the delivery time, and ensure that tax declarations are consistent with actual business operations. For companies adopting the advance payment model, it is necessary to note that the time of tax liability occurrence has been adjusted to “the date of acquiring the right to collect payment” (if the contract specifies a payment date) or “the date of goods delivery” (if there is no contract or no agreed payment date). Companies need to adjust their capital and tax planning accordingly.

 

XIV. Adjusting the Rules for Overdue Handling of Export Tax Rebates and Exemptions

The New Legislation clearly stipulates that exports not declared for rebate within the statutory period must be treated as domestic sales and taxed accordingly. The clause in the original draft for comment stating that “failure to process tax rebates or exemptions within 36 months shall be deemed as domestic sales” has been deleted. This adjustment imposes higher requirements on the management of tax rebate and exemption declarations for export companies. In practice, export companies need to further strengthen the management of the time limit for tax rebate and exemption declarations to avoid losing the preferential policy of tax rebates and exemptions due to overdue declarations and being forced to pay tax as domestic sales, which would increase operational costs. Since the specific declaration time limit shall be subject to subsequent supporting announcements issued by the Ministry of Finance and the State Taxation Administration, export companies need to closely monitor policy developments, adjust their declaration processes in a timely manner, and ensure that declarations are completed within the prescribed time limit. At the same time, companies should establish an internal control mechanism for tax rebate and exemption declarations, clarify the division of responsibilities, strengthen communication and coordination with customs, tax authorities, and other departments, ensure the completeness and timeliness of declaration materials, and reduce the risk of overdue declarations.

 

 

Summary

The changes in the new Implementation Regulations of the Value-Added Tax Law covers multiple core areas such as the taxation scope, tax calculation rules, input tax deduction, preferential policies, and collection and administration requirements. It not only aligns with international rules but also optimizes the system design in combination with domestic collection and administration practices, exerting a comprehensive and in-depth practical impact on companies' operational management, tax compliance, and planning strategies. From a practical perspective, some rule optimizations (such as the unification of simplified tax calculation rates, the streamlining of deemed sales rules, and the adjustment of input tax deduction for specific services) have provided space for companies to reduce burdens and costs, helping to stimulate market vitality. Meanwhile, some tightened rules (such as the time limit for tax calculation for small-scale taxpayers exceeding the threshold and the annual liquidation obligation for common input tax) have strengthened tax collection and administration, forcing companies to standardize their operations. Currently, some clauses and related practical issues (such as the definition of business activities, the scope of taxable transactions involving natural persons, and the declaration time limit for export tax rebates and exemptions) require further clarification in supporting announcements. Relevant taxpayers need to closely monitor policy developments, strengthen the construction of tax teams, improve compliance management capabilities, and accurately grasp the policy boundaries. At the same time, they should review their existing VAT compliance and conduct tax planning in combination with their own business realities to achieve an optimal tax burden under compliance and ensure the sustainable and healthy development of companies.