China Enacts First Formal VAT Law, Effective 2026

China released its first official VAT Law on December 25, 2024, set to take effect on January 1, 2026. Intending to strengthen the existing system, which made up 38% of tax revenue in 2024, the law introduces important changes—such as shifting the sourcing rule for services to the place of consumption, clarifying VAT rules for financial products, and refining "deemed sales." (Deemed sales refer to transactions that are treated as sales for tax purposes, even though no actual sale has occurred.) Article 15 imposes tax withholding obligations on buyers in foreign e-commerce unless a domestic agent is involved, signaling possible future VAT registration for non-resident sellers. Further rules are expected, and businesses should monitor updates to stay compliant.

On 25 December 2024, China’s Standing Committee of the National People’s Congress published the Value Added Tax (VAT) Law, effective from 1 January 2026. VAT, contributing around 38% of China’s total tax revenue in 2024, was previously governed by a fragmented set of regulations from the Ministry of Finance (MOF) and State Taxation Administration (STA).

The new VAT Law strengthens the principle of "taxation according to the law," but how it will integrate with existing rules remains unclear. A significant change is to base the taxation of services and intangible properties on the "place of consumption," bringing China's VAT system more in line with global standards. Regarding financial products, the Law now explicitly states that VAT is applicable when a product is issued within China or sold by a Chinese entity or individual.

The Law also narrows the range of “deemed sales,” removing the previous broad catch-all rule and limiting it to specified scenarios. However, since the VAT Law does not automatically repeal earlier rules, further MOF and STA regulations will be needed to fill gaps and address complex issues.

Article 15 introduces significant changes for foreign e-commerce: it puts the buyer in charge of handling VAT withholding unless the overseas seller decides to use a local representative. This means foreign sellers can avoid the hassle of setting up shop locally. However, it also hints that China might eventually make foreign suppliers sign up for VAT, just like many other countries do.

Both multinational and domestic businesses should closely monitor upcoming regulations, as they could significantly affect current VAT compliance frameworks.