On 11 August 2025, China’s Ministry of Finance and the State Administration of Taxation released the draft VAT Implementation Regulations for public comment, ahead of the new VAT Law effective 1 January 2026. Key changes include restrictions on input VAT credits (long-term assets above RMB 5m, non-VAT activities, loan-related costs), shifting annual reconciliation to enterprises, clarified cross-border rules, and adjustments to mixed-use sales and deemed taxable transactions. Certain exemptions are narrowed, and a General Anti-Avoidance Rule (GAAR) is introduced for the first time. These reforms align China with international practice but raise compliance burdens, documentation requirements, and enforcement risks, requiring companies—especially FIEs—to review their VAT planning and systems before the 2026 rollout.
China Proposes Major VAT Reforms for 2026, Tightening Compliance
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Author: Ljubica Blagojević
Category:
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Content accuracy validation date:
28.08.2025
Content accuracy validation time:
08:14h
Public comments are open until 10 September 2025.
Main Proposed Changes
- Input VAT credits
- Restrictions on long-term assets: Assets below RMB 5m remain fully creditable. For assets above RMB 5m, credits are allowed at acquisition but must be reconciled annually based on usage (adding compliance burden).
- Non-VAT transactions: Input VAT on goods/services used in non-taxable activities (outside Article 6 of the VAT Law) is non-creditable.
- Loan services: Input VAT on loan-related costs (advisory, handling, consultancy fees) explicitly disallowed.
- Annual reconciliation
Enterprises—not tax authorities—will now be responsible for calculating and filing non-recoverable input VAT adjustments, requiring stronger VAT reconciliation and lifecycle management systems. - Cross-border rules
- Clarifies when services/intangibles are considered consumed in China, determining VAT liability.
- Zero-rated services (R&D, software, international transport) remain, but technology transfers must be “completely consumed overseas” to qualify—though this term is undefined.
- Mixed-use sales
Clarifies conditions for applying the principal business tax rate when a transaction involves multiple activities with different rates. - Deemed taxable transactions
Narrowed scope: inter-branch transfers and certain free services no longer automatically taxable. However, they may still be challenged under anti-avoidance rules. - Tax incentives
Certain exemptions narrowed, e.g., cosmetic medical services removed from medical VAT exemption. - General Anti-Avoidance Rule (GAAR)
Introduced at VAT level for the first time, empowering tax authorities to challenge transactions lacking a reasonable commercial purpose, closing the door on aggressive VAT planning.
Analysis & Implications
- For businesses:
- Companies with large long-term assets must adopt robust asset tracking and VAT reconciliation systems to handle annual adjustments.
- Multinationals must prepare for stricter scrutiny of cross-border services, requiring detailed documentation of where services are consumed.
- Finance and tax teams must proactively handle loan-related VAT disallowances and ensure compliance in mixed-use scenarios.
- For tax authorities:
- GAAR significantly broadens enforcement powers, shifting compliance pressure onto enterprises.
- Moving reconciliation responsibility to taxpayers reduces administrative burden but increases risks for non-compliance.
- Strategic impact:
The draft regulations align China’s VAT system more closely with international practice, but also tighten input VAT credits, impose new reporting obligations, and expand anti-avoidance tools. Businesses—especially foreign-invested enterprises—must reassess VAT planning, compliance systems, and transaction structures before the 2026 rollout.
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