China formally ratified and introduced its highly anticipated Value-Added Tax (VAT) law in December 2024, marking a historic milestone in the evolution of the nation’s tax system. As the largest contributor to China’s tax revenue, VAT plays a pivotal role in the country’s fiscal framework. The new law will take effect on 1 January, 2026, replacing provisional regulations that have been in place for over three decades.

The VAT law comprises six chapters and 38 articles covering all aspects of VAT, including the fundamental legislative purpose, basic principles, tax rates, taxable basis, preferential tax policies, and tax collection and administration. 

While the law retains most existing VAT rules to maintain a stable policy environment, it introduces several changes that will impact businesses. Key changes relate to the determination of the place of supply for cross-border services, scenarios in which a VAT-able transaction is deemed to exist (i.e., “deemed sales” rules), the definition and treatment of “mixed sales,” taxpayers’ rights regarding unutilized input VAT, and the promotion of electronic VAT invoices.

The VAT law is crafted to ensure that it not only upholds the fundamental principle of maintaining a stable policy environment but also aligns itself with international practices while considering China’s unique circumstances. 

For instance, one of the notable changes brought by the law pertains to determining the place of supply for cross-border services. The criteria for determining whether cross-border services are subject to VAT in China have been adjusted from “if either the seller or the buyer is located in China” to “if the service is consumed in China or the service provider is located in China.” This change aligns the VAT system with the internationally recognized principle of taxing at the place of “consumption.” It may directly impact the determination of the country’s VAT obligations for cross-border services. 

Furthermore, the VAT withholding mechanism designed and implemented for cross-border services has been enhanced. The VAT law provides that a domestic purchaser generally acts as a VAT withholding agent for foreign businesses providing VAT-able services in China, except where a domestic agent is appointed under the regulations stipulated by the State Council. These provisions may affect foreign companies providing B2C digital services to various customers across China.

The law establishes a legal framework for preferential tax policies, thereby enhancing the certainty and reliability of the relevant policies. This is expected to foster a more stable and predictable business environment, crucial for attracting investment and promoting economic growth. Taxpayers may also welcome some other changes. For instance, the law simplifies some scenarios where a VAT-able transaction will be deemed to exist. Notably, the free-of-charge provision of services (other than the sale of financial products) will no longer be deemed a VAT-able transaction. 

Another change is the introduction of flexibility for taxpayers in managing unutilized input VAT. Under the VAT law, taxpayers can choose to carry forward the unutilized input VAT for credit in the next period(s) or apply for a cash refund. Furthermore, the law also amends the provisions regarding the definition of “mixed sales” and the rules about determining the applicable VAT rate for a “mixed sales” transaction. 

In light of the evolving business landscape, the law grants authority to the State Council to develop special preferential policies to support small and micro-sized businesses, key industries, innovations, entrepreneurship, employment promotion and charitable donations, etc. These measures reflect the government’s commitment to fostering inclusive and sustainable economic growth.

Upon enactment, it is anticipated that a suite of supplementary documentation, including implementation regulations, may be published within the year (2025). It will likely provide further guidance and clarification on key issues that hold significant interest for various industries. 

For example, there is considerable anticipation regarding the potential easing of the limitation on crediting input VAT arising from loan services. Such a change could substantially impact financial institutions and borrowers, as it would reduce the cost of financing. 

Another area of interest is cross-border services eligible for VAT zero-rating or VAT exemption and taxpayers’ wish to expand the scope of preferential policies to benefit more businesses. Also, the issue of whether the VAT levying rate of 5% (which has been applied to certain sectors such as real estate) will continue to be adopted is likely to be addressed.

Given the far-reaching implications of the law, businesses are advised to closely monitor regulatory progress to evaluate potential implications for their operations, financing and strategic planning and to develop the appropriate strategic responses and action plans.

Candy Tang, Tax Partner; Alex Guo, Senior Tax Manager, Deloitte Shanghai Tax Ltd.