The new Value-Added Tax (VAT) Law of the People’s Republic of China, approved on December 25, 2024, by the Standing Committee of the 14th National People’s Congress (NPC), will come into effect on January 1, 2026. This updated law aims to streamline and regulate the VAT system in China, aligning it with national economic goals and ensuring fairness and transparency in tax collection.

General Provisions

• Purpose: The law seeks to improve the VAT system to support high-quality economic development, regulate tax collection, and protect taxpayers' rights.

• VAT Applicability: VAT applies to the sale of goods, services, intangible assets, and real estate, including imports, by individuals and businesses within China. It also applies to the free transfer or personal use of goods.

• Non-taxable Transactions: Certain activities, such as employee services, administrative charges, interest income, and legal compensations, are exempt from VAT.

Tax Rates

• Main Tax Rates: VAT rates for the sale of goods, services, and imports are set at 13%, 9%, and 6%, with reduced rates for specific goods, such as agricultural products, books, and basic utilities.

• Zero Rate: Exported goods and some cross-border services are taxed at a zero rate.

• Simplified Tax Calculation: Small-scale taxpayers can use a simplified method with a 3% tax rate.

Taxable Amount

• General Tax Calculation: VAT is calculated by deducting input tax from output tax for most businesses. Small-scale taxpayers apply a fixed rate to their sales revenue.

• Import VAT: For imports, VAT is calculated based on the customs valuation, which includes tariffs and excise duties.

• Taxable Base: The sales amount is based on the actual transaction value, including non-monetary considerations, and is converted to RMB if denominated in foreign currencies.

Tax Incentives

• Small-scale Taxpayer Exemption: Small businesses with annual sales below a set threshold will be exempt from VAT. Specific exemptions apply to sectors like agriculture, education, healthcare, and cultural activities.

• Tax Preferences for Innovation and Public Welfare: The government may introduce targeted VAT exemptions or reductions for certain industries or activities to promote economic growth, innovation, and charitable endeavors.

Tax Administration

• Tax Filing and Payments: VAT obligations arise when a taxable transaction occurs. Taxes must be filed with the relevant tax authorities based on the nature of the transaction. Businesses can file monthly, quarterly, or on a per-transaction basis, with export-related transactions subject to refund or exemption.

• Invoice Requirements: Taxpayers must issue VAT invoices (either paper or electronic), which are legally equivalent.

• Taxpayer Registration: Provisions are in place for taxpayers to register for VAT, with regulations for cross-border transactions and the collection of VAT on imported goods.

Final Provisions

• Enforcement and Penalties: The law outlines penalties for non-compliance, with violations subject to enforcement under the Tax Collection and Administration Law of the People’s Republic of China.

• Implementation: The law will come into effect on January 1, 2026, replacing the Interim VAT Regulations.

Conclusion

The new VAT law is designed to enhance efficiency, fairness, and transparency in VAT collection, while supporting economic development and adapting tax policy to meet evolving national needs.

At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.  

PHC Advisory is a company of  DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance. 

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The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way. 

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