China's Value-Added Tax Law ("VAT Law") and its Implementing Regulations came into force on 1 January 2026. Subsequently, the Ministry of Finance and the State Taxation Administration issued a series of supporting announcements to ensure smooth implementation. As VAT represents China's largest source of tax revenue, the rollout of the new VAT Law and its supporting policies will positively improve the tax and business environment and support high-quality economic development. This article outlines five key changes associated with the new VAT Law.

1. Revisions to the Definition of "Within the Territory"

Item 4 of Article 4 of the VAT Law stipulates that "in the case of the sale of services or intangible assets, the services or intangible assets are consumed within the territory, or the seller is a domestic entity or individual." The new VAT Law has adjusted the original requirement that "either the seller or the purchaser is within the territory" to "the seller is within the territory" or "the place of consumption is within the territory," removing the criterion that "the purchaser is within the territory" and clarifying the place of consumption principle. The Implementing Regulations further clarify that "the consumption of services and intangible assets within the territory" refers to:

• Services or intangible assets sold by overseas entities or individuals to domestic entities or individuals, excluding services consumed on-site overseas;

• Services or intangible assets sold by overseas entities or individuals that are directly related to goods, real estate, or natural resources within the territory.

The VAT Law clarifies that services provided from abroad that are "consumed on-site overseas" are not subject to VAT. For example, overseas exhibitions and overseas tourism services provided to domestic enterprises do not require domestic enterprises to withhold VAT on their behalf.

At the same time, the criterion of "the purchaser being within the territory" has been removed, meaning that the purchaser is not limited to domestic enterprises. Sales of services and intangible assets between foreign enterprises, if directly related to domestic goods, real estate, or natural resources, shall also be deemed as consumption within the territory and thus fall within the scope of taxation.

2. Simplification of Deemed Taxable Transactions

Article 5 of the VAT Law streamlines the categories of "deemed taxable transactions" into three categories:

(1) Entities and individual business operators using self-produced or commissioned processed goods for collective welfare or personal consumption;

(2) Entities and individual business operators transferring goods without compensation;

(3) Entities and individuals transferring intangible assets, real estate, or financial products without compensation.

Article 3 of the VAT Law specifically emphasizes the "compensation-based nature" of taxable transactions (excluding deemed taxable transactions). Transactions such as "consignment sales," "contribution of goods as capital," and "distribution of profits in the form of goods"—which were included in the prior policy—have been removed, as these transactions are inherently compensation-based and can be treated directly as normal taxable transactions without the need for "deemed" rules.

Note: The provision of services without compensation is not included in the scope of deemed taxable transactions; however, taxpayers should avoid implementing arrangements that lack a reasonable commercial purpose to reduce, exempt, or defer tax payments, to avoid triggering anti-tax avoidance provisions (Article 53 of the Implementing Regulations). At the same time, expenses incurred by an enterprise in providing services without compensation may be subject to upward adjustment for corporate income tax purposes, as such expenses are unrelated to enterprise income.

3. Revisions to "Mixed Sales"

Article 13 of the VAT Law states that: "If a taxpayer engages in a taxable transaction involving two or more tax rates or levy rates, the tax rate or levy rate applicable to the primary activity of the taxable transaction shall apply."

Under old rules, a sales transaction involving both goods and services was considered a mixed sale, and the applicable tax rate was determined based on the taxpayer's principal business. The new VAT Law no longer emphasizes "goods + services," but rather focuses on taxable transactions involving two or more tax rates or collection rates where the business activities have a clear principal-auxiliary relationship. For instance, courier companies providing simultaneously transportation services (9%) and pickup and delivery services (6%), should pay VAT based on the rate for pickup and delivery services, because the core of the transaction lies in those services, while transportation is an auxiliary supporting activity.

4. Changes Regarding Small-Scale Taxpayers

(I) VAT Threshold

Announcement No. 10 of 2026 issued by the Ministry of Finance and the State Taxation Administration sets the following VAT threshold for taxable transactions conducted by small-scale taxpayers, effective 1 January 2026 to 31 December 2027:

• Monthly filing: Monthly sales volume threshold of RMB 100,000;

• Quarterly filing: Quarterly sales volume threshold of RMB 300,000;

• Per-transaction filing: Per transaction threshold of RMB 1,000 (excluding tax).

It is important to note that If sales reach the threshold, VAT shall be calculated and paid on the full sales amount (including RMB 100,000 and RMB 300,000), not only on the amount exceeding the threshold.

(II) Re-registration as a General Taxpayer

Article 36 of the Implementing Regulations stipulates enterprises and individual industrial and commercial households whose annual taxable VAT sales exceed the small-scale taxpayer threshold must complete general taxpayer registration and apply the general tax calculation method starting from the period in which the threshold is exceeded.

Small-scale taxpayers whose sales exceed the threshold (RMB 5 million) must complete the registration procedures within the filing period of the month in which the threshold is exceeded. It is recommended enterprises prepare sales forecasts in advance and schedule the registration appropriately.

5. Changes Regarding the Time When Tax Liability Arises

Article 28 of the VAT Law stipulates: "For taxable transactions, the time when the tax liability arises is the date on which the sales proceeds are received or the date on which a document entitling the taxpayer to claim the sales proceeds is obtained; if an invoice is issued in advance, it is the date the invoice is issued."

Article 39 of the Implementing Regulations further clarifies: "The date of obtaining a document evidencing the right to claim payment refers to the payment date specified in a written contract; where no written contract has been signed or the written contract does not specify a payment date, it refers to the date the taxable transaction is completed, that is, the date on which goods are dispatched, services are rendered, ownership of financial products is transferred, the transfer of intangible assets is completed, or the transfer of real estate is completed."

Note: For enterprises selling goods, the timing of the tax liability can be determined by signing contracts with the customers that clearly specify payment dates. This helps avoid triggering an early tax liability on the date of goods dispatched when no contract is in place or the contractual terms are unclear, which would otherwise tie up excessive corporate funds.

According to Announcement No. 13 of 2026 issued by the Ministry of Finance and the State Taxation Administration: "Where payment is received in advance and services are provided in installments or in stages, the time when the tax liability arises shall be determined based on the earlier principle—either the actual date the first service is provided or the date specified in the contract—and the taxpayer shall declare and pay VAT on the full amount of payment received."

Conclusion

The five changes outlined above cover key tax-related scenarios in enterprises’ daily operations. In addition, the new VAT Law also updated provisions on input VAT deduction and export transactions. Enterprises should take the implementation of the new VAT Law as an opportunity to review their existing tax management practices, to improve both tax compliance and operational efficiency.

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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