What does China’s new VAT law mean for foreign businesses operating in China?

Hawksford's senior tax service manager Will Chan talks us through the implications of China’s new VAT law and what it means for foreign businesses operating in China.

What are the new VAT rules in China?

China formally enacted its first-ever VAT law, which took effect on 1 January 2026. This law elevates VAT rules from administrative regulations to national legislation, strengthening enforcement and legal certainty. It consolidates previously scattered rules into a unified statutory framework and introduces refinements in areas such as taxable scope, taxpayer and withholding agent definitions, input VAT credit rules, preferential policies, filing requirements, and anti-avoidance administration.

China is maintaining its current three-tier VAT rate system:

• Ÿ 13% – Sale and import of most goods, processing, repair, and replacement services
• Ÿ 9% – Transportation, construction, real estate, utilities, agricultural products, publications
• Ÿ 6% – Modern services (IT, consulting, R&D), financial services, intangible assets
• Ÿ 0% (zero-rated) – Qualified exports of goods and services
• Ÿ 3% simplified method – Certain industries and small-scale taxpayers (no input VAT credit)

What are the key VAT compliance requirements for foreign businesses operating in China?

Foreign businesses operating in China are generally required to comply with China’s VAT rules through their China entities or, in certain cross-border transactions, through VAT withholding mechanisms.

Key VAT compliance requirements include:

• Ÿ Proper determination of VAT taxpayer status and applicable VAT rates
• Ÿ Correct classification of taxable transactions, including mixed sales and deemed taxable transactions
• Ÿ Accurate issuance, receipt, and management of VAT invoices (fapiao)
• Ÿ Timely VAT filing and tax payment in accordance with statutory deadlines
• Ÿ Correct calculation and documentation of input VAT credits and adjustments
• Ÿ Compliance with withholding VAT obligations for cross-border services or intangible asset transactions, where applicable

Under the new VAT law, tax authorities place increased emphasis on transaction substance, documentation consistency, and data-based administration, particularly for foreign-invested enterprises with complex business models.

What are common VAT compliance challenges for trading businesses in China?

Trading businesses in China, including foreign-invested trading companies, commonly face VAT compliance challenges in the following areas:

• Ÿ Correct VAT rate application for different categories of goods
• Ÿ Input VAT credit eligibility, especially where documentation is incomplete or transactions involve multiple parties
• Ÿ Management of VAT invoices (fapiao), including timing mismatches between goods delivery, invoicing, and payment
• Ÿ VAT treatment of bundled transactions, rebates, discounts, or complimentary items
• Ÿ VAT implications of cross-border procurement, import VAT, and export VAT refund or exemption procedures

Under the new VAT law, clearer rules on mixed sales, deemed taxable transactions, and input VAT adjustments increase compliance transparency but also require trading businesses to strengthen internal controls and documentation processes.

What are the penalties for non-compliance with VAT regulations in China?

Non-compliance with VAT regulations in China may result in administrative penalties under the Tax Collection and Administration Law and related regulations.

Depending on the nature and severity of the non-compliance, potential consequences may include:

• Ÿ Payment of outstanding VAT and late payment surcharges
• Ÿ Administrative fines imposed by tax authorities
• Ÿ Denial or claw back of input VAT credits or VAT refunds
• Ÿ Increased scrutiny, audits, or risk classification by tax authorities

Under the New VAT Law, tax authorities are explicitly empowered to make adjustments where transactions lack reasonable business purpose and result in reduced, deferred, or improperly refunded VAT. Enhanced data sharing between tax and customs authorities further strengthens enforcement, particularly in relation to export VAT refund matters.