China Aligns VAT Administration with New VAT Law
China’s VAT system entered a new phase in early 2026 following the formal implementation of the new VAT Law on 1 January 2026. February saw a coordinated series of administrative releases from the Ministry of Finance (MOF), State Taxation Administration (STA) and General Administration of Customs (GAC) designed to align preferential regimes, customs treatment and reporting obligations with the new legislative framework.
For multinational businesses operating in China, the changes combine targeted sector incentives with tighter compliance expectations.
SME VAT preference enforcement tightened
The STA has also clarified enforcement rules around SME tax incentives, particularly where businesses artificially split activities to remain below eligibility thresholds.
China currently offers significant VAT relief to small-scale taxpayers, including:
- VAT exemption for monthly sales below RMB 100,000
- A reduced 1% VAT rate (from the standard 3%) for qualifying small taxpayers
The new guidance introduces a three-part “reasonable commercial purpose” test focusing on motive, business substance and arm’s-length pricing. Authorities will challenge structures where entities share personnel, premises or assets, or where contracts are artificially split to remain under VAT thresholds.
Cross-border e-commerce VAT relief extended
China has extended its import VAT exemption for returned cross-border e-commerce exports until 31 December 2027. Goods re-imported within six months due to unsold inventory or customer returns remain exempt from import duty, VAT and consumption tax, provided they are returned in their original condition.
However, exporters must reverse any previously claimed export VAT refund before claiming the relief and provide documented evidence of the return.
Administrative updates to VAT return reporting
Finally, the STA issued technical adjustments to VAT return reporting rules to reflect the terminology and structure of the new VAT Law. While the return form itself is unchanged, several line items and classifications have been refined, including:
- Reclassification of processing and repair labour services under the broader services category
- Expanded disclosure of deductions under differential taxation regimes
- New reporting items for gold exchange input tax and oil and gas prepayments
For most taxpayers these represent administrative alignment rather than substantive policy change, but finance teams should review reporting processes to ensure classifications and deduction disclosures reflect the updated rules.
Targeted import VAT incentives extended
China confirmed the continuation of a wide set of import tax incentives through the current 15th Five-Year Plan period, generally running until 31 December 2030. The measures apply across sectors linked to innovation, healthcare and energy development.
Notable VAT-related measures include:
- Reduced 3% import VAT on anti-cancer and rare disease drugs (extended to 2027).
- Full exemption from import VAT, duties and consumption tax on qualifying scientific research equipment and teaching instruments.
- Import VAT exemptions for seeds, breeding stock and certain working animals.
- Energy sector incentives, including significant VAT refunds (70–80%) for qualifying pipeline and LNG terminal projects.
These policies reinforce China’s longstanding use of VAT and customs incentives to support industrial policy priorities such as biotechnology, energy security and R&D capability.
Implications
The February releases illustrate the direction of China’s post-VAT-Law environment: continued use of VAT incentives to support strategic sectors alongside tighter enforcement of preferential regimes and clearer administrative reporting rules. For multinational groups, the message is straightforward: opportunities remain, but documentation and compliance discipline will be increasingly scrutinised.
