Executive summary

Following the passage of China's Value-Added Tax (VAT) Law on 25 December 2024, the State Council officially released the VAT Implementation Regulations (the Regulations) on 30 December 2025. The Regulations provide detailed guidance on implementing the VAT Law and took effect on 1 January 2026. This Alert highlights the key changes most relevant to multinational enterprises operating in China.

Cross-border transaction rules

Place-of-consumption principle

Article 4 of the Regulations clarifies when services and intangible assets are considered "consumed in China," aligning with the Organisation for Economic Co-operation and Development's (OECD's) destination principle. Notably, the Regulations specify that services consumed on-the-spot overseas by Chinese entities or individuals are not considered domestic sales, preventing double taxation on services genuinely consumed abroad.

Zero-rated cross-border services

Article 9 codifies the scope of zero-rated cross-border services, including research and development (R&D) services, design services, software services and technology transfers to overseas entities — provided these are "completely consumed overseas." The phrase "completely consumed overseas" remains subject to further clarification in subsequent guidance. Businesses engaged in cross-border services should ensure proper contract documentation, delivery location evidence and supporting materials to substantiate zero-rate eligibility.

Output VAT rules updated

Mixed sales clarification

Article 10 provides clearer criteria for determining "mixed sales," i.e., when a single transaction bundles components subject to different tax rates. If the components have a clear principal-ancillary relationship, the entire transaction is taxed at the principal component's rate. Recent administrative guidance applies this principle to express delivery services (6% rate) and electric vehicle (EV) charging/battery-swap services (13% rate as electricity sales).

Streamlined deemed taxable transactions

The VAT Law significantly narrows deemed taxable transactions to three scenarios:

1. Self-produced or commissioned goods used for collective welfare or personal consumption
2. Transfer of goods without consideration
3. Transfer of intangible assets, real estate or financial products without consideration

Notably, services provided without consideration (e.g., interest-free loans, rent-free leases) and inter-branch transfers of goods are no longer explicitly listed as deemed taxable. Additionally, transfer of financial products without consideration is now included. Intercompany arrangements involving share transfers or equity swaps without consideration warrant careful review.

Input VAT management framework

Long-term assets: The RMB5m threshold

The Regulations introduce a significant change for input VAT credits on long-term assets (fixed assets, intangible assets and real estate). Under the current rules, assets used for both taxable and exempt/simplified-method projects can claim full input VAT credit. The new framework requires:

• Assets valued at 5 million Renminbi (RMB5m) or less: Full input VAT credit allowed, regardless of mixed use
• Assets exceeding RMB5m with mixed use: Full input VAT credit upon acquisition, followed by annual adjustments over the asset's useful life to allocate nondeductible portions

This represents a fundamental shift from "full deduction" to "usage-based allocation" for high-value mixed-use assets. Detailed operational guidance, including adjustment calculation methods and transition rules, is expected in subsequent regulations.

Non-VAT transactions and input VAT credit

Article 22 introduces a new category of non-creditable input VAT: purchases used for non-VAT transactions that generate economic benefits but fall outside the scope of taxable transactions. Though specific examples await clarification, potential scenarios may include income from business transfers, dividends, foreign exchange gains and certain equity transactions. Businesses should review their income streams and assess potential impacts on input VAT recovery.

Catering services: Resale exception

The VAT Law adds "directly used for consumption" as a qualifier for non-creditable catering, daily living and entertainment services. This means input VAT on services purchased for resale (e.g., conference organizers outsourcing catering, platform businesses reselling dining services) may now be creditable. Businesses with such models should prepare documentation evidencing the resale nature of these purchases.

Loan-service interest

Article 21 maintains the non-creditability of input VAT on loan interest and related fees, but notably uses "temporarily non-creditable" and mandates periodic policy evaluation. This signals potential future liberalization of the VAT credit chain for financial services.

Annual reconciliation of input VAT

Article 23 shifts the responsibility for initiating the annual input VAT reconciliation from tax authorities to taxpayers. General VAT taxpayers must now calculate non-creditable input VAT proportionally based on revenue ratios and complete annual reconciliation during the January filing period of the following year. Businesses should establish robust tracking systems for input VAT allocation and usage categorization.

General anti-avoidance provisions

For the first time, general anti-avoidance provisions are introduced for the VAT regulations. Tax authorities may adjust transactions lacking a "reasonable commercial purpose" that reduce or exempt VAT obligations or increase/accelerate tax refunds. This mirrors the framework in corporate income tax law. Businesses should ensure tax planning structures are supported by genuine commercial substance and documented business rationale.

Looking ahead

Although the Regulations provide essential implementation details, several areas require further clarification through subsequent guidance, including:

• Detailed operational guidance for long-term asset input VAT credit adjustments
• Specific scope of non-VAT transactions affecting the recovery of input VAT credit
• Criteria for "completely consumed overseas" for cross-border transactions
• Continuance of existing preferential VAT treatments such as 5% levy rate and margin scheme

With the VAT Law and the Regulations now in effect as of 1 January 2026, businesses should promptly assess the impact of these changes on their operations, particularly in areas of input VAT management, cross-border transactions, and VAT preferential treatments. Timely engagement with tax advisors is recommended to ensure full compliance.