China issues draft VAT implementation regulations for 2026 tax reforms

The draft consolidates existing circulars into a single framework, with the goal of strengthening tax certainty and compliance, especially for foreign-invested enterprises.

Clearer scope for cross-border services

A key update is a clearer definition of when services and intangibles from overseas providers are considered “consumed” in China and therefore taxable. VAT will apply if a service is sold to a Chinese customer and used domestically, or if it is linked to Chinese goods, real estate, or resources. This allows firms to specify consumption location in contracts, avoiding unexpected VAT bills.

Zero rating for service exports

Article 9 specifies which exported services will qualify as zero-rated (0% VAT with input VAT refunds). Categories include research and development (R&D), design, IT outsourcing, technology transfers, international transport, and repairs consumed abroad. Consolidating these rules will give businesses predictability, eases compliance, and enhances China’s appeal as a hub for exporting high-value services.

Upfront input VAT credits

The draft introduces a new, phased VAT deduction mechanism for capital investments. Assets under RMB 5 million qualify for immediate deduction; larger assets get full credit upfront but require annual adjustments if partly used for exempt activities. This change will simplify planning and enhance return on investment (ROI) for manufacturers and infrastructure investors.

Standardised exemptions and stricter compliance

The draft also establishes specific requirements for VAT-exempt sectors, specifying that exemptions are restricted to primary agricultural products, non-cosmetic medical services, personally-provided services by disabled individuals, core academic fees, and first-entry ticket revenues. These articles aim to standardise and limit the application of tax preferences, ensuring that benefits are applied only to qualifying units, individuals, and activities as narrowly defined by the regulations.

On the administrative side, VAT filing across multiple branches now requires approval, with cross-province filings centralised. Invoice rules have also been tightened – special VAT invoices may no longer be issued to individuals or for tax-exempt sales, and stricter conditions apply to “red-letter” invoices. Together, these measures aim to close loopholes, unify practice, and require stronger internal controls.

Implications

Overall, these regulations highlight the need for companies to reconsider their tax strategy. Companies should reassess cross-border contracts to clearly define consumption locations, pursue new zero-rated export opportunities, and update internal controls around invoicing and reporting. By providing clearer guidance, the draft promises to reduce disputes with tax authorities and improve certainty in tax planning.

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As a partner at MSA, Brian Blömer leads the corporate services division. Providing guidance to enterprises navigating the Chinese market, Brian's expertise spans various areas of service, including facilitating market entry, company establishment, corporate structuring, and managing company liquidations.