On 1 January 2026, China implemented its first Value-Added Tax Law and supporting implementation regulations, marking a significant shift in the country’s largest tax category. This legislative upgrade consolidates existing policies while introducing changes that will impact how businesses operate, particularly those engaged in cross-border transactions.
For foreign-invested enterprises and multinational companies, understanding these changes is essential to maintaining compliance and optimising tax strategies in China’s evolving regulatory landscape.
Reshaped rules for cross-border transactions
One of the most significant changes under the new VAT framework is how China treats cross-border services, intangible assets and financial products. The law now places greater emphasis on where these are consumed rather than simply where they originate.
Determining the place of consumption for services and intangibles
The implementation regulations introduce more detailed tests for determining whether services or intangible assets are subject to Chinese VAT. A key development is that services or intangibles supplied by overseas entities that are “directly related” to goods, real estate or natural resources located within China are now deemed consumed domestically and therefore subject to VAT.
This expansion could potentially subject more transactions to VAT liability, even when the purchaser is an overseas entity. However, the absence of a clear definition for “directly related” creates uncertainty that businesses should be prepared to navigate.
Revised VAT triggers on complex financial products
For financial products, the new law establishes that VAT applies if the product is “issued within China” or if the “seller is a domestic entity or individual”. This differs from previous rules and may create challenges for complex over-the-counter derivatives where identifying the “seller” is difficult. Further clarification on the meaning of “issued within China” is awaited.
Simplified deemed sales, but tighter input VAT deduction rules
While the new laws simplify the scope of deemed taxable transactions, it concurrently tightens the rules for inputting VAT credit.
