The Value-Added Tax Law of the People’s Republic of China (the “VAT Law”), together with its implementing regulations, which took effect on 1 January 2026, marks a fundamental shift in China’s VAT regime — from one primarily governed by administrative regulations to a framework anchored in statutory law. Compared with the long-applied Provisional Regulations on Value-Added Tax and their implementing rules, the VAT Law does not introduce disruptive changes to the overall tax structure. Instead, it delivers a structural upgrade in terms of legal hierarchy, rule rigidity, and certainty of application.

Under the former regulatory regime, enterprises were often required to rely on a fragmented set of ministerial rules, normative documents, and administrative interpretations when determining VAT treatment. The new VAT Law consolidates the core elements of the VAT system — including taxable transactions, tax rate structure, calculation methodologies, principles for determining taxable sales, and the timing of tax liability — directly into statutory provisions. By doing so, it significantly narrows the scope for discretionary interpretation at the institutional level.

As a result, VAT treatment is no longer merely a matter of policy interpretation but has become a compliance determination with clearly defined legal consequences. Certain operational practices that previously relied on policy flexibility may therefore require reassessment under the new legal framework.

In defining taxable transactions, the VAT Law places greater emphasis on substance over form. It clearly provides that VAT applies to taxable transactions carried out within the territory of China by entities and individuals, encompassing the paid transfer of goods, services, intangible assets, and immovable property.

Compared with the previous provisional regulations and policies introduced during the VAT reform period, the VAT Law demonstrates two notable features:

First, the concept of taxable transactions has been unified.
The law no longer differentiates between terms such as “taxable acts” or “taxable sales.” Instead, it adopts the single statutory term “taxable transactions,” reducing interpretative inconsistencies and enforcement divergence.

Second, the scope of taxation follows a “positive definition + statutory exclusion” structure.
By clearly defining the essential elements of taxable transactions while expressly listing circumstances that fall outside the VAT regime, the law prevents the tax base or exemptions from being expanded through analogy or overly broad interpretation.

With respect to business characterization, VAT Law adopts a more holistic approach to mixed sales and concurrent operations. Where a single transaction involves multiple tax rates or levy methods, the law requires a comprehensive assessment based on the transaction’s primary purpose, core content, and commercial substance, rather than a mechanical allocation based on monetary proportions or formal separation.

This shift requires enterprises to ensure consistency among commercial substance, contractual arrangements, and tax treatment throughout contract design, business structuring, and invoicing. Opportunities to achieve tax advantages through purely formal transaction splitting have been substantially curtailed, and the associated compliance risks have increased accordingly.

With respect to tax calculation, the VAT Law retains the existing tax rate structure and, for the first time, codifies it at the statutory level. The principal VAT rates prescribed by law include:

• 13%: applicable to the sale of goods, leasing of tangible movable property, and processing, repair, and replacement services.

• 9%: applicable to transportation services, postal services, basic telecommunications services, construction services, leasing of immovable property, as well as the sale of immovable property and the transfer of land use rights.

• 6%: applicable to modern services, consumer services, financial services, and the transfer of intangible assets (excluding land use rights).

• 0%: applicable to the export of goods and certain cross-border supplies of services and intangible assets.

The statutory confirmation of these rates means that rate selection is no longer merely a matter of policy application but constitutes a clear legal obligation. Incorrect application of VAT rates may directly result in underpayment of tax.

Regarding the timing of VAT liability, the new law further reinforces “completion of the transaction” as the primary determining criterion. Where no payment terms are agreed or no written contract is executed, the tax liability arises on the date when goods are dispatched, services are completed, or the transfer of rights to intangible assets or immovable property is completed. Invoice issuance or receipt of payment serves only as a supplementary reference.

This rule imposes higher requirements on corporate financial management, particularly in revenue recognition, contract administration, and the treatment of cross-period transactions, where differences between accounting and tax timing may become more pronounced.

For the first time, the VAT Law systematically distinguishes, at the statutory level, the legal boundaries among taxable transactions, non-taxable items, and VAT-exempt transactions. From a structural perspective, non-taxable items and exemptions do not represent two separate regimes, but rather two distinct legal conclusions as to whether a transaction falls within the scope of VAT:

• Non-taxable items do not constitute taxable transactions and are therefore excluded from the VAT regime from the outset.

• Exempt transactions fall within the scope of taxable transactions but are exempted from VAT based on specific public policy considerations.

1. Scope of Statutory Non-Taxable Items

The law expressly lists circumstances that do not qualify as taxable transactions, including, for example:

• Services provided by employees to their employment entities in exchange for salaries or wages; and

• Interest income derived from deposits obtained in accordance with the law.

These provisions delineate, by statute, the boundaries of transactions that do not enter the VAT system, preventing undue expansion of the non-taxable scope.

2. Scope and Conditions of Statutory VAT Exemptions

Through a closed-list legislative approach, the VAT Law significantly limits discretion in the application of exemptions. Statutory exemptions include, but are not limited to:

• The sale of self-produced primary agricultural products by agricultural producers.

• Basic medical and public health services provided by medical institutions (excluding for-profit cosmetic medical services and ancillary non-medical services).

• Academic education services, and first-time admission ticket income of museums and cultural institutions.

• Certain social services, such as elderly care, services for persons with disabilities, and funeral services.

3. Statutory Authorization for Preferential Tax Policies

Apart from exemptions and non-taxable items expressly prescribed by law, VAT preferential policies must be formulated by the State Council in accordance with statutory authorization and implemented strictly within the authorized scope. When applying various temporary, industry-specific, or regional preferential policies, enterprises should pay close attention to the legality of the policy source, eligibility criteria, and effective periods.

At the level of tax administration, the VAT Law significantly strengthens corporate compliance obligations through institutional integration and clearer allocation of responsibilities.

The law systematically defines the respective responsibilities of taxpayers and withholding agents, and clarifies rules on the place of taxation and cross-regional filing. For enterprises operating through multiple entities or across multiple jurisdictions, determining the correct place of taxation is no longer a matter of operational choice, but one that directly affects the legality of tax compliance.

Moreover, with the continued enhancement of information-sharing mechanisms and coordinated tax administration, tax authorities’ ability to assess transaction authenticity and tax burden reasonableness has been substantially strengthened. VAT compliance is no longer confined to filing and reporting, but extends throughout the entire business lifecycle — from transaction design and contract management to fund settlement and invoice administration.