To establish a robust statutory taxation framework, China has progressively enacted legislation for major taxes. The formalisation of Value-Added Tax (VAT), the largest tax category in China, marks a significant milestone in this process. VAT was first piloted in 1979 and formally introduced in 1994 under the Provisional Regulations on VAT. Over the past three decades, it has undergone multiple revisions through supplementary regulations to adapt to rapid economic development and evolving commercial practices.
The VAT Law officially came into effect on January 1, 2026. Elevating VAT from provisional regulations to statutory law significantly enhances the stability and authority of China's tax system. The Implementation Regulations of the VAT Law, which took effect on the same date, provide detailed operational guidance to support its application.
While the VAT Law largely retains the essential framework of the former Provisional Regulations, it introduces several important clarifications and refinements. Key highlights include:
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Explicit inclusion of taxpayer rights protection as a legislative objective
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The VAT Law uniformly defines the scope of taxation, i.e., VAT is levied on taxable transactions occurring within the territory of China
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Taxable transactions refer to the aforementioned four categories: goods, services, intangible assets, and real estate.
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For transactions occurring "within the territory":
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For goods and real estate, the criteria is relatively straightforward (e.g., place of origin, location of goods, or location of the property.
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For services and intangible assets, the law adopts a "consumption-based principle" to determine taxibility
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Retention of four levels of tax rates: 13%, 9%, 6%, and zero rate, with the levy rate for small-scale taxpayers unified at 3%, removing the previous levy rate of 5%
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Input VAT incurred on interest remains non-creditable
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Introduction of an explicit anti-avoidance clause, prohibiting taxpayers from evading taxes through improper adjustments to sales revenue; tax authorities may legally determine the sales amount in accordance with the law
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Simplification of deemed sales scenarios from the original 11 items to 3 items, with a clearer focus on the free transfer of goods and assets.
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Clarification on mixed sales activities, where the applicable tax rate should be determined based on the principal business of the taxable transaction
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Enterprises shall act as withholding agents when making payment taxable payments to individuals
In summary, the VAT Law encompasses numerous detailed policy provisions. While it establishes clearer and more structured rules, it also raises numerous compliance requirements for enterprises. Timely understanding of policies, proactive planning, and real-time operational adjustments are essential for businesses to effectively mitigate risks and strengthen their competitive position in an evolving tax environment.
China Updates
Accounting and Taxation
Announcement on the Registration & Administration of General VAT Taxpayers
In accordance with the VAT Law of the People's Republic of China and its Implementing Regulations, the key points concerning the registration and administration of general VAT taxpayers are summarised below:
Registration Criteria
Taxpayers whose annual taxable VAT sales exceed the threshold for small-scale taxpayers are generally required to register as general taxpayers. However, non-enterprise entities that do not frequently engage in taxable transactions and natural persons may opt to be treated as small-scale taxpayers.
Taxpayers whose sales do not exceed the threshold but have sound accounting systems and are able to provide accurate tax information may voluntarily apply for registration as general taxpayers.
Sales Calculation & Registration Time Limits
Annual taxable sales refer to the cumulative sales amount over any continuous period of up to 12 months or four quarters. Occasional sales of intangible assets or real estate are excluded from this calculation.
Taxpayers exceeding the threshold must complete registration within the tax declaration period of the month following the month in which the threshold is exceeded. Where the exceedance arises from self-correction, tax audits, or similar corrections, registration must be completed within 10 working days from the date of adjustment.
Effective Date & Transitional Arrangements (Key Changes)
General taxpayer status typically takes effect from the first day of the period in which the sales threshold is exceeded or registration is completed.
Key Transitional Rule: For taxpayers whose sales exceed the threshold during Q4 or December 2025, the effective date of general taxpayer status will be uniformly set as January 1, 2026. VAT paid at the applicable rate before this date cannot be credited as input tax credits.
The probationary period management measures for general taxpayers will be abolished from January 1, 2026.
Effective Date
This Announcement shall take effect on January 1, 2026.
Announcement on Matters Concerning the Pre-Tax Deduction of Advertising and Promotion Expenses
The Ministry of Finance (“MOF”) and the State Taxation Administration (“STA”) jointly issued the Announcement on Matters Concerning the Pre-Tax Deduction of Advertising and Promotion Expenses (“A&P expenses”) on December 29th, 2025.
The announcement extends and clarifies the corporate income tax (“CIT”) treatment of A&P expenses for the period from January 1, 2026, to December 31, 2027. This announcement supersedes the previous Announcement No. 43 of 2020, ensuring policy continuity and consistency in policy application.
The key points of the announcement are summaried below:
Special Industry Deduction Policy
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Applicable Industries: Cosmetics manufacturing or sales, pharmaceuticals manufacturing and beverage manufacturing (excluding alcohol manufacturing) industry.
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Deduction threshold: A&P expenses of up to 30% of annual net sales are deductible for CIT purposes.
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Carry-forward treatment: Any excess A&P expenses may be carried forward and deducted in subsequent tax years.
Related-Party Enterprise Allocation Mechanism
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Where related parties have entered into an A&P expense agreement on the apportionment (“Apportionment Agreement”):
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A&P expenses incurred by one party, within the 15% of annual net sales deduction limit, can be deducted by the incurring enterprise, or be wholly or partially allocated to the related party for deduction in accordance with the allocation agreement.
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The receiving party should calculate its own A&P deduction limit excluding any A&P expenses allocated to it under agreement.
Tobacco Industry Deduction Prohibition
Human Resources
Three-Year Action Plan for Promoting Employment of Persons with Disabilities in Shanghai
On December 22, 2025, the General Office of the Shanghai Municipal People's Government issued the "Three-Year Action Plan for Promoting Employment of Persons with Disabilities in Shanghai".
The plan calls for government agencies and public institutions to take the lead in employing persons with disabilities, while encouraging enterprises to expand recruitment channels and support flexible employment and entrepreneurship among people with disabilities. It also promotes the development of Sunshine Vocational Rehabilitation Assistance Bases and provides targeted employment support for persons with disabilities in secondary and higher education institutions, as well as those in rural areas.
To enhance professional capabilities, eligible individuals may receive free skills training up to three times a year, with a total annual training value capped at CNY10,000. The plan also seeks to strengthen employment security measures, improve the overall employment environment, and provide incentives to organisations that hire people with disabilities beyond the statutory proportion.
The plan will remain valid until December 31, 2027.
Corporate Governance
Catalogue of Industries Encouraging Foreign Investment
On 15 December 2025, with approval from the State Council, the National Development and Reform Commission and the Ministry of Commerce jointly released the Catalogue of Industries for Encouraging Foreign Investment (2025 Edition), which will take effect on 1 February 2026.
The 2025 Edition contains a total of 1,679 items, representing a net increase of 205 new items and 303 revised items compared to the 2022 Edition.
Within the Nationwide Catalogue, newly added encouraged sectors include nucleic acid-based drugs, intelligent testing equipment, and virtual power plant operations. In the services sector, new additions include pet hospitals, sports tourism and Internet+ medical and health services.
Within the Regional Catalogue, newly added sectors include cruise tourism, ice and snow equipment, computing power infrastructure software and hardware, and wind farm operations.
Foreign investment in encouraged industries may benefit from preferred policies such as tariff exemptions on imported equipment, priority land supply at preferential prices, a reduced 15% enterprise income tax rate for enterprises in Western China and Hainan, and tax credits for reinvested profits, among other industries.
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