China – New VAT Law and Modernization of VAT system

On December 25, 2024, the Standing Committee of the National People’s Congress adopted the VAT Law. The promulgation of the VAT Law will significantly reshape China’s indirect tax framework. The law is consistent with previous reforms, maintaining the three-tier tax rate system. At the same time, it modernizes its concept through different provisions that align with internationally accepted standards. 

The importance of the VAT regime can be quickly concluded based on its contribution to national coffers. The latest data shows that more than a third of the national revenue derived from taxes belongs to the VAT. The introduction of the VAT Law and modernization of the tax framework is the logical next step to make tax collection less burdensome and the business environment more international.

Timeline

The VAT Law will come into effect on January 1, 2026. 

New Regulatory Framework

The adopted VAT Law retains a significant part of the already established practice, maintaining the three-tier tax rate system and introducing new provisions reflecting the modernization and standardization following the worldwide accepted perspective on different VAT-related concepts. 

The VAT Law is based on the following three-tier tax rate system: 

• Standard rate – 13 % for the supply of goods, provision of different types of services, import of goods, and lease of tangible movable property;
• Reduced rate – 9% for provision of different kinds of services, import of goods( indicated list), supplies of printed and e-books, and other;
• Reduced rate – 6% for provision of services(except those for which a  different rate is reserved), supply of intangible assets. 

However, there are also VAT-exempt supplies and the zero-rated ones. In transactions that cover exports of goods(if not differently indicated by a specific rule), the VAT rate is zero; the same rule follows the cross-border provision of services by domestic legal or natural persons. 

The law embraces a more straightforward concept of taxable persons and taxable transactions. Taxable persons are entities and individuals that sell goods, services, intangible assets, or real estate within the People’s Republic of China or import goods. These persons are treated as VAT collectors and payers. 

Cross-Border transactions

As indicated earlier, the part of the VAT Law that defines the cross-border regime clearly shows a new, more international approach. The updated concept of the place of supply shows that the nature of provisions embraced the destination principle. Practically speaking, the place of supply for cases of distance supply or cross-border provision of service should follow the concept of where the transaction occurs. 

The shift towards the destination principle could be seen through the interpretation of the provision, which indicates that the place of supply will be PRC if the actual place of consumption is within the country.

Considering the generic interpretation of the VAT Law, non-resident providers of digital services or products will need to adjust their VAT collection systems accordingly. Whether tax authorities can establish simplified registration and reporting systems for cross-border suppliers remains to be seen. 

Adopting the VAT Law in the People’s Republic of China will unquestionably reshape the business environment for domestic and foreign economic operators. Extending the concept of taxable persons and transactions will expand the number of taxable persons obliged to register for VAT and establish a VAT compliance system when they make respective sales to customers based or residing in China. 

In the following months, it remains to be seen what rules and regulations respective tax authorities will adopt that will play an important role in shaping the obligations of non-resident providers of digital services or distance supplies of goods.