On 25 December 2024, the Standing Committee of the National People’s Congress promulgated the Value Added Tax (VAT) Law, which will take effect on 1 January 2026.
VAT is the largest source of tax revenue in China, contributing about 38% of total tax revenue in 2024. It was historically governed by a fragmented framework of regulations and rules issued by the Ministry of Finance (MOF) and State Taxation Administration (STA).
The enactment of the VAT Law marks a significant step towards reinforcing the principle of “taxation according to the law” in China. However, it remains to be seen how these fragmented rules will be integrated with the VAT Law and its implementing regulations.
Key changes to the source rules for services and intangible properties mean that, under the VAT Law, the primary criterion for determining whether a sale of services or intangible properties occurs within China has shifted to the “place of consumption”, rather than location of the seller or buyer, aligning with international tax norms.
Changes to the source rules for financial products mean the VAT Law now explicitly states that the sale of financial products occurs within China if the financial products are issued domestically, or if the seller is a domestic entity or individual, providing more clarity for the financial industry.
The narrowed scope of “deemed sales” rules is notable as the VAT Law now only includes a few specified scenarios. The previous catch-all provision has been removed.
Considering that the issuance of the VAT Law does not automatically repeal the previously applicable VAT rules, it remains to be seen whether and how the MOF and STA will issue further regulations to address gaps surrounding complexities on various issues.
Other questions on how businesses comply with the VAT Law include the future of foreign e-commerce businesses. Article 15 of the VAT Law now bypasses the question of business establishment or domestic agent of overseas entities/individuals, instead directly designating the purchaser as the withholding agent unless “the foreign entity/individual entrusts a domestic agent pursuant to State Council regulations”.
More countries have required non-resident e-commerce companies to register and pay VAT on their supply to domestic parties. It remains to be seen whether regulations referred to in article 15 may introduce something similar, which would mark a significant change for cross-border transactions.
Multinational and domestic companies alike should closely monitor forthcoming regulations, especially for aspects that may impact existing VAT compliance.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at howard.wu@bakermckenzie.com
