China Provides Detailed Rules on VAT Treatment of Long-Term Assets

General Deduction Rules: Input tax can be fully deducted for long-term assets used exclusively for taxable activities, while it is non-deductible for assets used exclusively for non-creditable activities, categorized into five types. If the use of an asset changes from taxable to non-creditable, adjustments must be made based on the asset’s remaining net value, with specific adjustment periods depending on the asset type.
Mixed Use Deduction Model: For long-term assets with mixed purposes, a two-tier model applies: assets valued up to CNY 5 million can have full deductions at purchase, while those over CNY 5 million allow for full upfront deductions but require annual adjustments based on their usage. The adjustments involve calculating the annual base and then determining non-creditable adjustments for welfare/personal consumption and sales activities.
Asset Disposal and Improvements: When long-term assets are sold, scrapped, or significantly changed in use, any remaining unadjusted input tax must be adjusted in a lump sum. Additionally, capitalized improvements exceeding CNY 5 million are treated as new assets, necessitating a new adjustment period for VAT calculations.