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China

Recent significant developments, changes and reforms in China

1 month ago
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13 min read

Executive Summary:

China’s VAT system is undergoing significant changes and reforms, particularly in 2025 and 2026. Key themes include:

  • Digitalization of Invoicing: A nationwide mandate for e-invoicing (e-fapiao) is expected by late 2025, requiring businesses to adapt to real-time reporting and standardized data formats.
  • VAT Law Modernization: A new, unified VAT Law takes effect on January 1, 2026, aiming to align China’s system with international standards, streamline compliance, and address inconsistencies.
  • Adjustments to VAT Refund Policies: Significant changes are being implemented regarding VAT credit refunds, with a focus on specific strategic sectors and varying refund rates.
  • Increased Enforcement and Crackdown on Fraud: Tax authorities are actively cracking down on VAT evasion schemes, utilizing big data analysis and collaborating with law enforcement.
  • Targeted VAT Policies: Sector-specific VAT policies are being implemented, notably in areas like renewable energy (offshore wind and nuclear) and high-tech manufacturing (integrated circuits).
  • Hainan Free Trade Port: Hainan continues its development as a Free Trade Port with full customs closure by December 2025, featuring significant tax exemptions and liberalization policies.
  • Changes Affecting the Gold Market: Significant changes are occurring to VAT rules surrounding gold, impacting jewelry, investment, and consumer behaviour.

1. E-Invoicing and Real-Time Reporting:

  • Mandatory e-Invoicing: China is transitioning to a “fully digital, real-time tax invoice system” (e-fapiao). While a full legal mandate wasn’t immediately imposed after December 1, 2024, “the expectation is that e-invoicing will become fully mandatory for all VAT taxpayers by late 2025.”
  • Clearance Model: The system operates on a “clearance model,” where invoice data is transmitted to tax authorities instantly upon issuance. This means “invoice data is reported to the government at issuance,” eliminating separate e-reporting deadlines for e-fapiao users.
  • Data Requirements: E-invoices adhere to a standardized XML format, with finalized invoices available in PDF or OFD format. They must contain mandatory fields like “unique invoice code and 20-digit number,” tax IDs, descriptions, tax rates, and VAT amounts, along with a “dynamic QR code” and “digital signature/certification.” The new fully digital format includes “17 data items”.
  • Long Archiving Period: E-invoices and related records must be “kept for 30 years.”
  • Implications: Businesses must “prioritize adopting e-fapiao, upgrading IT systems, and training staff” to ensure compliance. There’s a “2000 line item limit on Fully Digitalized Electronic Invoices”, impacting ERP systems.
  • Penalties: Businesses are “legally required to issue a valid fapiao for every taxable sale.” Failure to comply can lead to “hefty fines” and even “criminal penalties.”

Briefing document & Podcast: E-Invoicing and E-Reporting in China – VATupdate

2. VAT Law Modernization (Effective January 1, 2026):

  • Unified VAT System: A new VAT Law will take effect on January 1, 2026, unifying the VAT system and replacing the former Business Tax.
  • International Alignment: The law aims to align China’s system with “international standards and clarifies what counts as ‘consumption within China.'”
  • Key Changes: These include an expanded scope of taxable transactions, adoption of the destination principle for services and intangibles, and narrowed definition of deemed sales. Certain activities, such as “employee services for wages and administrative fees, are explicitly excluded from VAT”.
  • VAT Rate Structure: The three-tier VAT rate structure (13%, 9%, 6%) is retained, but there’s a simplified rate of 3% replacing the previous 5%.
  • Consultation: The Ministry of Finance sought public input on the draft regulations.
  • Impact on Foreign Businesses: the changes aim to “improve tax certainty for foreign-invested enterprises”, “streamline compliance, cash flow, and cross-border trade planning”

3. VAT Refund Policy Adjustments:

  • Targeted Refunds: China is adjusting its VAT refund policy, targeting “strategic sectors” and shifting from broad-based support.
  • Eligible Sectors: Specific industries, including “manufacturing, scientific research, technical services, software, IT services, ecological protection, and environmental management,” may be eligible for monthly refunds.
  • Real Estate: The real estate sector faces “specific conditions” for refund eligibility, requiring positive retained credits for six months and at least RMB 500,000 in credits, with a 60% refund on credit increases. “Real estate developers and operators face lower refundable proportions than previously allowed.”.
  • New Criteria: “Applicants must meet conditions set by the tax authority, including compliance and accurate filing history” . The new policy will start in the “September 2025 VAT filing period”.

4. Enforcement and Tax Evasion:

  • Crackdown on Fraud: Tax authorities are actively cracking down on VAT evasion schemes, using “big data analysis and on-site inspections.” Several cases have been exposed, involving “revenue splitting, false declarations, and fraudulent refund claims”.
  • Penalties: Penalties for non-compliance range from “minor fines” to “very substantial fines” and even “criminal charges” in cases of fraud. Authorities are emphasizing “strict enforcement against tax fraud to maintain a fair and lawful business environment.”
  • Specific examples:
    • Changzhou Martin New Energy Technology Co., Ltd. was investigated for fraudulently obtaining VAT credit refunds, facing a 13.2738 million yuan penalty.
    • Chengdu Tax Bureau investigated Sichuan Juxiangda Logistics Co., Ltd. for VAT fraud and tax evasion.
    • Hainan Yuehongyuan Tire Trading Co., Ltd. was investigated for fraudulently obtaining VAT credit refunds.

5. Sector Specific VAT Policies:

  • Offshore Wind and Nuclear Power: A 50% VAT refund for sales of self-produced offshore wind power is available from November 1, 2025, to December 31, 2027. Nuclear power units may also be eligible for similar refunds depending on their operation dates.
  • Contraceptives: China will impose a 13% sales tax on contraceptives starting January 1, 2026.
  • Luxury Cars: China will lower the consumption tax threshold for super luxury cars to CNY 900,000, effective July 2025.
  • Home Sales: VAT on residential properties sold within 2 years of purchase will be reduced from 5% to 3%, effective January 1, 2026. Properties held for 2 years or more will be exempt from VAT.
  • Delivery Services: The standard VAT rate is 9% for delivery services. Small-scale taxpayers may qualify for a 3 percent rate.
  • Express Delivery: VAT applies to revenue from domestic express delivery services by licensed providers

6. Hainan Free Trade Port (FTP):

  • Special Customs Zone: Hainan Island is being transformed into a full free trade port with sealed customs borders.
  • Zero Tariffs: The scheme includes “zero tariffs on most imports and special customs operations.”
  • Three Lines: The model features “three lines: open international border (zero tariffs), controlled mainland border (strict monitoring), and free internal movement.”
  • Expansion: The new regime expands the list of duty-free imports from 1,900 to 6,600 items.
  • Goal: The plan aims to “attract foreign investment, boost trade, and position Hainan as a global gateway, especially to ASEAN.” Hainan FTP will feature highly liberalized business conditions, including free market entry for foreign investment, freer capital flows, and duty-free imports for local manufacturing.
  • Customs Closure: Hainan Province will complete its formal customs closure on 18 December 2025.

7. Gold Market VAT:

  • VAT Changes: “China ended a tax rebate system for gold, no longer allowing retailers to offset VAT, causing domestic gold prices and jewelry stocks to plunge”. Also ending its two-decade platinum import tax exemption, imposing a 13% VAT on all platinum imports starting November 1, 2025″.
  • VAT Exemptions: “VAT exemption applies to standard gold trades on the Shanghai Gold Exchange and Shanghai Futures Exchange.”
  • Policy Impacts: “Increase widens the gap between jewellery purchase and buy-back prices, potentially reducing jewellery recycling. “

8. Digital Platforms:

  • Tax Reporting: China clarified tax reporting for digital platforms starting Oct. 1.

9. International Trade:

  • Tariff Reduction Agreement: The Trump Administration and China have agreed to a 90-day reduction in additional ad valorem duty rates by 24%, effective August 12, 2025.

Conclusion:

China’s VAT landscape is in flux, requiring businesses to stay informed and adapt to the evolving regulatory environment. The transition to mandatory e-invoicing, the implementation of the new VAT Law, and the adjustments to refund policies will have significant implications for tax compliance and cash flow management. Furthermore, the increasing scrutiny by tax authorities and the severe penalties for non-compliance highlight the importance of adhering to the latest regulations. Businesses operating in China should proactively review their VAT practices, upgrade their systems, and seek expert advice to ensure seamless compliance and mitigate potential risks.

 

 

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