Understanding China’s VAT system.

Value-added tax (VAT) is the largest single tax category in China, accounting for roughly 30% of total government tax revenue. As a key component of China’s broader tax framework, VAT applies throughout the production and distribution chain, covering the sale of goods, provision of services, transfer of intangible assets and importation of goods within China’s territory. Introduced in 1994 to replace the Business Tax and extended to cover services in 2016, the system is now governed by the Value-Added Tax Law of the People’s Republic of China and its Implementation Regulations, which came into effect on 1 January 2026, replacing the provisional regulations that had governed the system for over 30 years.

This guide covers China’s VAT system in full, from taxpayer classification and applicable rates through to tax calculation, export rebates and the cross-border and corporate income tax (CIT) implications that businesses operating in China most commonly need to understand.

VAT liability and exemptions

All enterprises and individuals engaged in the sale of goods, provision of services, provision of processing, repairs and replacement services, and the import of goods within China are liable for VAT. A small number of exemptions apply:

• Self-produced agricultural products sold by agricultural producers
• Contraceptive medicines and devices
• Antique books
• Instruments and equipment imported directly for use in scientific research, experiments and education
• Materials and equipment imported from foreign governments and international organisations
• Articles imported directly by organisations for special use by the disabled
• Medical services provided by licensed medical institutions
• Sales of used goods by individuals
• Services for education, marriage, funeral and cultural or religious activities

VAT rates in China

There are two types of taxpayers for VAT purposes: general and small-scale.

For general taxpayers, VAT is levied at 13% on the sale or importation of goods, provision of services, sales of intangible properties and immovable properties. Input VAT can be credited against output VAT. For small-scale taxpayers, the rate was reduced from 3% to 1% from 1 January 2023 to 31 December 2027.

VAT rates vary according to the taxable activity or classification:

VAT registration

Companies with annual taxable sales exceeding RMB 5 million are required to register as general taxpayers. Those below this threshold may opt for small-scale taxpayer registration. Small-scale taxpayers with monthly sales below CNY 100,000 remain exempt from VAT until 31 December 2027.

Under the VAT Law, eligibility for small-scale taxpayer status is more tightly defined. Only non-enterprise entities whose main business activities fall outside the scope of taxable transactions may elect small-scale taxpayer treatment after exceeding the RMB 5 million threshold. Companies that occasionally conduct high-value transactions should monitor their annual sales projections carefully, since crossing the threshold results in reclassification as a general taxpayer, with the corresponding obligations around input VAT credits and reporting.

Tax payable calculation

China’s VAT regime distinguishes between small-scale and general taxpayers, with each category subject to different methods for calculating VAT payable and claiming input VAT credits.

Small-scale taxpayers

For small-scale taxpayers, input VAT is not deductible. Any VAT paid on purchases becomes part of the cost of goods sold.

Tax payable = sales income × tax rate (1% from 1 January 2023)

General taxpayers

VAT payable = output VAT – input VAT

Input VAT

Input VAT refers to the VAT paid by taxpayers when purchasing goods or receiving taxable labour services. It is typically recorded on VAT invoices for domestic purchases or customs duty payment certificates for imports.

Input VAT may not be creditable under the following circumstances:

• Lack of valid supporting documents such as valid VAT invoices
• Inadequate accounting systems and tax filings
• Not being recognised as a general taxpayer
• Purchased goods or repair and processing services used for tax-exempt items, such as manufacturing goods for export
• Purchased goods or services used for collective welfare or individual consumption
• Goods experiencing abnormal losses
• Input VAT related to loan interest and associated fees, which remains temporarily non-creditable subject to future policy adjustments

The VAT Law also introduces a threshold rule for long-term assets, including fixed assets, intangible assets and real estate. Where the original value of a single asset does not exceed RMB 5 million, input VAT may be credited in full upon acquisition. For assets exceeding this threshold, input VAT is initially credited in full, but annual adjustments may be required if the asset is used for non-creditable purposes during the adjustment period. Maintaining accurate records of input VAT by asset category and use type is essential, given the need to monitor whether changes in asset usage trigger adjustments in subsequent periods.

For businesses managing complex accounting and compliance requirements, keeping VAT records aligned with asset registers from the point of acquisition reduces the risk of errors during any annual reconciliation.

Output VAT

Output VAT is the tax owed by taxpayers when selling goods or providing taxable labour services. It is calculated based on the taxable value of the sale.

Output VAT = turnover or taxable value × tax rate

Turnover includes all amounts and additional charges billed to buyers, such as allowances, overdue payment interest and leasing fees for packaging materials.

Under the VAT Law, certain transactions at no charge that were previously treated as deemed sales are no longer subject to VAT on that basis. Interest-free inter-company loans and free property leasing within a group fall outside the deemed sales treatment, which reduces the VAT compliance burden for group companies involved in fund dispatching and resource sharing. Where a transaction is treated as non-taxable as a result, any associated input VAT may need to be transferred out.

Where a taxable transaction involves two or more applicable rates, the rate corresponding to the primary activity of that transaction applies. For this rule to apply, there must be a clear principal-auxiliary relationship between the activities: the primary activity reflects the substance and purpose of the transaction, and the auxiliary activity is a necessary supplement to it. Businesses with bundled services or goods-and-services combinations should confirm how they classify each component where different rates apply.

Cross-border transactions and the VAT Law

The VAT Law applies a consumption-place principle to determine when cross-border transactions involving services and intangible assets fall within China’s VAT scope. This has practical implications for Chinese entities purchasing services from overseas providers and for domestic businesses supplying services to foreign customers.

For services provided by overseas entities to domestic Chinese entities, the transaction is treated as occurring within China where the service is consumed in China, regardless of where the overseas supplier is located or whether any of its personnel enter China. The domestic paying party is therefore required to withhold and remit VAT on the payment, unless the services are consumed on-site outside China, such as catering, tourism or exhibition services that require the buyer’s physical presence abroad. Chinese entities should review their cross-border service contracts to confirm whether a withholding obligation applies and to ensure the contract clearly allocates that responsibility between the parties.

Services and intangible assets provided by domestic Chinese entities to overseas customers may qualify for zero-rated VAT, provided they are consumed entirely outside China. Categories that typically qualify include international transportation services and R&D services provided to foreign entities for exclusive overseas consumption. Where a service has both onshore and offshore elements, determining eligibility for zero-rating requires careful analysis. Businesses involved in manufacturing and export operations should pay particular attention to the treatment of services bundled with goods exports.

China’s double tax agreements may also be relevant where cross-border payments are subject to both VAT withholding and CIT withholding obligations, particularly in terms of any treaty relief available to the overseas service provider at the CIT level.

VAT and corporate income tax

VAT and CIT interact in ways that affect the cost base and taxable income of a business, and the interaction is most relevant when assessing cross-border transactions and procurement decisions.

Where a business cannot recover input VAT, either because it is non-creditable or because the entity is a small-scale taxpayer, that irrecoverable VAT generally forms part of the cost of goods or services for CIT purposes and is deductible in arriving at taxable income. Where a business purchases equipment and is unable to credit the associated input VAT, the full purchase price including the VAT component can typically be capitalised and depreciated for CIT purposes.

VAT does not change the way revenue or costs are recognised for CIT. Output VAT collected from customers is not income for CIT purposes, and input VAT paid to suppliers is not a deductible expense in itself. The CIT base is the net economic gain from the transaction, with VAT operating as a pass-through. Businesses should review their income recognition policies against both the VAT rules and Chinese accounting standards to ensure consistency across tax and financial reporting.

Where a Chinese entity bears the cost of withholding VAT on a cross-border payment rather than reducing the amount paid to the overseas party, that VAT is typically not creditable as input VAT. It may however be deductible for CIT purposes depending on whether the underlying transaction is revenue or capital in nature. For companies managing corporate income tax compliance alongside VAT obligations, keeping the two frameworks aligned reduces the risk of inconsistent positions during audits.

How to calculate VAT rebates for exports

The tax refund process for exported goods in China involves either a refund of VAT already paid or an exemption from VAT payments. This system, known as the Exempt, Credit, Refund (ECR) method, calculates VAT payable for general VAT taxpayers as follows:

VAT payable = Output VAT on domestic sales – [total input VAT – non-exempted and non-creditable VAT]

Where:

Non-exempted and non-creditable VAT = (export sales – bonded imports) × (VAT rate – applicable refund rate)

Bonded imports refer to raw materials or goods imported specifically for manufacturing exported products. These imports are generally exempt from customs duties and import VAT.

General taxpayers are subject to a 13% output VAT rate, while VAT refund rates vary depending on the product. A higher VAT rebate on exported goods reduces non-exempted and non-creditable VAT, lowering VAT payable overall. If VAT payable is negative, the exporter may be eligible for a refund, subject to regulatory limits.

Calculating VAT refunds using the ECR method can be complex, particularly in cases involving factory transfers or indirect export sales, where goods are classified as exports for customs purposes but remain in China for further processing.

To qualify for a VAT refund, exporters must strictly comply with PRC customs, tax and foreign exchange regulations and hold the required documentation. Failure to meet these requirements can result in disqualification from VAT refunds, even where the goods were physically exported. Where a refund or exemption is not applied for within the required timeframe, the goods, services or intangible assets in question are treated as having been sold domestically and VAT is assessed accordingly. Keeping PRC tax receipts properly verified and in order is essential for substantiating refund claims during any review.

Conclusion

China’s VAT system categorises taxpayers into general and small-scale taxpayers, each with distinct tax rates and calculation methods. The ECR method plays a central role in export VAT rebates, requiring businesses to maintain proper documentation and comply with regulatory requirements throughout the refund process.

The VAT Law, which consolidated the system into a statutory framework, introduced a consumption-place principle for cross-border transactions that extends China’s VAT reach to services consumed domestically regardless of where the supplier is located. Combined with the interaction between non-creditable VAT and CIT deductibility, this makes it worth assessing VAT and CIT positions together rather than separately, particularly for businesses with cross-border service flows or significant capital expenditure. Foreign businesses with material VAT exposure in China benefit from working with a local adviser to manage compliance and make the most of available reliefs.

How Acclime can help with VAT compliance in China

Managing VAT in China requires a clear understanding of tax classifications, registration requirements, rebate processes and the rules introduced by the VAT Law. Acclime’s tax advisors work with businesses to develop tax-efficient operational structures that account for both VAT and CIT obligations, ensuring cross-border arrangements are correctly structured and documented. Our tax compliance team also conducts regular tax health checks to identify exposure areas and keep operations aligned with current regulatory requirements.

By partnering with Acclime, businesses can manage China’s VAT framework with confidence, secure export VAT refunds efficiently and maintain a consistent position across VAT, CIT and related reporting obligations. Contact us to discuss your VAT compliance needs and to get a clear recommended next step.