what we think

By Kathleen Cao

In recent years, we have supported numerous clients with regard to VAT exemptions on cross-border services that could be or were being challenged by local tax authorities. 

On 25 December 2024, China promulgated the PRC Value-Added Tax Law (VAT Law), which will take effect on 1 January 2026. This landmark legislation elevates VAT from provisional rules and administrative notices to a statutory framework. To ensure its effective implementation, the Ministry of Finance (MOF) and the State Administration of Taxation (STA) have just released the Draft VAT Implementation Regulations (Draft Regulations), on 11 August 2025. While the effective date of the Draft Regulations has not been explicitly announced, it is widely expected to take effect on 1 January 2026 as well. For multinational companies and foreign-invested enterprises (FIEs), one of the most significant changes concern cross-border service transactions.

1. Taxable Scope for Cross-Border Services

The Draft Regulations clarify when services and intangible assets are considered consumed in China and thus subject to VAT in China:

• Provided to a Chinese customer and used in China;
• Directly linked to domestic goods, immovable property, or resources;
• Other cases defined by MOF/STA.

Example: A German IT company providing cloud computing services to a Chinese subsidiary is subject to VAT if these services are accessed and consumed in China.

2. Zero-Rated Services for Exports

Services and technologies supplied to overseas clients and fully consumed abroad may qualify for zero VAT. Covered activities include:

• R&D, design, software, outsourcing, information system services;
• Technology transfers, circuit design and testing, business process management;
• International and aerospace transport, and processing/repair services conducted overseas.

Example: A Shanghai R&D center conducting design work for its US parent company may apply zero VAT, provided the output is entirely used abroad.

3. Input VAT and Cross-Border Operations

The Draft Regulations also provide more flexibility for investment-heavy projects:

• Assets under CNY 5m: full deduction immediately;
• Assets above CNY 5m: full deduction upfront, but adjustments required if used in exempt or simplified-tax projects.

Example: A foreign-invested manufacturer purchasing advanced equipment for exports can claim full VAT credit upfront, improving cash flow.

4. Compliance and Administration

At the same time, businesses who do cross-border business can expect to tightened compliance. Some examples include:

• Mixed sales taxed at the principal business rate; concurrent operations require separate accounting;
• Invoices remain central to VAT compliance, with electronic invoicing explicitly recognized.

Example: An FIE providing both consulting and software licensing must separate revenues for different tax rates; if it doesn't, then the higher rate applies to both kinds of services.

5. Key Takeaways for Multinationals

• Review cross-border contracts to determine if services are taxable in China.
• Identify opportunities to benefit from zero-rated VAT treatment on exports.
• Leverage optimized VAT credit rules for investment-heavy operations.
• Strengthen compliance, particularly in invoice management and mixed transactions.

Conclusion

The Draft Regulations, once effective, will provide clearer rules for cross-border activities and aim to reduce disputes with tax authorities. Foreign businesses operating in China should evaluate supply chains, service flows, and contract structures now to prepare for the implementation of the new legal framework in 2026.

R&P is a full-service law firm that supports international companies in China. Or tax practice focused on advice and implementation support with regards to tax structure and tax enforcement in China. For example, our team often advises clients on dealing with potential tax exposure, and negotiating with the tax office for solutions. For more information on how we can support your business, please write to your usual contact at R&P, or to Kathleen Cao ([email protected]) or Maarten Roos ([email protected]).