What’s New under VAT in China Since September 1, 2026
On August 27, 2026, the Ministry of Finance and the SAT issued Announcement 2026 No. 25 titled “关于明确非应税交易等增值税有关事项的公告”. (fgk.chinatax.gov.cn) This policy clarifies which transactions are not taxable and whether input VAT can be deducted, dramatically impacting many sectors. The announcement takes effect on September 1, 2026. (fgk.chinatax.gov.cn)
Key Provisions & Requirements
| Scenario | Are Input VAT Deductible? | Notes |
|---|---|---|
| Being an insurance claimant who receives compensation | Yes | If no taxable transaction occurred but relevant expenses exist. (fgk.chinatax.gov.cn) |
| Receiving donated assets (monetary or otherwise) | Yes | These are not sales, so their input VAT can be used. (fgk.chinatax.gov.cn) |
| Earning interest or dividends via equity | No | Such income is excluded from deduction of input VAT. (fgk.chinatax.gov.cn) |
| Contract breaches where no taxable transaction occurred | Yes | Income like late fees or damages can generate deductible input VAT. (fgk.chinatax.gov.cn) |
Other items clarified include volunteer/uncompensated services (except free transfer of financial products), sales of receivables, and treatment of public subsidy schemes under certain thresholds and decouplings. (fgk.chinatax.gov.cn)
Practical Implications & Action Items
- Review accounting and invoicing systems to classify and track non-taxable vs taxable transactions—mistakes could lead to lost deductions or audits.
- Adjust procurement policies: If you receive assets by donation, ensure the proper VAT invoices are secured so input VAT deduction is possible.
- When entering contracts, explicit terms about payment, breach, or damage should reflect tax treatment—especially whether VAT receipts are involved.
- Financial & investment income activities: Income like dividends must be carefully separated—since no input VAT deduction is allowed.
- Software and ERP systems may need updating to ask whether an item is permissible under the new rules to ensure input VAT deduction eligibility.
Example Situations
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A technology firm receives donated lab equipment from a partner organization. Under the new policy, the firm can deduct input VAT on that equipment, as long as it retains relevant VAT invoices. Without invoices, deduction is not permitted.
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A content platform offers voluntary free online services (excluding financial products). The input VAT incurred in offering those services can now be deducted, whereas previously tax authorities viewed many free offerings as non-deductible.
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A private individual invests in stocks receiving dividends. For companies, payments of dividends (股息红利) are not eligible for input VAT deduction under this new clarification. This won’t affect the personal income tax treatment, but firms involved must ensure downstream sales or purchases correctly handle VAT.
Who This Affects Most
- Manufacturers, tech companies, and platforms often engage in non-taxable or partly non-taxable activities, including donation, gratuity, or breach payments.
- Companies in financial services, investment, or holding shares where dividends are common.
- Entities delivering free or community goods or services, NGOs, or public service organizations.
Next Steps for Businesses
- Conduct a VAT-impact audit of your transactions in recent years to identify whether past input VAT was improperly denied or claimed.
- Liaise with tax advisors to decide whether new VAT invoices should be requested or system modified.
- Stay alert: more regulations are expected around controlled foreign companies (CFC) and individual income tax, which might interact with VAT/transaction classification rules.
Bottom line: These clarifications are significant—misclassifying non-taxable transactions could cost businesses in lost deductions. But with attention to documentation and classification, many will find new opportunities to optimize VAT position.