China’s new VAT Law and its Implementation Regulations have revised the rules for determining China’s taxable cross-border services. These changes will have minimal impact on domestic service providers, but material implications for overseas service suppliers. Regarding the implied expansion of the taxable scope, enterprises are advised to review their cross-border service models in accordance with the new rules.
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China’s new Value-Added Tax (VAT) Law and its supporting Implementation Regulations (effective January 1, 2026), have adjusted the criteria for determining taxable transactions of selling services within China. For most domestic sellers, this adjustment does not bring substantial changes. The key focus should be on the revised definition of taxable transactions for overseas sellers, which involves important adjustments in cross-border service transactions and may have a direct impact on the tax compliance of relevant enterprises.
Below is a comparison of the relevant articles between the New VAT Law and the Old Policy:
| Old Policy (Caishui Circular [2016] No. 36) | New Policy (VAT Law and its Implementation Regulations) |
| Article 12 of Circular No. 36:”Sales of services within the territory” refers to:Either the seller or the buyer of services (except for lease of real property) is located within the territory. Article 13 of Circular No. 36:However, services sold from a foreign entity or individual sells services to a domestic entity or individual that take place entirely outside China shall not be deemed as sales of services within the territory. | Article 4 of VAT Law: Taxable transactions within China refer to:For the sale of services, the services are consumed within China, or the seller is an entity or individual within China. (Article 4 of VAT Law)Article 4 of VAT Law Implementation Regulations: “Services are consumed within China” refers to the following circumstances:Where services are sold by overseas entities or individuals to entities or individuals within China, except for services consumed on-site outside China;Where services sold by overseas entities or individuals are directly related to goods, immovable property, or natural resources within China; andOther circumstances as prescribed by the competent finance and tax authorities under the State Council. |
Transactions from overseas sellers to domestic buyers (“External-to-Internal”)
A fundamental shift in the new VAT Law is the replacement of the previous criterion of “take place entirely outside China” with the “consumed on-site outside China” for judging the domestic tax liability of cross-border services.
In terms of the changes of wording, the scope of taxable activities under the new regulations appears to have expanded compared to the previous regulations. This development is also in alignment with the emerging international consensus that cross-border trade in services should be taxed at the place of consumption.
Nevertheless, determining the place of consumption remains a challenge in VAT legislation and enforcement. In practice, “consumed on-site outside China” can be understood concretely as services delivered and consumed simultaneously at a physical location outside China, such as on-site training, local transportation, or in-person conferences. In this sense,
Transactions from Overseas Sellers to Overseas Buyers (“External-to-External “)
Article 4 (2) of the Implementation Regulations stipulates that “External-to-External” transactions that are directly related to domestic goods, real estate, or natural resources to an overseas entities or individual shall be subject to Chinese VAT. This provision is different from the current policy and is a key change that overseas sellers need to monitor closely.
It should be noted that the concept and judgment criteria of “directly related” have not yet been clearly defined, which may lead to uncertainty in tax collection and administration practice. In practice, a comprehensive assessment will typically be required, taking into account the service purpose, expected outcomes, delivery methods and cost structure.
Further regulatory interpretations and guidance are still needed regarding how the Chinese tax authorities will ensure the collection of taxes on these transactions and how foreign companies should complete tax declarations in China.
Recommendation
In response to the above regulatory changes and potential uncertainties, we recommend that enterprises conduct a comprehensive review of existing cross-border service transaction models. For transactions with unclear VAT liability, it is advisable to consult professional tax advisors in advance to avoid underpayment or incorrect tax declarations.
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Rachel Wang
Senior Associate
