Value-added tax (VAT) is one of the first taxes a foreign-owned company encounters in China. It affects sales, purchases and periodic filings. China's VAT Law took effect on 1 January 2026, so a guide based only on older regulations may miss the current legal framework.
It is also the tax where the structural decisions are made early and are awkward to revisit. Taxpayer status, invoicing capability and the discipline around input documentation all get set in the company's first months.
This guide explains how VAT works in practice for a foreign-invested company, the decisions worth getting right at setup, and where companies lose money unnecessarily.
The mechanism
VAT is charged on the value added at each stage of supply rather than on the full sale price at the end.
A general VAT taxpayer charges VAT on its sales, which is output VAT. It pays VAT on its purchases, which is input VAT. What it remits is broadly the difference, with the input VAT credited against the output VAT, subject to the applicable rules on creditability.
Two consequences follow, and both matter commercially.
Input VAT needs prescribed evidence and an eligible use. A special VAT fapiao is a common document for domestic purchases; import VAT and other transactions may use other prescribed evidence. Some purchases are excluded from credit under the VAT Law even when the paperwork is valid.
VAT is a cash flow item. The tax point depends on the transaction and the law's timing rules, including payment entitlement and invoicing. A company may owe VAT before a slow-paying customer settles the bill, so payment and invoice terms deserve attention.
General taxpayer or small-scale taxpayer
This is the decision that shapes everything else, and it should be made deliberately rather than by default.
General VAT taxpayer status allows the company to issue special VAT fapiao and to credit input VAT against output VAT. It carries more compliance work. It is normally the right choice when the company's customers are businesses that need to credit input VAT themselves, or when the company has significant creditable input costs.
Small-scale taxpayer treatment is simpler and works differently, without the same input credit mechanism. It can suit small operations selling to consumers or to customers who do not need special fapiao.
The determining factor is usually the customer base. A business customer that cannot credit input VAT on your invoice is effectively paying more for the same service, and in competitive B2B situations that matters. Assess this against expected turnover, since thresholds apply, and confirm the current position for your industry.
What are China's main VAT rates in 2026?
The VAT Law sets main rates of 13%, 9% and 6% for different taxable supplies, and a 3% levy rate for the simplified calculation method, subject to applicable concessions. Exports can have zero-rate or exemption treatment where the legal conditions are met. A rate cannot be selected from the company's industry label alone: identify the actual goods or services and check any current implementing rules or incentives.
Two practical points:
Classification is a real decision. Where a company supplies a mix of goods and services, or services that could fall into more than one category, the classification affects the rate and needs to be supportable.
Contracts should reflect it. Whether prices are VAT-inclusive or VAT-exclusive should be explicit in contracts. Ambiguity here produces disputes with customers and awkward conversations with the tax bureau.
Confirm the current rates for your specific supplies with reference to the State Taxation Administration rather than working from a figure someone quoted informally.
Imports and exports
For trading companies this is where VAT interacts with customs.
Imports are generally subject to import VAT, which for a general VAT taxpayer may be creditable subject to the applicable rules and documentation. Import VAT is a cash flow event at the border, so it should be modelled rather than discovered.
Exports may qualify for VAT refund or exemption treatment. The refund system depends on eligibility, correct filing, and the supporting documentation being complete. Missing input fapiao is the most common reason an export refund is reduced or lost, which makes supplier documentation discipline a direct cash issue rather than an administrative one.
If the business plan depends on export refunds, treat the documentation process as part of the operating model from the first shipment.
Filing and the compliance rhythm
VAT filing is periodic rather than annual, which is what makes it the dominant part of the monthly accounting workload.
The recurring work involves recording transactions, managing fapiao issued and received, checking that input VAT is properly evidenced and creditable, and submitting the filings within the deadlines. Related surcharges are calculated on the VAT payable.
Late or inaccurate filings are not a minor administrative matter. They can affect the company's public credit record, and that record matters later when changing registration details, applying for permits or remitting funds overseas.
Where companies lose money
Not planning for the correct input document. Agree with suppliers on the required invoice type and delivery timing, then reconcile it to the underlying purchase.
Accepting the wrong fapiao type. Taking a general fapiao where a special VAT fapiao was available gives up a creditable amount.
Choosing taxpayer status by default. Ending up with a status that does not suit the customer base.
Ignoring the timing of output VAT. Not planning for VAT payable on invoiced but uncollected revenue.
Weak supplier discipline. Suppliers who are slow or reluctant to issue proper documentation quietly increase the company's tax cost.
Treating export refunds as automatic. Assuming a refund without confirming eligibility and building the evidence file.
How VAT interacts with the Hainan tax position
These are separate taxes, and it is worth keeping them separate.
Hainan's 15% corporate income tax rate concerns tax on profits and depends on encouraged-industry classification, a revenue threshold and substantive operation. It does not change how VAT applies to the company's sales.
Where the two connect is in the records. Demonstrating that more than 60% of revenue comes from the encouraged activity relies on invoicing and accounting records that clearly identify which revenue arises from which activity. Fapiao descriptions that are vague or inconsistent with the business scope weaken that evidence.
So the practical advice is the same in both directions: set the invoicing descriptions and revenue classification properly from the first month.
Related reading
- China fapiao and VAT invoices explained
- China corporate tax for foreign companies
- China bookkeeping and accounting costs explained
- Annual compliance for a foreign-owned company in Hainan
Official sources
- China VAT Law, effective 1 January 2026
- State Taxation Administration: invoice verification platform
- State Taxation Administration policy and regulation database
- State Taxation Administration guidance on Hainan encouraged-industry conditions
VAT rates, thresholds, creditability rules and export refund treatment change over time and depend on the specific supply. Confirm the current position for your company's activity before relying on a rate or a refund.
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