Italy and China Ratify Tax Treaty: Opening Doors for Business ( Cloned ) ( Cloned )

Welcome to our first briefing of 2026, providing guidance on the changes now shaping China’s fiscal landscape. With the Value Added Tax (VAT) Law officially in force as of January 1, businesses operating in and with China are navigating a legislative shift.

We will delve into the reform now in effect: the new Value Added Tax (VAT) Law and its implementation regulation published on December 25, 2025. After decades under provisional regulations, this formal law consolidates the system with clarifications and operational changes. We break down what this means for your ongoing operations, covering the VAT rates, rules for cross-border services, and the evolving landscape for VAT refunds.

Understanding these changes is not merely about compliance, it is an imperative for optimizing your financial operations and safeguarding against risk.

1. VAT Rates and Scopes

The standard VAT rates remain unchanged at 13%, 9%, and 6%. However, recent legislative updates have significantly expanded the scope of how these rates apply to complex, bundled transactions. This move replaces the old “mixed sales” concept with more nuanced rules.

Here’s a detailed look at these key shifts and what they mean for your business.

1. The Scope of Mixed Sales is Now Wider (article 12 of the VAT Law)

Previously, rules for bundled sales mainly applied to combinations of goods + services (e.g., selling equipment with installation).

The Change: the new framework now applies to any combination of items with different VAT rates. This acknowledges the complexity of modern business models.

Practical Examples of the Expanded Scope:

• Goods + Goods: Selling high-tech equipment (13%) bundled with agricultural products (9%).
• Services + Services: A security contract (6%) that includes the leasing of security equipment (13%).
• Goods + Real Estate: Selling factory machinery (13%) as part of a turnkey construction project (9%).

Why It Matters: you can no longer default to a single tax rate for a bundled sale. You must identify and separately account for the revenue attributable to each applicable rate within a single transaction. If separate calculations are not made, the highest tax rate shall apply.

2. A More Nuanced “Main Business” Test (article 13 of the VAT Law)

This is the most significant and subjective operational change. It applies when a taxable transaction includes two or more activities with different tax rates and there is an obvious principal-and-ancillary relationship among these activities

• Previous Rule (Entity-Level): determination of the VAT rate for the whole transaction was based on your company’s primary business activity (e.g., annual revenue breakdown).
• New Rule (Transaction-Level): you must now analyze each individual contract or sale to determine its “primary activity.” The VAT rate for the entire bundle follows this principal component.

How to Determine the “Principal Activity” of a transaction: it is defined as the core substance and purpose of the transaction. The auxiliary component must be:

• A necessary supplement to the principal activity.
• Logically dependent on the principal activity occurring.

3. VAT Rates remain unchanged (three-tiered)

1. International service agreement: how VAT applies to international service agreements

The VAT treatment of international services in China depends on two key determinations:

1. Whether the international service falls within or outside the scope of VAT (as defined by Article 4 of the VAT Law).
2. If within the scope of VAT, whether it benefits from the 0% VAT rate (article 10 (5) of the VAT Law) that applies to a defined list of cross-border services.
3. Basic Principle of Taxability

According to the VAT Law, a service transaction is subject to VAT if it is a “taxable transaction within China”, defined by as a situation where:

• The seller is an entity or individual within China, OR
• The services sold (or intangible assets) are consumed within China(regardless of the seller’s location).

Definition of “Consumed Within China” (Implementation Regulation, Article 4)

Services are deemed “consumed within China” (and thus taxable) in the following three circumstances:

1. Services sold by oversea entities to a Chinese entity/individual, except for services consumed on-site outside China.
2. Services sold by oversea entities are directly related to goods, real estate, or natural resources located within China.
3. Other circumstances prescribed by the competent finance and tax authorities.
4. Zero Percent Rate for Specific Cross-Border Services rendered by entities within China to overseas entities

Article 10 (5) of the new VAT Law states that domestic entities or individuals engaging in cross-border sale of services within the scope defined by the state council should apply a 0% tax rate on these services.

Article 9 of the VAT Law Implementation Regulation details the list of cross-border sales of services that should be subject to a 0% tax rate. For the services listed as well as for transfer of technologies they are subject to a 0% tax rate as long as they are fully consumed or used outside China by the overseas entities.

List of cross-border services subject to 0% tax rate:

1. Legalizing Excess input VAT Refunds

A key change in China’s VAT system is the formal legal recognition of the excess input VAT credit refund. Previously governed by administrative announcements (since the pilot in 2019), the refund mechanism is now enshrined in Article 21 of the new VAT Law. This elevates the refund from a revisable policy to a permanent statutory right, providing long-term predictability for businesses. In practice, eligible taxpayers can now choose between carrying the credit forward or applying for a cash refund, subject to detailed regulations.

Detailed regulations have been set out (effective from September 1^st, 2025):

For taxpayers that export goods or conduct cross-border sales of services or intangible assets under the “VAT exemption, offset, and refund” measures (article 33 of the VAT Law), the “exemption, offset, and refund” procedure shall be completed first. After completion, if the taxpayer still meets the conditions, they may apply for the VAT credit refund.