China Tax Updates: Key Changes from August 2025 Founders Need to Know in September
August 2025 brought important tax updates in China. Key changes cover VAT refunds, courier and logistics services, Hainan Free Trade Port incentives, bond interest taxation, and childcare subsidy exemptions.
For foreign investors and WFOE owners, these policies create new opportunities but also raise compliance requirements. This digest explains what changed and why it matters for business leaders and entrepreneurs in China.
China Updates VAT Refund Policy for Retained Input Credits
On 22 August 2025, the Ministry of Finance (MOF) and the State Taxation Administration (STA) issued Announcement No. 7 (2025), introducing a more refined system for refunding retained input VAT credits. The new policy takes effect from 1 September 2025, replacing earlier measures from 2019 and 2022.
This change is significant for companies operating in China, especially in manufacturing, technology, software, environmental services, and real estate development, as well as other general taxpayers with large VAT balances.
Key Highlights of the Policy
1. Wider Access to Refunds
- Manufacturing, R&D, software/IT, and environmental service industries can now apply for monthly refunds of retained input VAT credits.
- Real estate developers may apply for partial refunds (60%) of newly accumulated VAT credits, provided certain thresholds are met.
- Other industries may also apply if:
- They have had a positive VAT credit balance for six consecutive months, and
- The increase in credits exceeds RMB 500,000 compared with end-2024 levels.
Refunds are granted proportionally: - 60% for the first RMB 100 million of new credits,
- 30% for any excess above that.
2. Compliance Conditions
To qualify, businesses must meet several criteria:
- Hold a tax credit rating of A or B.
- No fraudulent VAT refund or export refund claims in the past 36 months.
- No more than one tax evasion penalty in the past 36 months.
- Not benefiting from “levy and refund” or “first levy then refund” VAT policies since April 2019 (unless otherwise specified).
3. Industry Definitions
- Companies must demonstrate that over 50% of sales come from the relevant industry (based on 12 months of sales data, or at least 3 months for newer businesses).
- For real estate developers, both VAT sales and pre-sale proceeds are counted toward the 50% threshold.
4. Implementation
- Businesses may choose to either carry forward their retained credits or apply for refunds starting the month after meeting conditions.
- Applications already in process before 1 September 2025 will be handled under the old rules.
- From September onward, only the new framework applies.
Why It Matters for Businesses
- Improved cash flow: More industries now qualify for refunds, reducing the burden of accumulated VAT balances.
- Predictability: Monthly refund options allow qualifying businesses to better manage working capital.
- Compliance pressure: Only companies with strong tax credit ratings and no major compliance issues will benefit. This reinforces the importance of clean tax records and good internal controls.
- Real estate sector impact: Developers can unlock liquidity, though only partial refunds apply.
Tax Administration Issues Guidance on VAT Refund Applications
On 22 August 2025, the State Taxation Administration (STA) released Announcement No. 20 (2025) to provide administrative guidance for handling VAT retained input credit refunds. This follows the Ministry of Finance and STA’s joint Announcement No. 7 (2025), which refined the overall VAT refund framework.
The new rules take effect from 1 September 2025 and standardize the application process, timelines, and compliance requirements for businesses seeking refunds.
Key Points
1. Application Process
- Who applies: General VAT taxpayers who meet refund conditions under Announcement No. 7.
- When: In the month after meeting refund conditions, during the VAT filing period.
- How: Submit a Refund (Offset) Application Form via the electronic tax bureau or tax service hall after completing the VAT return.
2. Export-Related Refunds
- Exporters or businesses with cross-border services/intangibles that use the “exemption, credit, refund” system can apply for both export refunds and retained input refunds in the same filing period.
- If there are no export sales, a zero declaration for the export refund must still be filed.
3. Processing Timeline
- Tax authorities must review applications within 10 working days of acceptance.
- If approved, a Tax Matters Notice confirming the refund is issued.
- If denied, a notice of rejection is provided.
- When both export refunds and retained input refunds are requested, export refunds are processed first, and the 10-day clock starts after export refunds are approved.
Why It Matters for Businesses
- Clarity and predictability: A defined application window, electronic submission process, and 10-day review timeline make refund processing more transparent.
- Compliance first: Credit ratings and risk checks are central — only businesses with clean tax records will enjoy timely refunds.
- Exporters’ advantage: Ability to combine export refunds with retained input refunds simplifies administration and accelerates cash flow recovery.
VAT Rules Clarified for Courier Services and Online Freight Platforms
On 11 August 2025, the Ministry of Finance (MOF) and the State Taxation Administration (STA) released Announcement No. 5 (2025), providing detailed VAT treatment for courier services and online freight transport (network freight) businesses. The new rules are effective immediately.
Key Highlights of the Policy
1. Courier Services
- Revenue from courier services must be taxed under the category of “collection and delivery services” for VAT purposes.
- Courier enterprises include:
- Companies licensed to operate courier services in China,
- Their registered branches with postal authorities, and
- Their registered last-mile courier outlets.
- Courier services are defined as end-to-end activities within a promised timeframe, including:
- Acceptance, inspection, packaging, and sealing of parcels,
- Sorting and consolidation,
- Transport,
- Final delivery to the recipient.
- Importantly, pure transportation services provided by courier firms do not fall under this definition.
2. Online Freight Platforms (Network Freight)
For taxpayers holding online freight transport operating qualifications, certain input costs can now be deducted from output VAT if conditions are met.
- Eligible deductions include:
- Fuel (oil, gas, electricity, hydrogen, methanol, dimethyl ether, and other vehicle energy),
- Road, bridge, and toll fees.
- Conditions for deduction:
The costs are directly linked to transport services subcontracted to actual carriers.
Valid VAT invoices or official deduction vouchers are obtained.
Why This Matters for Businesses
- Courier companies: Clearer classification under VAT rules reduces disputes and compliance risks. This matters especially for logistics providers expanding into nationwide parcel delivery.
- Online freight platforms: The ability to deduct input VAT on fuel and toll costs can significantly improve margins if compliance conditions are met.
- Shippers and partners: Expect better transparency in pricing and tax treatment across courier and freight services.
VAT Treatment Adjusted for Bond Interest Income
On 4 August 2025, the Ministry of Finance (MOF) and the State Taxation Administration (STA) issued Announcement No. 4 (2025), revising VAT policy on interest income from government and financial bonds.
Key Points
1. Resumption of VAT on New Bonds
Effective 8 August 2025, interest income from newly issued:
- Treasury bonds (国债)
- Local government bonds
- Financial bonds
will be subject to VAT
2. Grandfathering Rule
For bonds issued before 8 August 2025, including subsequent tranches of existing issues, interest income remains exempt from VAT until maturity.
Why This Matters
For Investors:
- New bond purchases will carry an additional VAT cost on interest income, potentially affecting net yields.
- Existing holdings retain VAT exemption, making older issues relatively more attractive until maturity.
For Issuers:
The tax change may influence investor demand, pricing strategies, and issuance structures for government and financial bonds.
For Businesses:
Corporate treasury teams managing bond portfolios should reassess after-tax returns and portfolio allocation between older exempt bonds and newly issued taxable ones.
Hainan Free Trade Port: Corporate Income Tax Incentives Extended and Substantive Operation Standards Clarified
On 14 August 2025, the Hainan Provincial Tax Service of the State Taxation Administration (STA), together with the Ministry of Finance and the provincial authorities, issued two important announcements extending and clarifying the corporate income tax (CIT) incentives available in the Hainan Free Trade Port (FTP). These measures will remain in force until 31 December 2027 and are designed to strengthen Hainan’s position as a leading hub for investment and innovation.
Key Highlights of the Policy
1. 15% Corporate Income Tax Rate for Encouraged Industries
- Enterprises registered in the Hainan FTP and substantively operating in encouraged industries will continue to enjoy a reduced 15% CIT rate (compared with the standard 25%).
- This applies to resident enterprises, Hainan-registered branches, and non-resident enterprises with establishments in the FTP.
- Qualifying businesses must prove that:
- Their main business falls within the Encouraged Industry Catalogue,
- At least 60% of total revenue comes from these encouraged activities,
- They conduct substantive operations in Hainan (see section 2).
2. Substantive Operation Requirements
A companion announcement (No. 3, 2025) sets strict criteria for determining whether a company is “substantively operating” in Hainan. Enterprises must demonstrate presence in four key areas:
- Production & Operations: Having fixed facilities, equipment, and the main business conducted in Hainan.
- Personnel: Employing staff who actually work in Hainan, with salary payments through local bank accounts. A minimum number of employees must reside in Hainan for at least 183 days per year (thresholds scale with company size).
- Accounting: Keeping accounting books, vouchers, and main bank accounts in Hainan.
- Assets: Owning or using assets located in Hainan that match business needs.
Companies that are only registered in Hainan but operate elsewhere do not qualify. Authorities will adopt a “self-declaration, post-filing verification” system, supported by joint regulatory inspections.
3. Tax Exemption on Certain Overseas Income
Enterprises in tourism, modern services, and high-tech industries will continue to enjoy CIT exemptions on income from new overseas direct investments made between 1 January 2020 and 31 December 2027. Qualifying investments include setting up or acquiring overseas subsidiaries, branches, or equity stakes.
Why This Matters for Businesses
- Major Tax Savings: The 15% CIT rate offers significant relief for companies in encouraged sectors, making Hainan one of the most attractive tax jurisdictions in China.
- Investment Incentives: Exemptions on overseas income and accelerated asset deductions encourage cross-border expansion and capital investment.
Customs Issues Detailed Guidance on “Zero-Tariff” Goods in Hainan Free Trade Port
On 29 August 2025, the General Administration of Customs (GACC) released an interpretation note clarifying the taxation and customs management rules for zero-tariff goods in the Hainan Free Trade Port (FTP). The guidance, structured into 20 articles, is designed to ensure consistent implementation of the FTP’s unique tax policies as the island prepares for full customs closure.
Key Points
1. Refining the Scope of Zero-Tariff Goods
- Transshipment Allowed: Goods imported under the zero-tariff regime can enter Hainan via transshipment if direct shipping routes are not available.
- Waiver Restrictions: If an enterprise voluntarily pays full import duties on goods, it is deemed to have waived zero-tariff eligibility for that HS code for the following 12 months.
- Supplementary Tax Rules:
- Enterprises (beneficiaries) must pay back duties and import-stage taxes if goods or processed products later lose eligibility.
- Once duties/taxes are paid at the first line or in-island transactions, no additional import taxes will apply when moving the goods across the second line into mainland China.
- Special Goods Control: For goods not on the restricted list but whose processed products are restricted, free circulation is allowed within Hainan FTP, but duties and relevant consumption taxes apply if they enter the mainland.
2. Policy Linkages and Transitional Issues
- Supervision Periods:
- Zero-tariff equipment, vehicles, vessels, aircraft, and yachts will be subject to fixed supervision periods, aligned with existing duty-free equipment rules.
- Goods already under customs control before FTP closure will have their supervision periods counted continuously.
- Haikou Customs is authorized to publish and adjust the specific zero-tariff equipment lists dynamically.
- Waste and By-products: Scraps, defective products, by-products, and damaged goods from processing zero-tariff imports are taxed based on actual condition and classification, following existing processing trade rules.
3. Tax Administration
- Valuation: Taxable value is determined under China’s Customs Valuation Rules, using transaction prices, adjusted for depreciation where applicable.
- Applicable Rates: Taxpayers must use the tax rates and exchange rates in effect on the date of tax payment. No deferred tax interest is charged.
- Preferential Tariffs: If origin requirements are met under trade agreements, enterprises may apply for treaty or preferential rates when back-paying duties.
4. Supervision and Compliance
- Haikou Customs will maintain electronic ledgers for zero-tariff goods and manage them through a smart supervision platform.
- Annual reporting is waived — reducing administrative burdens.
- Detailed technical rules on declaration categories and exemptions will be published separately by Haikou Customs.
Why This Matters for Businesses
- Greater Flexibility: The confirmation that transshipped goods qualify expands access to zero-tariff benefits.
- Stricter Discipline: Waiving zero-tariff status for one shipment blocks eligibility for similar goods for 12 months, requiring careful planning.
- Clearer Cost Structures: Rules on back taxes, supervision periods, and by-product treatment provide predictability for investors.
At Sapience Pro, we offer end-to-end consulting, tax advisory, and compliance support tailored to foreign-owned businesses in China.
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