Confirmation when input VAT can still be recovered even though no taxable supply has taken place
The Ministry of Finance and State Taxation Administration have issued Announcement No. 25 of 2026, providing further guidance on the VAT Law which came into force earlier this year.
The measures apply since 1 September 2026, but with retrospective effect for unprocessed matters arising from 1 January 2026.
Input VAT not automatically blocked
The Announcement identifies several situations where a transaction falls outside the scope of VAT, yet the associated input VAT may still remain deductible, provided the normal deduction conditions are otherwise satisfied.
These include:
- insurance compensation received;
- donations of cash or assets;
- contractual damages where no taxable supply actually occurred;
- most free-of-charge services (excluding gratuitous transfers of financial products);
- assignments of trade receivables arising from the taxpayer’s own taxable activities; and
- government subsidies that are not directly linked to the sale or volume of taxable supplies.
This removes uncertainty around a number of common commercial events that frequently arise in large corporate groups.
Four categories remain blocked
The guidance also confirms where input VAT cannot be recovered because the underlying activity is treated as a non-taxable transaction. These include:
- transactions falling outside the territorial scope of China’s VAT system;
- transfers of equity interests (other than securities);
- dividend income from equity investments; and
- commodity futures trading before physical delivery.
These are likely to be of greatest interest to investment groups, holding companies and businesses with significant cross-border operations.
Wider VAT guidance included
The Announcement extends beyond input VAT recovery; It also provides further interpretation on several practical areas of the new VAT regime, including:
- VAT exemptions;
- asset reorganisations;
- discount arrangements;
- bundled supplies; and
- application of the input VAT deduction rules more generally.
Taken together, the guidance continues the steady refinement of China’s new VAT framework as implementation issues emerge.
Retrospective application in transition
Perhaps the most significant practical point is the transitional rule.
The guidance applies since 1 September 2026, but taxpayers may also rely on it for transactions occurring between 1 January and 31 August 2026 where the VAT treatment has not yet been finalised.
That retrospective application should reduce the need for businesses to adopt conservative positions simply because detailed administrative guidance was unavailable when the new VAT Law first took effect.
