Other BriefingsChina Monthly Tax Brief: February 2026
In this China Monthly Tax Brief for February 2026, we highlight key taxation developments relevant to businesses.
February 2026 was a significant month for China’s tax landscape, marked by a wave of policy releases across customs, value-added tax (VAT), individual income tax, and enterprise compliance. Much of the activity was driven by a single structural event: the formal implementation of China’s new VAT Law on January 1, 2026, which triggered a coordinated effort across the Ministry of Finance (MOF), General Administration of Customs (GAC), and State Taxation Administration (STA) to align existing preferential policies, filing procedures, and administrative rules with the new legislative framework.
Beyond VAT Law housekeeping, the month saw meaningful new policy in several areas. The Hainan Free Trade Port’s zero-tariff resident consumption regime went live, marking a tangible step toward Hainan’s full customs enclosure. A comprehensive package of import tax incentives was extended through 2030, covering sectors from pharmaceuticals and research and development (R&D) to energy, seeds, and firefighting equipment. Cross-border e-commerce exporters received a further extension of return shipment tax relief. And two special economic zones, Hengqin and Hetao, received updated tax and customs frameworks, reinforcing their positioning as destinations for high-value talent and R&D investment.
On the compliance and enforcement side, the STA’s Q&A on small and micro enterprise (SME) income splitting serves as a clear signal that tax authorities are sharpening their focus on arrangements designed to artificially preserve access to SME preferences, a reminder that the preferential tax environment comes with a growing expectation of substantive commercial justification.
Taken together, February’s updates reflect a China tax environment that is simultaneously liberalizing in targeted sectors and tightening on compliance expectations. Businesses operating in China should treat this month’s releases as both an opportunity checklist and a compliance prompt.
Key import tax incentives extended through the 15th FYP period
In February 2026, China’s MOF, GAC, and STA jointly released a comprehensive package of import tax incentive policies, coordinating the transition following the implementation of the new VAT Law. Covering sectors including pharmaceuticals, scientific research and innovation, science outreach, energy exploration, seeds and breeding stock, firefighting equipment, and international trade exhibitions, the policies took effect January 1, 2026, and are generally valid through the end of the 15th Five-Year Plan period (December 31, 2030)
| Sector | Core Benefit | Validity |
| Anti-cancer & rare disease drugs | Reduced import VAT at 3% | Through Dec 31, 2027 |
| Scientific research & innovation | Full exemption from import duties, VAT, and consumption tax on qualifying R&D and teaching equipment | Through Dec 31, 2030 |
| Science outreach venues | Full exemption on outreach films, instruments, and exhibits | Through Dec 31, 2030 |
| Offshore energy exploration | Duty exemption (self-operated projects); duty + VAT exemption (Sino-foreign JVs)
Up to 70–80% VAT refund for qualifying pipeline and LNG terminal projects |
Through Dec 31, 2030 |
| Seeds, breeding stock & working animals | Import VAT exemption on qualifying seeds, wild species stock, and working animals (military/security/rescue) | Through Dec 31, 2030 |
| Firefighting & rescue equipment | Full exemption from import duties, VAT, and consumption tax on listed equipment | Through Dec 31, 2030 |
| Sales at international exhibitions | Imported exhibits sold by individual exhibitors within the applicable duty-free quota during qualifying international trade fairs are exempt from import duties, import VAT, and consumption tax. | Through Dec 31, 2027 or 2030* |
*The applicable exhibitions under the two validity periods are slightly different.
Why this matters for your business
China’s latest wave of import tax incentives signals a deliberate effort to lower the cost of doing business in strategically important sectors through the end of the decade. For foreign investors and companies operating in China, the practical implications are significant.
If your operations touch R&D, advanced manufacturing, energy, or life sciences, these policies directly reduce input costs on imported equipment and materials that Chinese suppliers cannot yet match in quality or specification. In sectors like offshore energy and natural gas infrastructure, the savings on import duties and VAT refunds can be substantial at scale.
The five-year horizon, locked in through 2030, provides the kind of policy stability that supports longer-term procurement planning, capital expenditure decisions, and supply chain structuring. Businesses no longer need to budget around annual policy uncertainty for these categories.
Foreign-invested R&D centers are explicitly named as eligible entities under the science and innovation provisions, a signal that China continues to court high-value foreign R&D activity despite the broader geopolitical climate. If your company operates or is considering establishing an R&D presence in China, this is a meaningful cost offset worth factoring into your business case.
Finally, businesses should not treat these policies as automatic. Eligibility requires proactive registration and periodic re-verification with the relevant authorities. Companies that imported qualifying goods on or after January 1, 2026, before completing registration should move quickly.
STA clarifies “reasonable commercial purpose” test for small and micro enterprise tax preferences
On February 25, 2026, China’s STA published a Q&A addressing a practice tax authorities have increasingly encountered: businesses artificially splitting revenue to remain classified as SMEs and continue accessing preferential tax treatment. The Q&A sets out a three-part test and a positive/negative list of criteria, effectively signaling how tax authorities will approach enforcement.
The preferences at stake
The SME preferential policies targeted by the guidance are substantial:
- VAT exemption for small-scale taxpayers with monthly sales below RMB 100,000
- Reduced VAT rate of 1% (down from 3%) for applicable small-scale taxpayers
- 50% reduction on six taxes and two fees for small-scale VAT taxpayers, small low-profit enterprises, and sole proprietorships
- Corporate income tax: taxable income calculated at 25% of actual income, taxed at 20%
- Individual income tax: 50% reduction on annual taxable income up to RMB 2 million for sole proprietorships
The Three-part test
Tax authorities will assess alleged income splitting against three criteria:
| Test | Legitimate Split | Problematic Split |
| Motive | Consistent with industry norms and business strategy; delivers genuine operational or competitive benefits | Tax reduction is the sole or primary purpose; overall business scale and structure unchanged before and after the split |
| Business substance | Entities are independently organized with separate assets, personnel, operations, and financials; income matches actual business activity | “One address, multiple registrations”; virtual or shared office addresses; no actual staff, business records, or operational activity |
| Arm’s length pricing | Transactions priced at market rates, supported by third-party quotes or industry benchmarks | Profits shifted via below-market pricing or free services to reduce overall tax liability |
what counts as legitimate — and what doesn’t
The STA’s positive list recognizes five categories of restructuring as having reasonable commercial purpose: splitting distinct business lines for specialized management (such as separating R&D from manufacturing); risk segregation between high- and low-risk operations; regional expansion through local subsidiaries with genuine local management; asset carve-outs for operational efficiency or listing compliance; and family business succession or equity incentive arrangements.
On the negative side, the STA identifies two primary red-flag patterns. The first is entity splitting, creating multiple affiliated entities, sole proprietorships, or shell companies that nominally operate independently but share personnel, premises, and assets, with the real function being to divide revenue across multiple registrations (the “one address, many licenses” or “one person, many licenses” patterns). The second is contract splitting, breaking a single large contract into multiple smaller ones timed to fall below VAT thresholds or SME eligibility limits, sometimes routed through an intermediary entity.
Why this matters for your business
This guidance carries practical weight for any business operating through a group structure in China that includes entities qualifying for SME preferences. Several points deserve attention.
First, the STA is drawing a clear line between tax-motivated structure and commercially driven structure. The question is not whether an arrangement reduces tax, most legitimate structures do, but whether tax reduction is the primary or sole rationale, with no genuine change in how the business actually operates.
Second, the emphasis on documentation is significant. Legitimate splits are expected to be supported by independent business records, contracts, arm’s length pricing evidence, and genuine operational separation. Businesses that cannot produce these materials are exposed, regardless of whether the original intent was aggressive.
Third, the guidance implicitly raises the risk profile for common VIE-adjacent and holding structures where group entities share offices, management, or back-office functions. Where such arrangements exist for legitimate reasons, businesses should ensure the commercial rationale is clearly articulated and documented.
Finally, the publication of an explicit positive and negative list is notable in itself. It suggests the STA is moving toward more structured and transparent enforcement criteria in this area — which, while creating compliance risk for those gaming the system, also provides a clearer roadmap for businesses with legitimate structures to demonstrate their position.
Import tax relief for cross-border e-commerce return shipments
China’s MOF, GAC, and STA have jointly issued Announcement [2026] No. 16, extending import tax relief for returned cross-border e-commerce exports through December 31, 2027. The policy, first introduced in 2023 and renewed twice since, continues without material change to its core terms, reinforcing its status as a stable feature of China’s cross-border e-commerce regulatory framework.
| Return-to-China Import Tax Relief Policy | |
| Category | Key points |
| Core preferential treatments | Goods (excluding food) re-imported in their original condition within 6 months from the export date due to unsold inventory or customer returns are eligible for tax relief: 1. Import tax exemption: Import duty, import VAT, and consumption tax are exempted for returned goods. 2. Refund of export duties: Export duties already paid at the time of export may be refunded, in line with the rules for domestic returned goods. 3. Export VAT refund reversal: If an export VAT refund has been claimed, enterprises must first repay the refunded tax. Upon repayment, the tax authority will issue the Certificate of Export Goods with Tax Repaid / No Tax Refunded, which is required for applying for import tax exemption and export duty refund. |
| Eligible entities & regulatory scope | Applies to goods declared for export under cross-border e-commerce customs supervision codes 1210, 9610, 9710, 9810. Special note: For exports under code 1210 (bonded e-commerce), the 6‑month return period starts from the actual departure from the bonded area, not the declaration date. |
| Key eligibility requirements | 1. Original condition: Returned goods must remain substantially the same as at export, with no processing or modification. Opening packages or testing for inspection purposes is allowed. Goods should generally be unused (except for quality issues discovered through trial use). 2. Valid reasons for return: Restricted to unsold products or customer returns. |
| Documentation requirements | • Unsold returns: Enterprise must provide a self-declaration confirming the goods are returned due to being unsold. • Customer returns: Provide return records (e.g., platform return records, rejection notices) and relevant return agreements. |
| Compliance reminder | Enterprises must ensure the complete authenticity of submitted documents to avoid violations such as tax evasion or fraudulent tax refunds. |
Why This matters for your business
Cross-border e-commerce exporters routinely face return rates that are difficult to predict, particularly in fashion, electronics, and consumer goods sold into markets with liberal return policies. Without this relief, returned shipments would be subject to full import duties and VAT upon re-entry, effectively taxing goods that generated no revenue.
For businesses operating on a scale, the cumulative cost of return duties can be significant. The extension through 2027 means companies can continue to factor this relief into their pricing models, logistics planning, and working capital calculations with reasonable confidence.
The policy also has a compliance dimension worth noting. The documentation requirements, self-declarations for unsold stock, platform records, and return agreements for customer returns, are straightforward in principle but require disciplined record-keeping in practice. Customs and tax authorities have made clear that misrepresentation of return reasons constitutes a legal violation. Businesses should ensure their operations teams and logistics partners maintain accurate, auditable return records aligned with the declared customs code and return basis.
Hainan FTP: Zero-tariff policy for island residents now live
In February 2026, China’s MOF, GAC, and STA jointly issued the framework for a zero-tariff regime on goods purchased by Hainan residents for personal consumption, a landmark step toward Hainan’s full customs enclosure. Three coordinated documents establish the policy, operator licensing, and customs supervision framework, respectively.
| Document Title | Issuing Authority | Positioning & Function |
| Notice on the “Zero-Tariff” Policy for Inward Goods Consumed by Hainan Free Trade Port Residents (Caiguanshui [2026] No. 6) | MOF, GAC, and STA | Defines top-level policy design, including preferential scope, eligible subjects, quota standards, and other core rules. |
| Administrative Measures for Operators and Duty-Free Stores of “Zero-Tariff” Inward Goods Consumed by Hainan Free Trade Port Residents (Trial) (Provincial Government Order No. 338) | People’s Government of Hainan Province | Sets out operating rules such as market access requirements, store establishment procedures, and division of regulatory responsibilities. |
| Interim Measures of the Customs of the PRC on the Regulation of Operating Premises and “Zero-Tariff” Inward Goods for Hainan Free Trade Port Resident Consumption (GAC Announcement [2026] No. 18) | General Administration of Customs | Provides detailed operational procedures, including import declaration, sales verification, and information system connectivity requirements. |
Who qualifies as a resident
Chinese citizens holding a Hainan ID, residence permit, or social security card, and foreign nationals holding valid Hainan residency documents, are eligible. The policy is designed for those living and working in Hainan on a stable, long-term basis.
What the policy offers
Qualifying residents receive a dual-layer tax exemption, both at the import stage (customs duties, import VAT, and consumption tax) and at the domestic sales stage (VAT and consumption tax), making end purchases genuinely tax-free. The annual quota is RMB 10,000 per person with no limit on the number of transactions. Goods are managed under a positive list, which the three ministries will update dynamically. Purchases must be made in person with identity verification; goods are for personal use only and may not be resold.
For retailers seeking to operate zero-tariff stores:
| Requirement | Detail |
| Licensing | Dual approval required: Hainan provincial government (via Commerce Department) + GAC registration |
| Eligibility | Must demonstrate financial soundness, stable supply chains, sound governance, and good credit standing |
| Approval timeline | 20 working days after acceptance (extendable by 10 days) |
| Ownership | The operator must hold more than 50% in the project company running the store |
| Store locations | Determined by the county/city government and approved by the provincial government |
| Franchise fee | Payable as required under applicable rules |
| Store naming | Format: [City/County] + [Brand] + “Daily Consumer Goods Duty-Free Store”; no branches or sub-counters permitted |
Operational compliance requirements are substantial: all goods must be imported directly from overseas through customs; sold in dedicated areas; tracked via traceability codes on packaging; and sales data transmitted in real time to customs systems. Stores must also implement internal anti-smuggling controls and staff training programs.
Violations carry serious consequences across all parties involved:
- Consumers who resell goods or exploit others’ quotas face customs penalties and, in serious cases, criminal prosecution for smuggling.
- Operators face warnings, fines of up to RMB 200,000, and potential license revocation for recordkeeping failures, data fraud, or fraudulent licensing; criminal liability applies for smuggling.
- Third-party service providers (logistics, warehousing, delivery) facilitating unauthorized movement of zero-tariff goods face fines up to RMB 200,000 and criminal exposure.
Why this matters for your business
For consumer goods brands and retailers, this policy opens a new retail channel targeting Hainan’s permanent and long-term resident population, distinct from the existing duty-free shopping regime aimed at departing tourists. The dual-layer tax exemption makes price competitiveness genuinely achievable on imported goods, and the positive list expansion over time could broaden the addressable product range significantly.
However, the compliance bar is high. The licensing process is rigorous, the operational requirements are technology-intensive, and the penalty framework is unambiguous. Businesses entering this market should treat compliance infrastructure, particularly the customs data integration and traceability systems, as a prerequisite, not an afterthought.
VAT return filing requirements updated to align with the new VAT Law
Following the implementation of the VAT Law and its implementing regulations on January 1, 2026, the STA issued an announcement on February 1, adjusting the filing instructions for certain line items on the VAT return. The form itself remains unchanged; only the reporting criteria have been refined. The adjustments took effect on February 1, 2026.
| Adjustment | Details | Who Is Affected |
| “Labor services” reclassification | “Processing, repair, and replacement labor services” is reclassified as “processing, repair, and replacement services” and consolidated under the “services” category; related line items updated accordingly | General and small-scale taxpayers |
| Differential taxation reporting | Financial instrument transfer transactions must now report deduction details; all other permitted deductions must also be reported with deduction breakdowns | General and small-scale taxpayers |
| Small taxpayer exemption threshold | Clarifies the applicable scope and exemption calculation method for “small enterprise exempt sales” vs. “below-threshold sales” | Small-scale taxpayers |
| Input tax credit additions | Line 8b (“other”) now includes gold exchange input tax entries; Line 23b adds entries for non-deductible items transferred out | General taxpayers |
| Oil and gas field enterprise prepayment | Prepayment form adds a “production and livelihood services” line item; clarifies how prepaid tax may offset final liability | Oil and gas field enterprises |
Why this matters for your business
For most businesses, this is a housekeeping update rather than a substantive policy change; the adjustments bring filing terminology and logic into alignment with the new VAT Law without altering tax burdens. That said, finance and tax teams should review their filing workflows to ensure the reclassification of processing and repair services is correctly reflected, and that differential taxation deductions are fully documented and reported. Businesses involved in gold trading or oil and gas production should pay particular attention to the line-item additions relevant to their sectors, as incorrect or incomplete entries could trigger compliance queries.
Annual IIT reconciliation: Filing window now open
On February 3, 2024, the STA announced Announcement [2026] No. 1 that the annual reconciliation filing period for 2025 consolidated individual income tax (IIT) runs from March 1 to June 30, 2026.
| Filing Period | Appointment Required | How to File |
| March 1 – March 20 | Yes — bookable from February 25 via the IIT mobile app | IIT mobile app |
| March 21 – June 30 | No appointment needed | IIT mobile app or the Natural Person e-Tax Bureau portal |
The STA has also published a step-by-step mobile app guide covering the filing process, key reminders, and FAQs.
Why this matters for your business
For employers and HR teams, this is the prompt to remind employees, particularly expatriates and those with multiple income sources, that the reconciliation deadline is June 30. Individuals who expect a refund have an incentive to file early; those who may owe additional tax should use the window to assess their position before the deadline. Missing the June 30 deadline can result in late payment interest and penalties, so proactive communication to affected staff now is advisable.
Hengqin-Macao Deep Cooperation Zone: IIT Preferences extended through 2027
The MOF and STA have extended the IIT preferences for the Hengqin-Macao Deep Cooperation Zone for a further two years, effective January 1, 2026 through December 31, 2027. High-end and in-demand talent working in the zone, both domestic and foreign, are exempt from IIT on the portion of their effective tax burden exceeding 15 percent. Macao residents working in the zone receive a corresponding exemption on the portion exceeding their Macao tax burden. Eligible income covers the four categories of consolidated income (wages and salaries, labor service remuneration, author’s remuneration, and royalties), business income, and government-recognized talent subsidies. Qualifying individuals are subject to list-based management administered jointly by Guangdong and Macao authorities.
For businesses with operations or talent deployment in Hengqin, the extension provides two more years of planning certainty for compensation structuring and talent attraction, particularly relevant for firms recruiting from or relocating Macao-based staff.
GAC publishes customs code table for goods subject to 9% import VAT rate
Following MOF and STA Announcement [2026] No. 9, which set out the scope of goods subject to a 9% import VAT rate, the GAC has published the corresponding customs commodity code table to enable practical implementation at the border.
The table covers a range of goods attracting the nine percent rate, including certain foods and agricultural products, vegetable oil, raw pasta, sterilizing and disinfecting agents, agricultural film, fiber raw materials, agricultural pumps, diesel engines, tractors, excavators, magnetic media, and related items.
From the date of the announcement, these codes must be used in import and export declarations for the relevant goods. Importers who declared affected goods between January 1, 2026 and the announcement date using non-conforming codes are required to file declaration amendments. Businesses importing goods in these categories should verify their HS code classifications against the published table promptly to avoid declaration errors and potential amendment obligations.
GAC Issues customs management rules for Hetao Shenzhen Park
On February 10, 2026, two new GAC announcements took effect, establishing the customs framework for the Hetao Shenzhen-Hong Kong Science and Technology Innovation Cooperation Zone.
Announcement No. 19 covers duty-free imports of self-use R&D goods on the applicable exemption catalog. Equipment (code 508) carries a three-year supervision period; removal or repurposing triggers depreciation-based tax recovery. Consumables (code 509) have no fixed supervision period but are taxed as imported materials upon removal from the zone. Qualifying entities must self-report monthly inventory, usage, and disposal status. Entities that voluntarily pay tax on an exempt item are barred from re-applying for the same category for 36 months.
Announcement No. 20 governs the movement of goods, vehicles, and personnel between the park and overseas, with streamlined quarantine approvals and facilitated entry/exit procedures. Goods moving between the park and the domestic market are not subject to quarantine. Compliant enterprises integrating via ERP systems receive expedited customs clearance.
For R&D companies considering the Hetao park, these rules provide the operational clarity needed to structure duty-free procurement and customs compliance.
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