Editor’s Note：In recent years, regulatory scrutiny over the application of tax incentive policies has continued to intensify, and businesses are now operating in an environment of heightened regulatory scrutiny and increasingly stringent compliance requirements for claiming tax incentives. As demonstrated by recently published typical cases, many enterprises were not found to have fraudulently obtained tax incentives. Instead, they incorrectly applied tax incentive policies due to factors such as misunderstanding policy requirements or changes in the conditions for eligibility, ultimately resulting in additional tax assessments and late payment surcharges.

Drawing on these typical cases, this article examines the principal risk scenarios associated with the improper application of tax incentive policies, analyzes the characteristics of fraudulent claims for tax incentives and the corresponding legal consequences, and offers practical compliance recommendations to assist enterprises in properly claiming tax incentives and managing tax risks.

01 Intensified Regulatory Scrutiny over the Application of Tax Incentive Policies

On 28 January 2026, the National Tax Work Conference identified 2026, the inaugural year of China’s 15th Five-Year Plan, as a key year for strengthening tax administration. The Conference emphasized that the tax authorities would enhance tax administration and tax audit efforts in a more scientific and targeted manner, rigorously investigate and penalize tax-related violations involving the fraudulent claiming of tax incentives and other forms of tax evasion, and continue promoting tax compliance through case-based education, warning, and governance. On 16 April 2026, the State Taxation Administration ("STA"), together with the Ministry of Public Security, the Supreme People's Court, the Supreme People's Procuratorate, the People's Bank of China, the General Administration of Customs, the State Administration for Market Regulation, and the State Administration of Foreign Exchange, jointly convened the National Meeting on the Ongoing Coordinated Campaign Against Tax-Related Crimes. The meeting further called for intensified efforts to combat tax-related offences, including the fraudulent claiming of tax incentives. These policy developments further demonstrate that cracking down on the fraudulent claiming of tax incentives and other tax-related violations has become a key focus of China's tax administration and tax enforcement.

Since 2025, the typical cases published by the tax authorities indicate that regulatory oversight over the application of tax incentive policies has increasingly focused on two parallel objectives: rigorously combating the fraudulent claiming of tax incentives while promoting the proper and compliant application of tax incentive policies. On the one hand, the tax authorities have continued to publish dozens of typical cases involving the fraudulent claiming of tax incentives, sending a clear signal that such violations will be subject to stringent enforcement. On the other hand, they have also successively released a number of typical cases involving the improper application of tax incentive policies by enterprises. For example, the State Taxation Administration ("STA") recently published a series of typical cases concerning the standardized application of preferential real estate tax and urban land use tax policies, with the aim of providing guidance on the proper and compliant claiming of tax incentives.

Meanwhile, during the first half of 2026, a number of listed companies disclosed that they had been required to make additional tax payments together with late payment surcharges due to the improper application of tax incentive policies, changes in their eligibility for preferential treatment, or the recalculation of tax benefits previously claimed. In several cases, the additional tax liabilities exceeded RMB 100 million. These cases demonstrate that, amid increasingly stringent regulatory oversight, enterprises may face significant tax adjustment risks even in the absence of any deliberate intent to fraudulently obtain tax incentives, where tax incentive policies are improperly applied due to misunderstanding of policy requirements, changes in eligibility conditions, or inadequate accounting and tax compliance.

The strengthening of regulatory oversight over the application of tax incentive policies is closely linked to the continued digitalization of China's tax administration. Leveraging the development of the Smart Taxation initiative and the extensive use of tax big data, the tax authorities are able to identify anomalies in the application of tax incentive policies with greater precision through cross-agency information sharing, comparisons of tax filing data, historical data analysis, and risk-model screening, and to conduct targeted compliance reviews accordingly. As tax incentive matters are progressively incorporated into a digitalized, end-to-end risk management framework, enterprises will face increasingly comprehensive and sophisticated scrutiny regarding the authenticity, accuracy, and ongoing compliance of their claims for tax incentives.

02 Major Risk Scenarios in the Improper Application of Tax Incentive Policies

Recent typical cases concerning the application of tax incentive policies indicate that the improper application of such policies by enterprises generally falls into four major risk categories.

（1）Failure to Meet the Eligibility Requirements for Tax Incentive Policies

Tax incentive policies are subject to clearly defined eligibility requirements. Taxpayers are entitled to claim the relevant tax incentives only if they satisfy all prescribed requirements, including those relating to taxpayer qualification and the nature of the business activities concerned. In practice, some enterprises fail to adequately verify whether they meet the applicable policy requirements and claim tax incentives despite not satisfying the prescribed eligibility criteria, resulting in the improper application of tax incentive policies. Typical examples include: a second- and third-tier subsidiary within a corporate group claiming the VAT exemption for intercompany on-lending under the unified borrowing and unified lending arrangement despite failing to satisfy the prescribed taxpayer qualification requirements; and a grain trading enterprise claiming tax incentives applicable to state grain reserve operations after leasing its warehouse to a third party for grain storage, despite no longer meeting the relevant business eligibility requirements. In both cases, the enterprises were required to pay the underpaid tax together with late payment surcharges. In addition, the eligibility requirements for tax incentive policies are not static. Enterprises should closely monitor changes to the tax incentive policies they rely upon and continuously assess, in light of their actual circumstances, whether they remain eligible for the relevant incentives. Failure to do so may result in the improper application of tax incentive policies and expose enterprises to additional tax liabilities and late payment surcharges.

（2）Claiming Tax Incentives Beyond Their Permitted Scope

Tax incentive policies generally apply only to specified categories of income, assets, business activities, or projects that satisfy the prescribed requirements. In practice, some enterprises, although eligible for the relevant tax incentives, fail to accurately determine the scope of their application and improperly include non-qualifying items in their tax incentive claims, thereby claiming tax incentives beyond the scope permitted by law. According to the typical cases published by the State Taxation Administration ("STA") in July 2026, such issues are relatively common. For example, some enterprises claimed the tax incentive applicable to agricultural wholesale markets for premises used for non-agricultural business operations; claimed the urban land use tax incentive for warehousing facilities of logistics enterprises in respect of office buildings, landscaped areas, and other non-warehouse land; claimed the urban land use tax incentive available to civil airports for internal airport operational roads; or claimed the tax incentive for urban public transport terminals in respect of land falling outside the designated planning area for bus terminals. In all of these cases, the enterprises were required to pay the underpaid tax together with late payment surcharges as a result of claiming tax incentives beyond their permitted scope.

（3）Continuing to Claim Tax Incentives After No Longer Meeting the Eligibility Requirements Due to Changes in Circumstances

After becoming eligible for a tax incentive, an enterprise should promptly reassess its eligibility whenever there are material changes in its business operations, the use of its assets, or its business functions, to determine whether it continues to satisfy the applicable policy requirements. In practice, some enterprises fail to take such changes into account and continue to claim tax incentives based on their original eligibility status, resulting in the improper application of tax incentive policies. Typical examples include: a salt production enterprise leasing its salt fields for vehicle parking and other non-qualifying uses, thereby no longer satisfying the eligibility requirements for the urban land use tax incentive applicable to salt fields and salt mines; and a corporate group that, following a restructuring of its shareholding structure, no longer possessed independent manufacturing capabilities and no longer met the policy requirement that manufacturing sales account for at least 50% of its total sales, yet continued to claim the VAT super credit policy for advanced manufacturing enterprises. In both cases, the enterprises were required to pay the underpaid tax together with late payment surcharges.

（4）Failure to Maintain Proper Accounting Records Affecting the Application of Tax Incentive Policies

Certain tax incentive policies require enterprises not only to satisfy the prescribed eligibility requirements, but also to maintain separate accounting records and accurately allocate income, costs, and expenses relating to the relevant preferential tax treatment. In practice, some enterprises fail to establish the required accounting procedures, resulting in distorted tax calculation bases and, in some cases, conflicts between different tax incentive policies. Typical cases published by China Taxation News mainly involve the following two situations.

First, a financial leasing company failed to separately identify and deduct financing costs attributable to different leasing businesses. Instead, it allocated all financing costs based on the proportion of VAT taxable sales derived from direct financial leasing and sale-and-leaseback transactions. However, direct financial leasing is subject to the 13% VAT rate, and its taxable sales include the principal amount of the lease, whereas sale-and-leaseback transactions are subject to the 6% VAT rate, and their taxable sales exclude the principal amount. Under such circumstances, allocating financing costs based on the proportion of taxable sales resulted in a larger share of deductible financing costs being allocated to the higher-taxed direct financial leasing business, thereby distorting the deduction base for both types of transactions and systematically reducing the enterprise's overall VAT burden. As a result, the enterprise was required to pay more than RMB 40 million in underpaid tax and late payment surcharges, while its VAT excess input tax credit carryforward was reduced by more than RMB 11 million.

Second, a renewable energy enterprise adopted a head office–branch office structure under which each branch independently filed and paid VAT in the locality where its power generation projects were located and enjoyed the VAT refund-upon-collection incentive on a project-by-project basis, while enterprise income tax was consolidated at the head office level, with each project enjoying the preferential "three-year exemption followed by a 50% reduction for the subsequent three years" policy. During the project construction stage, all procurement activities were centralized at the head office, and input VAT invoices relating to project construction were issued to the head office. As the head office had no actual power generation projects or corresponding output VAT, substantial excess input VAT credits accumulated, and the enterprise applied for a VAT refund of the excess input tax credits. Because the relevant input VAT was neither allocated according to the projects to which it related nor attributed, based on the economic substance of the transactions, to the branches that actually benefited from the expenditures, the branches were unable to accurately calculate the amount of VAT eligible for the refund-upon-collection incentive. This also affected the allocation of costs for enterprise income tax purposes. At the same time, after the head office obtained a refund of excess input VAT credits, the branches continued to enjoy the VAT refund-upon-collection incentive, resulting in an overlap and conflict between the two preferential tax treatments. Ultimately, the enterprise voluntarily repaid more than RMB 23 million in VAT refunds that had been improperly obtained and comprehensively revised its internal cost allocation mechanism.

03 Characteristics and Legal Consequences of Fraudulently Claiming Tax Incentives

（1）Characteristics of Fraudulently Claiming Tax Incentives

Based on cases involving the fraudulent claiming of tax incentives published since 2025, such misconduct has been concentrated in areas including the super deduction for research and development (R&D) expenses, tax incentives for small and low-profit enterprises, preferential policies for small-scale VAT taxpayers, VAT refunds of excess input tax credits, export tax refunds, and tax incentives relating to the agricultural sector. Although these cases involve different types of tax incentive policies, the underlying unlawful practices share a number of common characteristics. Typical methods include: fabricating R&D projects, inflating the number of R&D personnel and the amount of R&D expenditures in order to improperly claim the super deduction for R&D expenses; concealing income or circumventing eligibility thresholds by receiving payments through personal bank accounts, maintaining dual sets of accounting records, splitting revenue, or establishing shell entities to improperly obtain tax incentives available to small and low-profit enterprises or small-scale VAT taxpayers; and fraudulently obtaining VAT refunds of excess input tax credits, export tax refunds, or other tax incentives through issuing or obtaining false invoices, falsely claiming input VAT credits, or fabricating transactions or export activities. The defining characteristic of such conduct is that the taxpayer, with the intent to fraudulently obtain tax incentives, creates the false appearance of satisfying the statutory eligibility requirements through false tax filings, concealment of material facts, fabricated transactions, or other deceptive means, thereby unlawfully obtaining tax benefits.

（2）Legal Consequences of Fraudulently Claiming Tax Incentives

Where a taxpayer, with the intent to fraudulently obtain tax incentives, improperly claims such incentives through false tax filings, concealment of material facts, fabricated transactions, or other deceptive means, thereby resulting in an underpayment of tax, the tax authorities will generally characterize the conduct as tax evasion and impose administrative penalties in accordance with the law, including the recovery of the underpaid tax, the imposition of late payment surcharges, and monetary fines. Unlike the improper application of tax incentive policies resulting merely from a misunderstanding of policy requirements, once the fraudulent claiming of tax incentives is determined to constitute tax evasion, the taxpayer will face significantly more severe administrative liabilities and may also be exposed to criminal liability. Based on cases publicly reported by the tax authorities since 2025, criminal referral generally arises in two circumstances. First, where a taxpayer has been found to have committed tax evasion but fails to pay the outstanding tax, late payment surcharges, and administrative fines within the prescribed time limit, the tax authorities will generally refer the case to the public security authorities for criminal investigation in accordance with the law. Second, where the fraudulent claiming of tax incentives involves other suspected criminal offences—such as the issuance or obtaining of false invoices—the tax authorities will likewise transfer the relevant criminal clues to the public security authorities for investigation. In such circumstances, the enterprise and the individuals responsible may be held criminally liable for offences including tax evasion and false invoicing, among others.

 

04 Recommendations for the Compliant Application of Tax Incentive Policies

（1）Establish a Dynamic Review Mechanism for Eligibility under Tax Incentive Policies

Enterprises should establish a dynamic review mechanism to continuously assess their eligibility for tax incentive policies, integrating tax incentive compliance throughout the entire lifecycle of claiming, maintaining, and administering tax incentives.

Before claiming any tax incentive, enterprises should carefully review the applicable policy provisions and verify, on a requirement-by-requirement basis, whether the relevant eligibility criteria—including taxpayer qualification, business activities, scope of application, and the applicable implementation period—have been satisfied. Where there is any uncertainty regarding the interpretation of a policy or the scope of its application, enterprises are advised to consult the competent tax authorities in a timely manner to avoid the improper application of tax incentive policies resulting from misunderstandings of the relevant requirements.

For tax incentives that have already been claimed, enterprises should maintain an inventory of the tax incentive policies they currently rely upon, closely monitor policy amendments and changes affecting eligibility, and conduct periodic self-assessments at key compliance stages, such as the annual enterprise income tax reconciliation and settlement and the filing of special tax incentive claims. In particular, following significant events such as corporate restructuring, changes in principal business activities, changes in the use of assets, or adjustments to business models, enterprises should promptly reassess whether they continue to satisfy the relevant eligibility requirements, so as to avoid continuing to claim tax incentives after the applicable conditions are no longer met.

Where a self-review identifies any failure to satisfy the applicable policy requirements or any improper application of tax incentive policies, enterprises should promptly correct their tax filings and make the necessary adjustments in accordance with the law, thereby preventing further escalation of tax risks.

（2）Strengthen Tax Management for Corporate Groups and Multi-Entity Business Structures

Corporate groups, enterprises operating through head office and branch structures, and businesses comprising multiple operating entities should strengthen the coordinated management of tax incentive matters, as the application of tax incentive policies often involves business arrangements and tax treatment across multiple entities. This helps prevent the improper application of tax incentives resulting from issues such as ineligible taxpayer status, incorrect attribution of business activities, or inappropriate organizational structures.

For example, where a corporate group seeks to apply tax incentive policies such as the VAT exemption for on-lending arrangements (tongjie tonghuan), it should carefully verify that each entity involved satisfies the applicable eligibility requirements under the relevant policies. Internal back-to-back lending arrangements involving entities that do not meet the prescribed conditions should not be included within the scope of the tax incentive.

For enterprises operating under a head office and branch structure, income, costs, and input VAT should be allocated accurately in accordance with the principle that "the entity benefiting from the expenditure should bear the corresponding tax allocation." This helps avoid conflicts in the application of different tax incentive policies arising from unclear accounting or cost allocation between the head office and its branches.

In addition, following significant changes such as equity restructurings, business integrations, or functional adjustments, corporate groups should promptly reassess whether each entity continues to satisfy the eligibility requirements for the relevant tax incentive policies and whether tax incentive qualifications should be reallocated within the group. This will help prevent the improper continued application of tax incentives following changes in the economic substance of the business and thereby avoid tax risks, including additional tax assessments and late payment surcharges.

（3）Improve Dedicated Accounting Mechanisms for Tax Incentive Items

Enterprises should establish dedicated accounting systems and maintain supporting accounting records in accordance with the requirements of applicable tax incentive policies, so as to ensure that the tax base used for calculating tax incentives is accurate, complete, and supported by reliable evidence.

For example, for tax incentive items that require detailed accounting, such as the VAT deduction under the margin taxation regime for finance leasing, enterprises should allocate and record revenue, costs, expenses, and input VAT based on the economic substance of the underlying transactions. Simplified allocation methods, such as apportionment based solely on fixed ratios, or the commingling of different business activities, should not be used as substitutes for proper attribution.

Where different tax rates, different tax incentive programs, or different business entities are involved, enterprises should clearly distinguish the relevant accounting units and maintain accurate records to ensure that the basis for calculating each tax incentive is authentic, complete, and traceable. This helps prevent miscalculations of tax incentives arising from distorted accounting data and avoids conflicts in the application of different tax incentive policies.

（4）Strengthen Tax Risk Mitigation and Tax Controversy Management

While claiming tax incentives, enterprises should establish robust tax documentation retention mechanisms and properly retain contracts, business records, invoices, payment vouchers, accounting books, and other supporting documentation capable of demonstrating the authenticity of the underlying transactions and compliance with the applicable eligibility requirements for the relevant tax incentive policies. Such documentation should provide a complete, accurate, and traceable basis for claiming tax incentives and serve as adequate evidentiary support in the event of a tax audit or investigation.

Upon receiving a tax risk alert or becoming subject to a tax inspection, enterprises should promptly conduct an internal review, comprehensively examine the relevant business facts and tax treatment, and actively cooperate with the tax authorities throughout the investigation. Particular attention should be given to substantiating the authenticity of the underlying transactions and the legal basis for claiming the relevant tax incentives through well-prepared supporting documentation and explanations. Where an enterprise identifies that tax incentives have been incorrectly claimed, it should promptly make voluntary corrections to its tax filings and pay any underpaid taxes in accordance with the law, with a view to resolving potential tax risks at an early stage.

Where a case may involve potential findings of tax evasion, the issuance of fraudulent invoices, or other tax-related violations or criminal offences, enterprises should seek professional assistance at the earliest opportunity and handle tax disputes and criminal risk prevention in accordance with the law. Doing so may help prevent an ordinary tax adjustment from escalating into an administrative penalty or even criminal prosecution, thereby safeguarding the enterprise's legitimate rights and interests to the greatest extent possible.