Editor’s Note: Recent intensive adjustments to tax incentive policies in sectors such as new energy vehicles, batteries, and medical aesthetics, alongside accelerated phase-outs of local illegal tax rebates, and continued structural tax support for hard-tech fields like integrated circuits and machine tools, mark a clear "retreat" and "advance" in China's tax policy landscape. This dual movement not only reshapes corporate tax expectations but also harbors multiple risks, including retroactive recovery of past benefits and maintenance of qualification status. This article provides practical guidance for enterprises to comply with and benefit from applicable tax incentives by analyzing the policy logic, risk focal points, and compliance pathways.

 

I. The Underlying Logic Behind the "Retreat" and "Advance" of Tax Incentives

Tax incentives are not simply about "collecting less tax." Behind their "retreat" and "advance" lies a coherent theoretical framework. Activities such as R&D and innovation, SME development, and employment of key groups generate positive externalities—where the private return on corporate investment is lower than the social return, leading to under-supply by the market, thus necessitating government intervention. The mechanism of tax incentives is to reduce the tax burden on specific economic activities, guiding market participants' behavior, and allowing eligible entities to automatically benefit—making them more inclusive and stable compared to direct subsidies. When a large number of enterprises are steered by policy signals in the same direction, macroeconomic effects emerge, and if such direction aligns with national strategy, a positive resource allocation effect is created. However, tax incentives inherently carry negative effects: resources may flow to subsidized industries rather than the most efficient ones; they exacerbate fiscal imbalances under tight budgets; selective incentives lead to unequal tax burdens among similar enterprises; and local governments' competitive granting of incentives can trigger vicious tax-base competition and rent-seeking. Therefore, tax incentives must be constrained within a legal framework.

Placing this logic in the current era provides a clearer understanding of the ongoing policy direction. From the "15th Five-Year Plan" recommendations to the official outline, the objective of deepening the construction of a unified national market is explicitly set forth. As a key component of the macroeconomic regulatory system, tax incentive policies embody three integrated functions: first, precisely guiding resources toward emerging and future industries; second, facilitating the formation of unified institutional rules and standards; and third, curbing excessive competition through regulating local incentives, thereby fostering a fair and law-based market environment. Hence, the current "retreat" and "advance" of tax incentives are a practical implementation of this logic: the "retreat" applies to illegal incentives lacking legal basis and those for mature industries that have fulfilled their historical missions, while the "advance" applies to structural incentives grounded in clear market failures and serving national strategies. For enterprises, this means the source of certainty for tax incentives is shifting toward the "rule of law," and businesses must adjust their tax planning accordingly.

II. Recent Trends in the "Retreat" and "Advance" of Tax Incentive Policies

At its core, the "retreat" direction aims to restore tax neutrality, unify industry-specific tax calculation rules, and smooth out tax burden differences across value chains, thereby allowing market competition to revert to enterprises' technology, products, and genuine operational capabilities, and fostering a fair and transparent market environment. The "advance," on the other hand, consists of targeted structural tax cuts and fee reductions within the statutory tax framework. Both forces work in tandem to drive China's tax incentive system toward greater legalization and standardization.

(A) The "Retreat" Dimension: Cleanup of Illegal Tax Incentives and Phase-out of Mature Industries

Recent tax policy adjustments exhibit a "retreat" concentrated in two areas: first, the elimination of incentives that lack legal basis; and second, the orderly withdrawal of incentives due to changes in national strategy or policy adjustments. This "retreat" does not mean a wholesale cancellation of incentives; enterprises should understand it from two angles.

First, the systematic cleanup of illegal incentives is a corrective measure against unlawful tax practices. Article 3 of the Tax Collection and Administration Law explicitly stipulates that tax reductions, exemptions, and refunds must be implemented in accordance with laws or administrative regulations, and no authority, entity, or individual may arbitrarily grant tax incentives in violation thereof. This provision establishes the statutory principle of tax incentives and defines the core boundary for policy cleanup: the removal of incentives without legal or regulatory backing. Currently, localities are intensifying special governance efforts against tax-related irregularities in investment promotion. Certain preferential arrangements previously enjoyed by some enterprises, lacking a basis in laws or administrative regulations, are now subject to compliance review. At the enforcement level, many localities have disclosed notices requiring enterprises to return previously received subsidy or rebate funds. For enterprises, such regulatory governance creates a compliance-scrutiny environment, where the legality and stability of relevant arrangements are subject to reassessment, and the continued existence or future applicability of certain preferential conditions may be retroactively adjusted or modified based on cleanup progress.

Second, the orderly phase-out, expiration, and tiered adjustment of tax incentives represent a national-level optimization of the tax system. Currently, multiple mature industries have clear, phased phase-out pathways with transition periods. For example, vehicle purchase tax has been adjusted from a full exemption with a cap to a 50% reduction; battery consumption tax is being reintroduced in stages, with lithium primary batteries and lithium-ion batteries taxed at 2% from September 1, 2026, and the rate rising to 4% from September 1, 2027. Additionally, under the latest policy effective July 2026, from January 1, 2027, the 50% reduction on vehicle and vessel tax for energy-saving automobiles will be canceled, and the full exemption for pure electric commercial vehicles, plug-in hybrid commercial vehicles, and fuel-cell commercial vehicles will also terminate simultaneously. From a market development perspective, as the penetration rate of new energy vehicles in China has exceeded 50%, the industry has moved past its initial nurturing phase, prompting the successive withdrawal of related temporary incentives. VAT incentives are also being adjusted: the simplified VAT calculation methods previously applicable to biological products and construction "owner-supplied materials" have been abolished, reverting to the general 13% VAT rate; the VAT exemption previously enjoyed by for-profit medical aesthetic institutions has also been formally repealed. These adjustments help restore the integrity of the VAT deduction chain, reduce tax distortions caused by policy differences among industries, and move the tax system toward greater neutrality. For enterprises, these types of policy changes have clear legal bases and transparent transition arrangements, mainly affecting future tax burdens and are unlikely to involve retroactive adjustments for taxes already enjoyed in prior periods.

(B) The "Advance" Dimension: Continued Strengthening of Structural Tax Incentives at the National Level

In stark contrast to the orderly withdrawal of incentives for mature industries and the comprehensive cleanup of illegal policies, the state is intensifying structural tax support for new quality productive forces and hard-core technological innovation. If the "retreat" is about correcting irregularities and purifying the market environment, the "advance" is about precisely implementing structural tax cuts and fee reductions within the statutory framework. Recent policy developments show a phased and structured pattern.

In the field of scientific and technological innovation, policy support for key industries such as integrated circuits and machine tools has expanded from the R&D stage to operational aspects. Previously, the 120% super-deduction for R&D expenses was effective until the end of 2027. In August 2026, the Ministry of Finance, the State Taxation Administration, the National Development and Reform Commission, and the Ministry of Industry and Information Technology jointly issued Announcement No. 23 (2026), clarifying that for integrated circuit and machine tool enterprises, income recognized from non-monetary asset exchanges occurring from January 1, 2026, to December 31, 2028, may be evenly included in taxable income over a period not exceeding five years. This extends policy support from R&D investment to asset replacement, allowing relevant enterprises to benefit in more operational dimensions.

In terms of support for business entities, people's livelihoods, and green development, existing policy frameworks remain largely unchanged. For business entities: the VAT super-deduction for advanced manufacturing continues until the end of 2027; the one-time pre-tax deduction for equipment and器具 under RMB 5 million remains in effect; and the corporate income tax incentives for small low-profit enterprises and VAT reductions for small-scale taxpayers are effective through the end of 2027. For people's livelihoods: the special additional deductions for "one elderly and one child" under individual income tax have been increased; tax deduction policies for enterprises hiring key groups and for veterans' entrepreneurship and employment continue; and the individual income tax refund policy for housing replacement is extended. For green development: investment tax credits for environmental protection equipment and the "three-year exemption, three-year half-reduction" for energy-saving and water-saving project income remain in force.

Overall, the current direction of tax policy adjustment shows: orderly withdrawal of incentives in mature industries, continued cleanup of local illegal tax-related practices, and intensified support for technological innovation. This aligns with the inherent requirements of tax policy reform under the unified national market initiative.

III. Tax Risks Facing Enterprises Amid Policy Adjustments

Against the backdrop of comprehensively tightening tax collection and administration, enterprises should pay close attention to four major categories of tax risks: recovery risks from the cleanup of illegal incentives; tax burden adaptation risks amid frequent policy changes; qualification maintenance risks from strengthened structural incentives; and invoice and compliance risks under big-data supervision.

(A) Remediation Risks from Cleanup of Illegal Incentives

Under the Tax Collection and Administration Law, the Fair Competition Review Regulation, and other relevant provisions, local fiscal incentive arrangements that are tied to enterprises' actual tax payments without State Council approval have been included in the nationwide special rectification scope. The core feature of this round of governance is a comprehensive review of previously existing regional fiscal and tax policies. Unlike the phase-out of time-limited incentives—which only adjusts future policy application without retroactive effect—this local cleanup may re-examine enterprises' past business activities that relied on local policy support.

(B) Tax Burden Adaptation Risks Amid the Transition Between Old and New Policies

This risk is a common challenge for enterprises under structural tax adjustments. Its essence lies in enterprises' tax management lagging behind policy changes, as they continue to apply old frameworks to tax matters, potentially leading to non-compliance such as claiming incentives without meeting conditions, improperly extending expired benefits, or using incorrect tax calculation methods.

On the "retreat" side, multiple adjustments are occurring: tiered adjustments to new energy vehicle taxes, reintroduction of battery consumption tax, expiration of vehicle and vessel tax incentives, and abolition of simplified VAT calculations for certain industries. On the "advance" side, incentives for integrated circuits, machine tools (deferral of tax), and R&D super-deductions for tech enterprises are continuously optimized, with updated eligibility criteria, filing requirements, and management rules. During this transition, some enterprises may lag in policy interpretation, fail to update internal records timely, or make inaccurate tax burden projections. Enterprises in mature industries may risk non-compliance by habitually applying already-adjusted incentives; tech enterprises may misunderstand the scope of new benefits, leading to filing errors, missing documentation, or asset-misclassification issues. This risk spans the entire transition period, and without timely dynamic tracking, may create persistent compliance gaps.

(C) Qualification Maintenance and Substance-Based Operational Compliance Risks

While illegal incentives are being cleaned up, statutory incentives in areas such as integrated circuits, machine tools, high-tech enterprises, and regional development continue to improve. However, enhanced policy support is accompanied by strengthened supervisory scrutiny. Eligibility for incentives is premised on genuine operations and substantial matching; any discrepancy between qualification and business substance may lead to revocation of benefits and retroactive tax adjustments.

A hallmark of such risks is "retroactive reassessment": enterprises may have met conditions at the time of application, but if performance metrics decline or operational substance weakens during the qualifying period, their status may be re-evaluated, triggering cascading adjustments. As of 2025, at least 6,649 enterprises have had their High-Tech Enterprise (HTE) status revoked. Verification focuses have extended from mere ratio indicators to the genuineness of R&D activities and the relevance of intellectual property to core business operations. Revocation of HTE status may involve supplementary tax payments. Meanwhile, the "substantial operations" standard for regional incentives has also been raised. For effective regional incentives like Hainan Free Trade Port and the Western Development Program, four-dimensional routine verification (premises, personnel, assets, decision-making) is now conducted, and key regions have established cross-departmental joint inspections and big-data comparisons. Practices such as separated registration and operations, off-site social insurance registrations, lack of fixed business premises, or remote core decision-making assets are now detectable by regulators.

(D) Invoice and Digitalized Tax Collection Compliance Risks

With the improvement of invoice management rules and the rollout of full-process big-data supervision, activities such as issuing fictitious invoices, splitting income, and concealing operating income through private accounts face higher detection probabilities.

The first sub-category is small-enterprise benefit arbitrage. The preferential corporate income tax rates for small low-profit enterprises and the "six taxes and two fees" reductions have eligibility thresholds. Some enterprises attempt to manipulate taxable income—by splitting entities, concealing income, using private accounts, or inflating costs—to artificially meet thresholds and obtain benefits. In regulatory practice, such entity splits or income segmentation, regardless of formal bookkeeping compliance, may be deemed improper claiming of incentives. Under the integrated data management framework, cross-referencing of fund flows, inventory records, and social insurance data makes such operations more detectable.

The second sub-category is invoice and transaction compliance. In 2026, the State Taxation Administration officially issued a positive-and-negative list for invoice compliance, including 16 positive compliance standards and 28 negative prohibitions, clarifying the complete boundaries for issuing, obtaining, and managing invoices. Key prohibited practices include issuing invoices under misclassified categories, issuing invoices in bulk without basis, issuing invoices without actual transactions, applying incorrect tax rates, and distorting invoice information. Under the fully digitalized invoice system's real-time dynamic management, invoice circulation, information, and issuance behaviors can be traced and verified in real time, significantly increasing detection risks.

IV. Recommendations for Corporate Tax Compliance Management

In light of the current tax policy adjustments and evolving collection environment, enterprises are advised to establish a compliance management framework covering pre-event, in-process, and post-event stages.

At the pre-event level, enterprises must precisely grasp the details of new policies, including eligibility criteria, effective periods, filing requirements, and expiration dates. Focus on key areas such as new energy, hard-tech, livelihood services, and VAT calculation. Establish a dedicated tax incentive dynamic ledger to track effective, expiring, and abolished policies in real time. Furthermore, assess post-adjustment tax burden changes in advance and optimize operational and pricing plans to avoid relying on outdated policies based on past experience.

At the in-process level, enterprises should standardize full-process financial, tax, and transaction management to ensure consistency among business activities, contracts, invoices, and fund flows. Issue and obtain invoices in compliance, and properly preserve supporting documentation related to operational substance. For enterprises enjoying HTE, regional, or other incentives, continuously monitor the authenticity of R&D activities, matching of personnel and assets, and completeness of decision-making records throughout the qualification period, to prevent re-assessment due to changes in relevant indicators or operational substance.

At the post-event risk resolution level, upon receiving tax risk alerts or inspection notices, enterprises should conduct internal reviews. Scrutinize whether business activities, filing data, and qualification criteria align with policy requirements, and identify any non-compliance such as unmet indicators, incomplete documentation, or improper arbitrage. If compliance gaps are found, take corrective action promptly to eliminate tax risks. If, after review, the enterprise confirms that its operations are genuine and compliant with applicable incentives, but disagreements arise with tax authorities over factual findings or policy interpretation, the enterprise should promptly compile complete transaction evidence, proactively communicate with the authorities, and may engage professional advisors to handle the matter lawfully, achieving a balanced approach to compliant operations and risk prevention.