Why China’s Export Tax Rebates Were Never the Golden Ticket

China’s sweeping reduction in export tax rebates affects 6.7% of its massive export machine, but for foreign companies, the complex reality of claiming these incentives meant their true value was always less than advertised.

As of Dec. 1, 2024, China’s Ministry of Finance has completely eliminated the 13% rebate on aluminum and copper products while slashing rebates from 13% to 9% on everything from solar panels to batteries.

If you’re in one of these affected categories, you’re probably going to feel the pinch pretty quickly. Whether you’re working through your own trading company or buying straight from Chinese suppliers, costs are headed up next quarter. 

Since China introduced these incentives in 1985, setting up dedicated trading entities to capture VAT rebates has been a popular strategy for foreign businesses.

However, even at 13%, these rebates were never the windfall they appeared to be for many companies. While the rebates looked attractive on paper, the fixed costs and administrative headaches of claiming them (though simplified in 2022) often eroded much of their value. The rebates only became truly beneficial when export volumes were large enough to significantly offset the fixed costs.

So, if your product still falls under the 9% rebate category, is it worth operating a company in China to take advantage of it?

China’s Not-So-Simple VAT Rebate System

Let’s take a step back. There are two ways companies can claim export VAT rebates in China, and which one you’ll use depends on what type of business you run:

• Model A: For Manufacturers
  • If you’re actually making stuff in your own factory in China (which most foreign companies aren’t), you’ll use this one.
• Model B: For Trading Companies
  • This is probably the one for you if you’re buying from Chinese suppliers to export.

On paper, the process seems straightforward – establish a trading company in China, manage your supply chain, and collect VAT rebates. However, establishing and maintaining a trading company in China comes with substantial overhead:

• Annual entity maintenance costs
• Monthly compliance requirements and filing procedures
• Dedicated staff for accounting and administration
• Regular audits (more expense!)

*We cover all of this in our Entity Essentials series.

“You need to have a dedicated team in place and that costs money,” explains Cathy Zhang, founder and partner of Cathy Accounting Firm. “This team must include logistics personnel. Even if you outsource customs clearance and logistics operations, you still need in-house staff to coordinate with the logistics team and collect all necessary documents from suppliers and shipping companies.”

The Administrative Reality

Model B trading companies face particularly strict oversight compared to their manufacturing counterparts.

“Government oversight of Model A is relatively lenient, while Model B faces much tighter controls,” says Cathy. “Filing tax refund applications with the tax bureau typically requires a highly skilled financial team to manage the process.”

The documentation requirements are exacting. “First, the paperwork has to be perfect – and I mean perfect. Every single item name on your customs declarations needs to match exactly what’s on your purchase invoices,” notes Cathy. “One small error can trigger delays or rejections.”

Second, tax authorities don’t just take your word for it. They investigate your suppliers thoroughly – checking if they actually have production capabilities and verifying their material purchases, utility bills, and even employee records.

If a supplier fails inspection, the trading company becomes liable for the full VAT amount. Even worse, Cathy says, “We’ve seen cases where authorities find problems with a client’s supplier months or even years later, they can demand you pay back those refunds.”

This rigorous compliance environment means that while the headline rate might be 13% (now 9% for many products), the actual benefit after accounting for administrative costs is often just a few percentage points.

For companies with sufficient export volumes to absorb these costs, it can still make sense – but for many, the administrative burden erases much of the benefit.

Key Financial Obligations

Even after mastering the administrative challenges and operational expenses, there’s another consideration: your Chinese trading company needs to show it’s making money (and paying taxes)!

Let’s say you’re selling goods in the U.K. that you source through your Chinese trading company. If your Chinese company handles significant export activity but shows zero profit, this raises immediate red flags with tax authorities. 

The way around this (and what most companies do) is what’s called a “cost-plus” model. Here’s how it works:

1. Add up ALL your Chinese operation costs:
   • Staff wages
   • Office rental
   • Admin costs
   • Other expenses
2. Add a markup of 8% (this becomes your taxable Chinese profit)
3. Your Chinese company then invoices your U.K. company for this total amount.

Critical Tax Threshold

If your Chinese entity’s 8% profit comes to under $414,000 (approximately 3 million yuan), you’ll only need to pay 5% corporate tax.

However, once you cross this threshold, your tax rate jumps dramatically to 25% on ALL profits.

So, if your Chinese operation is purchasing $10 million per year in goods from China:

• You charge your U.K. company $10.8 million
• This shows $800,000 profit in China
• You pay $200,000 Chinese tax (25% of profit)

This obligation represents yet another expense layer on top of your operational costs, entity maintenance fees, and administrative overhead. 

Is It Worth It?

With the rebate now at 9% (down from 13%), you need to carefully evaluate whether setting up an entity makes financial sense.

This is especially true if your export volumes would put you just over the $414,000 profit threshold, triggering the 25% tax rate instead of 5%.

You need to ask yourself:

• Do you have the resources to handle this complexity?
• Are your margins high enough to justify the overhead?
• Would the tax burden at 25% eliminate most of your rebate benefits?

Before jumping in, it’s worth counting up all these costs and comparing them against your potential VAT savings.

“If the volume is substantial and the company has a strong need to consolidate goods in China before export, then this approach still makes sense,” says Cathy. “With higher volumes, the fixed costs — such as labor, personnel, and process management teams — become more cost-effective, as these overhead expenses are spread across a larger operation.”

However, for companies with moderate export volumes – especially those just over the tax threshold – the combination of 25% tax rate and fixed costs can significantly diminish the rebate benefits. Luckily, there are simpler options:

• Use the rebate knowledge in supplier negotiations
  • Remember: Your suppliers can claim these rebates themselves under Model A if they export directly to you. If they’re getting 9% back on exports, that’s room for negotiation on your prices. Knowledge is power here – understanding their rebate potential gives you leverage in price discussions.
• Consider an employer of record service (like The China Desk)
  • These services can handle the administrative burden of claiming that 9% rebate while you focus on your core business.

The bottom line: Don’t get caught up chasing rebates if the administrative costs eat up all the savings. The VAT rebate system was really designed to benefit Chinese manufacturers, not foreign companies setting up trading entities to claim it.

When you factor in the tax implications, entity maintenance costs, and administrative burden, it often makes more sense to work directly with suppliers who are already set up to handle these rebates efficiently.

If you need advice on this topic, schedule a free consultation with one of our experts!

Cathy Zhang, founder and partner of Cathy Accounting Firm, contributed expertise to this article. For more information about Cathy Accounting Firm, contact her at cathy.zhang@cathytax.com or visit their website.