Tax Controversy 2025

Hwuason Law Firm was established in 2006, and is headquartered in Beijing. It is China's first law firm specialised in tax law. Leveraging its dual expertise in taxation and law,Hwuason lawyers focus on providing legal services including tax dispute resolution, tax risk management, tax law consultation and advisory, tax planning, international taxation, and tax-related criminal defence.Services cover industries including real estate,petrochemicals and energy, steel, foreign trade, pharmaceuticals, renewable resources,and investment and financing. Hwuason also founded a 5A-level tax agents group,establishing branches in over 30 major cities across China. With a team of more than 1,000 professionals including tax lawyers and tax agents, Hwuason has built a nationwide tax law network.

The Latest in Tax Controversy in China in 2025

In recent years, the Chinese government has continuously strengthened the construction of smart taxation, constantly advanced the process of tax legislation, and actively participated in international tax mutual assistance and co-operation. The legal rigidity of Chinese taxation has been continuously enhanced, the tax administration capacity and level of tax authorities has been continuously improved, and the transparency of tax information at home and abroad has been continuously increased. The level of tax compliance and tax dispute resolution capabilities of foreign investors in greenfield investments and cross-border trade in China need to be rapidly upgraded and effectively adapted to these trends.

Trends of tax disputes in 2025

The National Taxation Work Conference held by the State Taxation Administration in January 2025 unveiled four key regulatory priorities for this year, which are tax issues arising from non-compliant efforts to attract investment, criminal offences of false invoicing and tax fraud, enhanced precision in supervision through big data analysis, and tax avoidance planning devised by tax intermediaries. As a result, tax disputes between mainland enterprises and tax authorities in 2025 are expected to focus on areas such as issuing false invoices, export tax rebate fraud, illegally enjoying local tax preferences, and malicious tax evasion planning. Tax compliance risks remain severe across several specific sectors, where tax disputes continue to occur frequently, including coal, petrochemicals, renewable resources, agricultural products, pharmaceuticals, logistics and transportation, flexible employment, venture capital, film and entertainment, corporate mergers and acquisitions, and high-net-worth individuals.

Affected by the economic downturn, local governments face enormous pressure to organise tax revenue. Some tax authorities will trace back the tax payments of certain enterprises in previous years for tax-related matters with rather ambiguous implementation standards of tax policies, which makes it more difficult for enterprises to prevent tax risks. For instance, at the beginning of 2025, tax authorities in provinces like Yunnan and Hainan placed retroactive adjustments for certain venture capital enterprises that had previously enjoyed reduced corporate income tax rates under the large-scale development of the country’s western regions and Hainan Free Trade Port preferential policies. These enterprises were disqualified from tax benefits on grounds of failing to register with the Development and Reform Commission. The amount of tax recovered reached over CNY100 million, which sparked disputes between tax authorities and enterprises.

In terms of cross-border trade in goods, disputes over royalties in the taxable prices of imported goods occur frequently. According to the Measures of the Customs for the Determination of the Customs Value of Imported and Exported Goods revised by the General Administration of Customs in October 2024, the royalty paid directly or indirectly by the buyer within China to the seller or third party abroad shall be included in the taxable price as long as they are related to the goods or constitute the conditions for sale. It usually involves patent rights, the right to use proprietary technology, trade mark rights, copyright, sales rights, etc. In terms of cross-border service trade, China has not yet introduced tax policies for the digital economy, but the compliance risks regarding the withholding obligation of value added tax have increased. Under current VAT regulations, only when both conditions are met, including that the seller is located abroad and the service occurs entirely abroad, can it be considered as selling services abroad. Domestic purchasers do not need to withhold and remit VAT on behalf of overseas sellers. In recent years, tax authorities have intensified their efforts to alert domestic enterprises of the risk of value added tax withholding by using the foreign exchange payment information of enterprises transmitted by banks. If the services provided by overseas sellers leave traces within the country, this tax risk will be triggered.

It is worth noting that China has joined the Automatic Exchange of Information (AEOI) advocated by the OECD and formulated the Chinese version of the Common Reporting Standard (CRS) regulations. In September 2018, China exchanged financial account information with other countries and regions that have joined the AEOI for the first time and has since implemented automatic exchanges on a regular basis. According to the official disclosure of the OECD, the most recent exchange occurred in September 2024. The main information of financial accounts opened by foreign enterprises and individuals within the territory of China will be automatically transmitted to their home countries under the CRS rules, and it is necessary to properly handle tax investigations by the tax authorities of the home countries on funds or income derived from China.

Tax administrative reconsideration

As an internal error-correction mechanism within the tax administration system, tax administrative reconsideration serves as a critical legal relief for foreign-invested enterprises in China to resolve tax disputes. When the tax authority makes a decision on tax collection and supplementary payment, the affected entities can usually apply for reconsideration to the immediate superior tax authority. The higher-level tax authority will conduct a review of the decision regarding factual determinations, evidence, application of law, and statutory procedures, and make a ruling.

The State Taxation Administration disclosed that the number of national tax administrative reconsideration cases was 2,088 in 2022, 3,131 in 2023, and rose to 5,243 in 2024. According to the Ministry of Justice’s 2024 national administrative reconsideration statistics, 90.3% of the cases did not enter the administrative litigation or letters and visit procedures after administrative reconsideration. Since this procedure is non-public, the conflicts in tax disputes do not externalise and will not overly intensify the tension between the tax authorities and taxpayers. It has a relatively large flexibility characteristic and the effect of resolving the disputes is more desirable.

It should be noted that, in accordance with the current Tax Collection and Administration Law, before an enterprise applies for administrative reconsideration regarding substantive tax disputes, it must first meet the prerequisite of making up for the tax payment and late payment penalties or providing tax payment guarantees. Otherwise, it does not have the qualification to apply for reconsideration. In March this year, the Ministry of Finance and State Taxation Administration released a draft for public comment on the revision of the Tax Collection and Administration Law, explicitly abolishing the above-mentioned tax clearance rules. The revised draft is expected to be submitted by the State Council to the Standing Committee of the National People’s Congress for review in 2026, with potential approval within approximately two to three years. The abolition of the tax clearance will further activate this procedure, making it truly become the most important legal remedy for enterprises to resolve tax disputes.

Tax administrative litigation

Tax administrative litigation serves as a legal remedy for enterprises seeking judicial review of tax disputes, characterised by strong legal nature, independence, confrontation and openness. However, China’s court system currently lacks specialised tax tribunals, resulting in long-standing deficiencies in judicial resources, capability and expertise for handling tax cases. The ratio of enterprises winning their cases is very low and they often go through first-instance, second-instance, and even retrial procedures.

In January 2025, the Supreme People’s Court announced a retrial case of a tax administrative lawsuit. In 2013, the tax authority made a decision of back-taxes and imposing penalties on an engineering company for underpaying real estate tax. The enterprise began to resort to legal remedies at the end of 2013, but failed in administrative reconsideration, and the first-instance and second-instance of administrative litigation. After the Guangdong High Court rejected its petition in 2017, the company appealed to the Supreme People’s Court. In January 2024, the Supreme People’s Court decided to initiate a retrial of this case and made a retrial judgment in December, determining that the tax collection and penalty actions of the tax authorities were contrary to the objective facts, and violated the principle of proportionality between offence and punishment and protection of reliance. The original judgment and penalty decision were thus revoked. After more than ten years of litigation, the case was finally won.

In summary, enterprises initiating administrative reconsideration or litigation to resolve tax disputes not only need to be prepared for a protracted and tough battle, but also should rely on the professional support of tax lawyers. During the case trial process, it is critical to gain the trust and support of the reconsideration authorities and courts, and to assist judges – particularly during litigation – in discovering, understanding, and applying tax laws, thereby maximising the protection of legitimate rights and interests.

Special tax investigations and mutual agreement procedures (MAP)

In recent years, the Chinese government has actively participated in the BEPS action plan advocated by the OECD, gradually improved the anti-tax avoidance and special tax adjustment rules, and committed to implementing Pillar Two. Multinational enterprises should attach importance to the tax risks of related-party transactions and properly resolve related disputes.

Chinese tax authorities have carried out anti-tax avoidance investigations, with a focus on risk points such as high value of related-party transactions of enterprises, long-term losses, thin profits, leap profits, profit level lower than the industry level, mismatch between profit levels and functional risks, mismatch between shared profits and cost, thin capitalisation, non-compliant preparation of contemporaneous documents, and transactions with low-tax related parties. In the early stage of responding to anti-tax avoidance investigations, it is recommended that enterprises, based on the contemporaneous reports, make statements and defences regarding the two key points of comparability analysis and transfer pricing methods, discussing that related-party transactions comply with the principle of independent transactions, as well as the matching relationship between returns, risks and functions.

In response to the special tax adjustment conclusion issued by the Chinese tax authorities, enterprises can not only resort to legal remedies such as administrative reconsideration and administrative litigation, but may also request their overseas affiliates to initiate a mutual agreement procedure (MAP) through their home country’s tax authorities. While Chinese tax authorities generally refrain from initiating MAP for special tax adjustment cases involving unpaid taxes according to domestic regulations, this is not absolute. As long as the tax authorities of the home country initiate reciprocal anti-tax avoidance investigations against Chinese-funded enterprises and formally request China to initiate MAP under the bilateral tax treaty, it will increase the bargaining chips of the investigated foreign-funded enterprises in negotiations with the Chinese tax authorities and have a greater chance of obtaining the final understanding of the Chinese tax authorities.

Advance pricing arrangements

Foreign-invested enterprises in China with a high dependency on cross-border related-party transactions, may apply to the Chinese tax authorities for signing unilateral or bilateral advance pricing arrangements (APAs), thereby enhancing the certainty of the pricing principles and calculation methods for cross-border related-party transactions. The officially signed APA not only applies to the subsequent three to five years but may also cover related-party transactions from prior years, with a retroactive period of up to ten years.

The negotiation and execution of the advance pricing arrangement consist of six stages, which are pre-filing meeting, letter of intent, analysis and evaluation, formal application, negotiation and signing, implementation and monitoring. It is initiated by an enterprise submitting an application for pre-filing meeting, and the initiation threshold is that the amount of related-party transactions that occurred in each of the past three years is over CNY40 million. Enterprises with related-party declarations, compliant submission of contemporaneous materials, tax credit ratings of Grade A, complete application materials, and renewal, may be given priority for acceptance. For enterprises applying for bilateral advance pricing arrangements, if the overseas tax authorities have a strong willingness to negotiate and a high degree of attention, they may also be given priority in accepting the application.

As of 2023, China has signed 153 unilateral APAs and 143 bilateral APAs, but has not yet signed multilateral APAs. Among these, the proportion of APAs involving tangible assets is as high as 56%, while the proportions of APAs involving intangible assets and labour transactions are 20% and 23% respectively. The proportion of APAs involving financing is only 1%, and the proportion of APAs involving the transfer of financial assets has not yet been signed. In addition, among the bilateral APAs that have been signed, China has signed 99 cases with Asian countries, 27 cases with European countries, 16 cases with North American countries, and one case with Oceanian countries. In terms of signing time, the vast majority of unilateral APAs and half of bilateral APAs are usually signed within 24 months, and nearly half of the number of bilateral APAs take longer than 24 months to sign. From an industry perspective, manufacturing, wholesale and retail, leasing and business services, transportation and postal industry, and information technology services constitute the primary sectors covered by signed APAs, collectively accounting for 97% of the total.

The above data is sourced from the China Advance Pricing Arrangement Annual Report (2023) released by the State Taxation Administration. Such reports are usually released in December each year, and enterprises planning to apply for an APA may take note and refer to them. It is worth noting that the number of renewals of APAs after expiration has been increasing year by year, which reflects the positive role played by APAs in preventing the risk of special tax adjustments. Given that the procedures for negotiating and signing APAs are complicated and the process is lengthy, it is advisable for enterprises to proactively seek assistance from tax lawyers to complete the signing of advance pricing arrangements with professional assistance and support.

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