If a unit or individual industrial and commercial household provides services free of charge to other units or individuals, value-added tax (VAT) will no longer be levied. One of the benefits offered by some enterprises and institutions to their employees has been canteen meal prices or dormitory rents set significantly below market rates, which were previously exempt from VAT but may become taxable after 2026. The VAT Law and its implementing regulations have officially taken effect starting January 1, 2026. Taxable transactions within China are subject to VAT, while transactions not classified as taxable are exempt. The VAT Law enumerates four categories of non-taxable transactions and, compared to previous regulations, has removed the clause for "services provided by a unit or individual industrial and commercial household to its employed staff." In other words, services such as meals or accommodation provided by employers to employees were previously exempt from VAT regardless of whether a fee was charged. With this clause now removed, the taxability of such services remains uncertain. Concurrently, Article 5 of the VAT Law, which lists transactions deemed as taxable, also omits the previous provision stating that "services provided free of charge by a unit or individual industrial and commercial household to other units or individuals" are considered taxable transactions. This means that providing free services to external parties will no longer be treated as a taxable transaction and will not be subject to VAT. Ge Yuyu, an associate professor at the Shanghai National Accounting Institute, analyzed that many services employers provide to employees are market-based activities; if fees are charged, they can reasonably be subjected to VAT. Considering the VAT Law clarifies that providing such services free of charge is no longer deemed a taxable transaction, services offered to employees without charge starting this year will not incur VAT. However, if these services are provided for a fee, VAT will apply. "For example, a company offering young employees housing rental services at below-market rates—say, market rent in an area is 3,000 yuan, but the employer charges only 1,000 yuan—was previously tax-exempt, but starting this year, it becomes taxable," Ge Yuyu said. Li Jun, a tax partner at PwC China, noted that in practice, many employers provide various services to their staff, such as car wash services offered by an automotive company or telecom services provided by a telecommunications firm to employees. If these services are charged, they are fundamentally similar to services provided to other entities and individuals and should thus be included in taxable sales for VAT; if provided free of charge, under the VAT Law, they are not deemed taxable transactions and are not subject to VAT. "Previously, in practice, it was often difficult to distinguish whether free services constituted regular business transactions or simply convenience and support, leading to complex situations and high taxation costs. The changes in the VAT Law enhance the certainty of tax treatment," Li Jun said. According to the VAT Law, services rendered by employees to their employers in exchange for wages or salaries are not considered VAT-taxable transactions and are exempt from VAT. This means that employee wages and salaries remain exempt from VAT, consistent with prior regulations. Ge Yuyu explained that the services employees provide to employers in return for compensation are internalized; while theoretically taxable, international practice generally exempts them from VAT, hence the VAT Law's explicit exclusion from taxable transactions. "Given these changes, many companies may consider providing meals, accommodation, and other services to employees free of charge to avoid VAT. Correspondingly, the cost of these free services might be reflected in a reduction of employee wages. For instance, in the previous example, instead of charging 1,000 yuan for dormitory rent, the employer might reduce the employee's salary by 1,000 yuan," Ge Yuyu said. It is also common for some employers to offer subsidized meals to staff, and under the new VAT Law, such services should also be subject to VAT if fees are applied. For employers providing meals, accommodation, and similar services, if they are general VAT taxpayers, a 6% tax rate generally applies; for small-scale VAT taxpayers, a 3% levy rate is typical. Ge Yuyu indicated that whether paid services provided by employers to employees will ultimately be taxed still depends on whether relevant authorities introduce any preferential tax policies in the future.
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