10% tax bonus for foreign investors: China's new deal between capital incentives and data control

More incentives for foreign investors, more control over company data

The People's Republic of China is reshaping its economic and political landscape – with far-reaching consequences for global trade. Between 2025 and 2030, the era of mere declarations of intent will give way to a hard-nosed, precise regulatory reality. Whether through the new value-added tax law, massively tightened cybersecurity requirements, or the strategic use of rare earth elements in the trade conflict with the US, Beijing is pursuing a remarkable dual strategy. On the one hand, the country is attracting foreign investors with unprecedented tax incentives and new market openings; on the other, it is tightening its net of national security and control like never before. For European and German companies, this marks a watershed moment. The future of doing business in China will no longer tolerate any gray areas. Those who want to remain successful in the Middle Kingdom must not only know the new rules of the game but also integrate them deeply into their own corporate strategy. The following comprehensive analysis illuminates the most important regulatory, tax, and geopolitical shifts and shows why the price of market access is now compliance excellence.

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From negative list to invitation policy: Market access redefined

China is sending clear signals. The People's Republic's political direction for the years 2025 to 2030 is more precise and strategic than ever before – and it fundamentally changes the rules of the game for foreign companies. Anyone who dismisses this development as mere bureaucratic red tape underestimates the weight of the decisions made in Beijing. For what at first glance reads like technical legal revisions reveals, upon closer inspection, a coherent governance concept: China wants to remain open – but only to those who contribute to its strategic goals. For everyone else, the playing field is shrinking.

This report analyzes the key regulatory shifts of 2025 and 2026 along four central areas of action: market access and the investment climate, tax law and fiscal incentives, trade and export controls, and digital regulation and data security. The analysis is complemented by the strategic framework of the 15th Five-Year Plan and the geopolitical dynamics of the Sino-American trade conflict, which overshadows all other developments.

What the blacklist reveals – and what it conceals

The "Market Access Negative List" is China's central instrument for controlling market access. Anything not on the list is considered generally open. Since its introduction in 2018, the list has been continuously shortened. The 2025 edition reduces the number of restricted sectors at the national level from 117 to 106 entries – a decrease of almost 30 percent compared to the initial version. Local restrictions have also been streamlined, from 36 to 20 entries.

The liberalized sectors are not trivial. Television production, telecommunications services, online information services for pharmaceuticals and medical devices, and forest seed imports have been partially opened. Regional governments have been instructed to facilitate market access in transportation, logistics, freight forwarding, and vehicle rental. All of this sounds like liberalization—and it is, within the limits set by Beijing.

At the same time, new items were added to the blacklist: unmanned aerial vehicles (drones), e-cigarettes, and newer generation tobacco products. These decisions follow a logic that could be described as "precise regulation": opening up where China needs capital and know-how; closing down where national security, public health, or strategic control are at stake.

The 2025 Action Plan: Stabilization under pressure

On February 19, 2025, the Ministry of Commerce (MOFCOM) and the National Development and Reform Commission (NDRC) published the Action Plan for Stabilizing Foreign Investment. The document was not presented under favorable circumstances: Foreign direct investment (FDI) in China had plummeted by 27.1 percent in 2024 – the sharpest decline since the 2008 global financial crisis. On an annual basis, FDI fell by a further 9.5 percent in 2025 to 747.77 billion CNY, marking the third consecutive year of declining inflows.

The action plan responds to this erosion with a broad package of measures: The "Invest in China" brand is to be strengthened internationally, and the list of industries in which foreign investment is particularly welcome has been revised and expanded to include more than 200 sectors. The focus is on advanced manufacturing, modern services, and green and high-tech sectors. The new catalog came into effect on February 1, 2026, replacing the 2022 edition.

The geographical dimension of this realignment is noteworthy. Beijing is actively seeking to direct foreign investment not only to the core economic centers along the coast, but also to the central and western regions, as well as the northeast and Hainan – regions that, despite government support, have thus far received less attention. Behind this strategy lies a dual interest: mitigating regional development imbalances and improving national resilience through broader industrial diversification.

Equal treatment as a signal and as a promise

A central theme of China's investment discourse in 2026 is the so-called "national treatment" for foreign companies. At the national trade conference in January 2026, MOFCOM representatives emphasized that foreign-invested companies should have equal access to consumer spending programs, government procurement, and public tenders. This is a direct response to long-standing complaints from foreign business associations that documented discrimination against state-owned enterprises.

Whether this promise will be fulfilled in practice remains to be seen. The institutional foundations – the Foreign Investment Act of 2020 and its implementing regulations – are to be further developed in 2025 and 2026. The bureaucratic entry procedure has been simplified by a "single window" model, which makes company registrations significantly more efficient. These administrative improvements should not be underestimated: For medium-sized companies that cannot employ armies of compliance experts, the quality of administrative processes often makes the difference between market entry and market absence.

Tax law in transition: From provisional measures to binding laws

The new VAT law: A historic step

On December 25, 2024, China passed a fully codified Value Added Tax Law (VAT Law), which came into effect on January 1, 2026. This step may sound technical, but it is of considerable structural importance: For over three decades, China's VAT system was based on provisional regulations and administrative guidelines – a patchwork that created planning uncertainty, especially for foreign companies.

The new law establishes a uniform, legally sound framework that is more closely aligned with international standards. The basic tax rates remain stable: 13 percent for goods, 9 percent for transport and telecommunications, and 6 percent for modern services. Small businesses with an annual turnover of less than 5 million RMB will benefit from a simplified rate of 3 percent. The previous provisional arrangement stipulated 5 percent for certain categories – the standardization at 3 percent provides particular relief for smaller service companies.

The country-of-destination principle is changing practice

The most significant substantive change concerns the taxation of services and intangible goods. In the future, the destination principle will apply: what matters is where the service is consumed – not where the supplier or customer is located. This eliminates gray areas that were previously exploited primarily by internationally operating companies.

Specifically, this means that if a German software company provides services to a Chinese customer that are consumed in China, Chinese value-added tax (VAT) is payable – regardless of whether the German company has a physical presence in China. Conversely, services provided by foreign suppliers to Chinese customers are tax-exempt if they are consumed entirely abroad. The precise interpretation of the term "place of consumption" will be further clarified by subsequent regulations – companies should now carefully examine their cross-border business relationships to identify potential tax risks early on.

Other relevant changes: Loan interest will be deductible as input tax, which will provide relief, especially for capital-intensive companies. Internal transfers of goods between company locations within China will no longer be automatically subject to value-added tax, thus reducing the burden on intra-group supply chains. At the same time, tax authorities will be granted expanded powers to review and correct unusually high or low sales figures.

Tax magnet: The tax credit policy for reinvestments

A particularly targeted instrument for capital management is the new "Tax Credit Policy," which is in effect from January 1, 2025, to December 31, 2028. The concept is simple and effective: Foreign investors who reinvest profits of their Chinese subsidiaries in China, instead of distributing them abroad, receive a tax credit of 10 percent of the reinvested amount against their annual corporate income tax.

This incentive is fundamentally different from the previous instrument from 2018, which merely granted a tax deferral. The new regulation results in a genuine tax waiver – the tax is permanently waived, not just temporarily. Furthermore, supplementary measures were enacted in July 2025, granting reinvestors administrative relief, simplified licensing procedures, more flexible land use, and foreign exchange facilitation.

This policy is complemented by the revised catalog of industries eligible for foreign investment, which offers foreign-invested companies customs exemptions on imported equipment, preferential land prices, and reduced corporate tax rates in certain regions. Beijing is thus establishing a multi-tiered incentive instrument that systematically rewards long-term capital commitment.

Export compliance: The end of grey-zone exports

The new export compliance reform is significant for export-oriented companies: From October 2025, STA Notice No. 17 will apply, mandating a clear distinction between own exports and commissioned exports. The long-standing practice of using third-party export documents without possessing one's own export authorization will be classified as an administrative offense and actively prosecuted. At the same time, e-commerce platforms must report seller income, order volumes, and commissions – the industry is entering a phase of complete tax transparency.

Trade geopolitics between escalation and tactical détente

The Sino-American tariff conflict: A year full of twists and turns

The trade war between the US and China dominated the economic policy agenda in 2025 like no other issue. In April 2025, the situation escalated dramatically: The US imposed substantial additional tariffs on Chinese imports. China responded in kind. In Geneva on May 12, 2025, both sides agreed to reduce their respective additional tariffs by 115 percentage points – 91 percentage points were completely eliminated, and the remaining 24 percentage points were suspended for 90 days. A base tariff of 10 percent remained in place on both sides.

On the sidelines of the APEC summit in South Korea, US President Trump and Chinese President Xi Jinping met on October 30, 2025. The agreement reached was substantial: The US reduced the tariff-related additional duty imposed in connection with the fentanyl crisis from 20 to 10 percent. In return, China agreed to resume importing US soybeans and to suspend previously announced export controls on rare earth elements for one year. The agreement is valid until November 2026 and can be extended.

What remains is a state of limbo: tariffs have been reduced, but are still significantly higher than before Trump's second term. The fundamental conflict over technological dominance, rare earth elements, semiconductors, and market liberalization has not been resolved – it has merely been frozen.

The strategic weapon “rare earths”

China controls over 85 percent of the world's rare earth processing capacity. This structural dependency has transformed Beijing into a geopolitical tool. Between April and October 2025, export controls were successively introduced or tightened on a total of twelve of the seventeen rare earth metals – including samarium, gadolinium, terbium, dysprosium, lutetium, scandium, yttrium, holmium, erbium, thulium, europium, and ytterbium.

The implications of these measures extend far beyond direct exports from China. MOFCOM Notice No. 61/2025 stipulates that products manufactured abroad that contain Chinese rare earth elements or are produced using Chinese processing technologies also require an export license. Products with a Chinese rare earth element content exceeding 0.1 percent fall under this regulation. This is an extraterritorial regulation with significant consequences for European manufacturers in the electronics, automotive, and energy technology sectors.

Following the preliminary trade agreement, these export controls were suspended until November 10, 2026. But the message is unmistakable: China is prepared to use its raw material power as a trade policy instrument – ​​and global industry has realized how vulnerable it is.

The new foreign trade law: Sovereign opening

On December 27, 2025, the Standing Committee of the National People's Congress adopted a fundamentally revised foreign trade law, which came into effect on March 1, 2026. This law represents the most significant revision of China's foreign trade framework since the 2004 reform that enshrined China's WTO accession commitments.

The law explicitly commits to a policy of opening up – but through a new, more sovereignty-oriented legal architecture. It expands the definition of the conditions under which China can restrict trade in certain goods or technologies to include "other necessary measures." This deliberately broad wording will allow for export controls, investigations of foreign companies, and targeted sanctions without requiring a narrow set of criteria. China is thus positioning itself as an active shaper of the global trade order – no longer merely as a participant that adapts to the rules of others.

Customs adjustments 2026: Targeted opening for strategic goods

From January 1, 2026, China will apply provisional tariffs below the most-favored-nation (MFN) rates to 935 imported products. The focus is revealing: tariff reductions primarily affect key components for technological self-sufficiency, certain raw materials to promote green development, and medical products to improve healthcare. At the same time, import tariffs have been increased on some products, including micromotors, printing presses, and sulfuric acid—precisely where Chinese producers need protection from competition. The 2026 tariff scheme is therefore not a commitment to liberalization, but rather an industrial policy instrument.

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Digital sovereignty: Cybersecurity and data protection as systemic issues

The amended Cybersecurity Act: Pace and scope

On January 1, 2026, the first fundamental amendment to China's Cybersecurity Law (CSL) since its adoption in 2017 came into effect. The changes are far-reaching and affect all companies operating in China, offering products or services in the Chinese market, or connected with Chinese suppliers.

The core principle of the new law is real-time transparency. Operators of critical information infrastructures must report significant cybersecurity incidents within 60 minutes in certain scenarios – in other cases, a four-hour window applies. For German companies, whose compliance processes are often designed for one-day response times, this means a fundamental overhaul of their incident response structures.

The material consequences of violations are significant: fines ranging from 2 to 10 million RMB, deactivation of apps, and revocation of business licenses. Furthermore, managers face personal liability. However, the law also provides for mitigating circumstances: those who act quickly, maintain complete documentation, and demonstrably operate without fault can significantly reduce their penalties.

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Extraterritorial effect: China regulates beyond its borders

Particularly noteworthy is the expansion of the personal scope of application. The previous law primarily referred to foreign actors directly impacting China's critical infrastructure. The amendment can now be applied to virtually any action by foreign organizations or individuals, provided it is deemed detrimental to national cybersecurity. This extraterritorial approach follows a logic also found in Western regulations—such as the GDPR—but is linked to a different geopolitical context in China.

For companies with ERP, cloud, research and development, or shared service structures in China, a review of data storage and IT security processes is urgently needed. The law mandates data localization: personal data and critical business information must generally be stored in China and may only be transferred abroad in legally defined exceptional cases.

Artificial intelligence as a security issue

One of the most significant substantive changes in the CSL amendment is the first-ever explicit inclusion of artificial intelligence (AI) in the legal text. AI is now officially recognized as a strategic asset, but simultaneously as a security risk requiring regulation. Network operators must actively manage AI risks, and companies operating AI systems, algorithms, or related infrastructure are subject to detailed requirements regarding ethics, risk control, and system security. This step elevates AI governance from individual administrative regulations to the level of national law – with the consequence that violations will have significantly more serious repercussions than before.

The 15th Five-Year Plan: China's coordinate system until 2030

Technological independence as state doctrine

In spring 2026, the 15th Five-Year Plan for the years 2026 to 2030 was adopted. It is the strategic framework within which all previously described individual regulatory decisions are embedded. Its core objective: technological sovereignty. The plan explicitly focuses on strengthening domestic research and technology expertise to reduce dependence on foreign technologies.

The strategic fields are clearly defined: semiconductors, artificial intelligence, robotics, biotechnology, quantum computing, and 6G mobile communications. The plan also defines a concrete target: by 2030, approximately 50 percent of industrial plants in China should operate largely automatically. This is not mere ambition – it is the continuation and intensification of the "Made in China 2025" program under a new, more realistic agenda, which has gained further urgency due to the trade conflict with the US.

What the plan means for foreign investors

The 15th Five-Year Plan is not a prohibition document for foreign companies – but it does define the parameters within which market opportunities arise. Access opportunities exist primarily in sectors that directly support China's strategic goals: renewable energy, smart manufacturing, high-quality materials, digital infrastructure, and sustainable products. Companies that align their investment strategy with these priorities will find government support, streamlined permitting processes, and predictable support policies.

Conversely, investments in areas subject to National Security Review (NSR) are facing increasing regulatory burdens. This particularly affects military technology, critical infrastructure, and key technologies. Merger control reviews by the State Administration for Market Regulation (SAMR) are also becoming more intensive for larger transactions, leading to longer decision-making cycles and higher costs.

Domestic consumption as an economic policy priority

In addition to technological sovereignty, the Five-Year Plan focuses on the systematic strengthening of domestic consumption. This strategic direction is economically imperative: China's growth model, which for decades relied on investment and export surpluses, is reaching its structural limits. Demographic aging, excessive debt in the real estate sector, and increased uncertainty in foreign trade make a domestic demand revolution a strategic necessity.

The MOFCOM 2026 trade conference explicitly identified digital consumption, green consumption, and health-related consumption as growth priorities. Campaigns like "Shopping in China" aim to motivate foreign companies not to repatriate their profits earned in China, but rather to invest in products and services that are in demand by the growing middle class.

The contradictions of the Chinese path: Openness and control as twins

Investment reality versus investment rhetoric

A gap exists between Beijing's political ambitions and economic reality that cannot be ignored. Despite all the signs of opening up, measured foreign direct investment fell by a further 7.3 percent in the first quarter of 2026. Total inflows in January and February 2026, at 161.45 billion CNY, remained significantly below the levels of previous years. This demonstrates that regulatory relief and tax incentives alone are insufficient to regain the confidence of foreign investors, which has been severely damaged by the geopolitical tensions of recent years.

However, there are also counter-indicators. On a balance of payments basis, net FDI inflows quadrupled in 2025 to US$76.5 billion, compared to US$18.6 billion in 2024. Investments from Switzerland rose by 66.8 percent, from the United Arab Emirates by 27.3 percent, and from the United Kingdom by 15.9 percent. The number of newly established, foreign-invested enterprises increased by 19.1 percent to 70,392. These figures signal that China remains attractive for strategically oriented investors – even if the aggregate volumes are declining.

The structural tension between openness and control

What the analysis of all these developments reveals is a fundamental tension that shapes China's economic policy: The People's Republic wants to both open up and maintain control. It wants to attract foreign capital and technology, but within clearly defined channels. It wants to create legal certainty for investors, but retain strategic freedom of decision-making for the state. It wants to be integrated into the global economy, but reduce its critical dependence on foreign technologies and intermediate goods.

This ambivalence is not a planning error, but a strategy. It explains why the negative list is being shortened while export controls are simultaneously being tightened. Why the VAT law follows international standards while tax authorities are being granted audit rights. Why the new foreign trade law proclaims openness while expanding the instruments of closure.

What European companies need to do now

This analysis provides a clear course of action for European and especially German companies.

First, regulatory complexity has increased, but it is manageable – for those who act proactively. The new VAT law, the revised export compliance, and the amended cybersecurity law require a review of existing structures, not a reinvention of doing business in China.

Secondly, the tax incentives for reinvestment are real and substantial. Companies already active in China with profitable subsidiaries should incorporate the 10 percent tax credit policy into their financial planning – four years of genuine tax relief is a significant incentive.

Thirdly, the geopolitical situation remains fragile. The suspension of export controls on rare earth elements is only valid until November 2026. The trade agreement between the US and China is limited to one year. Those who do not diversify their supply chains, who source critical intermediate products exclusively from China, expose themselves to a risk that is now politically enshrined.

Fourth: The sectoral selectivity of China's opening-up policy means that market access opportunities and barriers exist simultaneously. The question is no longer, "Is China open or closed?" The question is, "In which sector, with which technology, and with which compliance architecture is China opening up for my company?"

Strategic China of the coming years

China's regulatory agenda for 2025 to 2030 is more coherent and strategic than in any previous period. It is characterized by an awareness that China operates in a system of global economic rivalry where technological dependencies pose existential risks. The lessons learned from the semiconductor embargo, export restrictions on AI chips, and American pressure on Chinese technology giants are enshrined in the 15th Five-Year Plan.

At the same time, China needs foreign capital and expertise. The persistently declining FDI figures are a warning signal for Beijing. The multitude of measures described – negative list, investment catalog, tax credit policy, administrative simplifications – is not a coincidence, but a targeted response to this warning signal.

China's logic is this: We open where we stand to gain. We close where we stand to lose. We establish regulatory frameworks that ensure our strategic control, even when attracting foreign capital. This logic is not new – but it is now being pursued with a clarity and consistency that leaves no room for interpretation.

For international companies pursuing a China strategy, this means: The market remains large, the opportunities remain real, but the price of entry is compliance excellence, strategic positioning aligned with Chinese national objectives, and well-thought-out risk management for a world where regulatory surprises can occur at any time. China has not become an easy market – it has become a predictable one, if you know the rules of the game.

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Xpert.Digital is a data-driven B2B industry hub led by Konrad Wolfenstein . The company acts as an external, quasi-in-house solution for industrial partners, closing operational gaps in marketing, content, and sales – without requiring additional resources on the client side.

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