Input tax on interest income is explicitly not allowed as a deduction.

The "Regulations for the Implementation of the Value-Added Tax Law" will take effect on January 1, 2026. Article 21 of the Regulations states quite clearly:

Taxpayers' PurchasesInterest Expense on Loan Services, as well as expenses paid to the lender that are directly related to the loan services—such as investment and financing advisory fees, processing fees, and consulting fees—and the corresponding input tax creditsNot available at this timeDeducted from output tax.

A similar provision had previously appeared in the documents regarding the replacement of business tax with value-added tax; now that it has been elevated to the level of an administrative regulation, its legal effect is more clearly defined.

“The four words ”directly related” are the key

The regulations not only cover interest but also include several types of fees directly related to loans: investment and financing advisory fees, processing fees, and consulting fees.

The key to determining this is whether the recipient is the lender and whether the fees are directly related to that loan.

Here are a few typical examples:

• Loan processing fees paid to the lending bank → Not deductible
• Loan-related financial advisory fees paid to the lending bank → Not deductible
• 向Independent Third PartyFees paid to a consulting firm for the design of a financing plan are not directly related to the loan in question → This must be determined based on the substance of the transaction; such fees generally do not fall within the scope of this provision.

In practice, the most common mistake is grouping expenses of different natures under a single account. It is recommended to separately classify “payments to lenders” and “payments to third parties” during accounting to avoid having the entire transaction rejected.

Expenses for social engagements and entertainment are clearly classified as personal expenses.

Article 20 of the Regulations provides:Taxpayers' entertainment and hospitality expenses are classified as personal consumption under the Value-Added Tax Law.

This means that input tax on expenses such as meals and entertainment incurred in the course of business hospitality is not deductible. This issue has long been a subject of debate in practice and has now been clarified at the level of administrative regulations.

For businesses, there are two key points to implement:

1. You should determine the purpose of the invoice as soon as you receive it. It wasn't until later that we realized it was for entertainment purposes, so we need to reverse the input tax credit for the amounts already claimed.
2. Distinguish between hospitality, meetings, and business travel. Conference fees, lodging expenses, and transportation costs are classified differently and cannot all be categorized as entertainment expenses, nor can they be broadly treated as deductible costs.

There is another category: non-taxable transactions are not deductible.

Article 22 of the Regulations also provides for another option: where a taxpayer purchases goods, services, intangible assets, or real property for use in circumstances that simultaneously meet both of the following conditions:Deductions for non-taxable transactions are not permitted., the corresponding input tax is not deductible.

These two circumstances are: engaging in business activities not covered by Articles 3 through 5 of the Value-Added Tax Law and deriving related economic benefits; and such activities do not fall under the circumstances specified in Article 6 of the Value-Added Tax Law.

This provision is relatively abstract; in practice, it is recommended to consult the competent tax authority or a professional advisor based on the specific nature of your business operations, rather than simply applying it as is.

If an allocation cannot be made, the amount is calculated on a pro rata basis and settled at the end of the year.

Article 23 of the Regulations sets forth the procedure: Where a general taxpayer purchases goods (excluding fixed assets) or services for use in projects subject to the simplified tax calculation method, tax-exempt projects, or non-taxable transactions for which input tax credits are not allowed, and is unable to allocate the non-deductible input tax, the taxpayer shallCalculated on a period-by-period basis based on the percentage of sales or revenueInput tax that is not deductible in the current period, and as ofConduct the annual summary and settlement during the tax filing period in January of the following year.The

Please note the two time requirements: calculation on a per-period basis + settlement in January of the following year. Many companies only perform monthly allocations and omit the annual settlement, resulting in incomplete tax filings.

A Self-Assessment Checklist

• Have the input tax credits for loan interest and related fees paid to the lender been reversed?
• Should entertainment and hospitality expenses be accounted for separately?
• Are common-use expenses allocated based on a percentage of sales or revenue?
• Was the annual summary settlement completed last year?
• When signing a new loan agreement, should the nature of the fees and the party issuing the invoice be clearly specified in the contract?

If you’re verifying that your materials align with the reporting guidelines, feel free to contact a consultant at Qicaiying (WeChat/Phone: 18676749275), and we’ll walk you through the entire process from start to finish.