From 2027, New Energy Vehicle Tax Breaks Revised—PHEVs and Range-Extended Models to Lose Exemption

Starting January 1, 2027, the policy halving vehicle and vessel tax for energy-efficient vehicles will be abolished. Simultaneously, the exemption from vehicle and vessel tax for battery electric commercial vehicles, plug-in hybrid (including range-extended) vehicles, and fuel cell commercial vehicles will also end. This adjustment was jointly announced by the Ministry of Finance, the State Taxation Administration, and the Ministry of Industry and Information Technology. Vehicle and vessel tax is a property tax levied annually in China on motor vehicles and vessels, with tax rates linked to engine displacement. Under current rules, the annual base tax for passenger cars with displacements between 1.0 and 1.6 liters (inclusive) ranges from RMB 300 to 540; for those between 1.6 and 2.0 liters (inclusive), it ranges from RMB 360 to 660; and for vehicles exceeding 4.0 liters, the annual tax reaches RMB 3,600 to 5,400. After the implementation of the Vehicle and Vessel Tax Law in 2012, battery electric and fuel cell passenger vehicles were explicitly excluded from taxation, while plug-in hybrid vehicles received full exemptions. Starting in 2015, qualified energy-efficient vehicles continued to enjoy a 50% tax reduction. At that time, annual new energy vehicle (NEV) sales totaled only about 12,800 units, reflecting an industry still in its infancy. By 2025, the retail penetration rate of NEV passenger cars had surpassed 50%, reaching 53.9% for the full year, and further climbed to 62.8% in June 2026. The market has transitioned from policy-driven to market-driven growth. However, the existing tax incentives—still based on early-stage frameworks—have led to two major issues: first, plug-in hybrids and range-extended vehicles, which are equipped with internal combustion engines and produce emissions, have enjoyed the same tax exemption as pure electric vehicles; second, high-end NEVs and low-cost conventional fuel vehicles face significantly different tax burdens, undermining the regulatory function of this property tax. The new policy clarifies that battery electric and fuel cell passenger vehicles—which lack engine displacement—will remain outside the scope of vehicle and vessel taxation. In contrast, plug-in hybrids, range-extended vehicles (which include internal combustion engines), and commercial NEVs used for business operations will resume paying the tax, ensuring that “any vehicle producing emissions pays tax” and “commercial vehicles bear responsibility.” This adjustment is widely seen as a critical step toward reducing the automotive industry’s reliance on policy support and shifting competition toward product competitiveness. Additionally, as a locally administered tax, vehicle and vessel tax revenues can help alleviate local fiscal pressures. Industry experts note that this reform marks the beginning of deeper adjustments to China’s automotive fiscal and taxation system. As the number of NEVs on the road continues to grow, traditional highway maintenance funding—largely sourced from fuel consumption taxes—is facing a shortfall. Future reforms may explore new taxation mechanisms based on vehicle weight, energy consumption, or mileage, aiming to establish a modern automotive tax system covering the entire lifecycle—from purchase and ownership to usage.