EU Financial Sector Taxation: A Reform Back on the Agenda

Last week, the European Parliament’s Committee on Economic and Monetary Affairs published a draft report calling for a coherent tax framework for the EU’s financial sector.

Origin and purpose of the report

The report was prepared by the European Parliament’s Committee on Economic and Monetary Affairs (ECON). It is addressed to the European Commission and the Council and calls for concrete legislative proposals, notably on VAT reform and alternative solutions following the withdrawal of the EU Financial Transaction Tax (FTT) proposal.

Its objective is clear: reduce tax fragmentation, improve competitiveness and ensure that the financial sector makes a fair and predictable contribution to public finances.

Key messages of the report

1. A fragmented tax landscape

The Parliament highlights that the taxation of financial services in the EU remains highly fragmented, with divergent national financial transaction taxes, bank levies and other sector-specific measures.

This creates legal uncertainty, compliance costs, risks of double taxation and opportunities for regulatory arbitrage. According to the report, coherent EU-level rules would strengthen cross-border activity and the competitiveness of the Single Market.

2. Reforming the VAT exemption for financial services

Financial services are generally exempt from VAT in the EU. As a consequence, financial institutions cannot deduct input VAT, leading to the well-known “irrecoverable VAT problem”.

The report considers that the original technical justification for this exemption is now obsolete. It stresses that the current VAT framework:

• Creates hidden costs and market distortions
• Encourages self-supply structures
• Places certain actors, particularly fintech and digital financial services, at a competitive disadvantage

Importantly, the VAT Directive does not contain specific provisions for emerging financial instruments such as crypto-assets, decentralised finance and fintech models. This has led to divergent national interpretations and legal uncertainty across Member States.

The Parliament therefore calls on the Commission to propose a reform of the VAT rules applicable to the financial sector.

3️. Ensuring a fair contribution

The report also recalls the EU’s significant annual investment gap (EUR 750–800 billion) and underlines that fair taxation of the financial sector could help mobilise public revenue.

Following the withdrawal of the FTT proposal from the Commission’s 2026 Work Programme, the Parliament urges the Commission to present a concrete alternative to address the policy gap. It also mentions the possibility of coordinated strictly time-bound windfall taxes in exceptional circumstances.

Possible VAT consequences

For financial institutions, the message is clear: the current VAT exemption regime is under scrutiny. A reform could change the treatment of fees and commissions, reduce irrecoverable VAT and alter internal structuring models.

For corporate clients, this could affect the cost and VAT recovery models of financial services.

For fintech and digital players, a clearer and more harmonised VAT framework could reduce legal uncertainty and support innovation at EU level.

At this stage, the document is a draft report and does not change existing rules. Any reform of the VAT Directive would require unanimity in the Council, meaning that negotiations are likely to take time. Nevertheless, the political signal is strong: the taxation of financial services, including fintech and emerging digital products, is firmly back on the EU agenda.

Source : https://www.europarl.europa.eu/doceo/document/ECON-PR-779360_EN.pdf