EU VAT reform for the financial sector draws closer
15/08/26
The VAT exemption for financial services is once again firmly on the European agenda. The European Commission has published a comprehensive study exploring various directions for reform. In addition, the European Parliament has adopted a resolution urging a more coherent VAT system for the European financial sector.
What does this mean for your organisation?
The VAT treatment of financial services has been the subject of discussion in the EU for some time. While the definitive outcome remains uncertain, recent developments are building momentum for change. The direction the VAT system takes is ultimately a political choice that will be further shaped at EU and Member State level in the period ahead. The PwC FS VAT team is closely monitoring this topic and will keep you informed of developments and the implications for your organisation. Please do not hesitate to contact us if you would like to discuss this further.
In brief
The European Commission has published a comprehensive study presenting three possible directions for reforming the VAT exemption for financial services, ranging from modernising existing rules to fully abolishing the exemption or introducing a Financial Activities Tax (FAT).
On 7 July 2026, the European Parliament adopted a resolution calling on the Commission to consider policy options for a more coherent VAT system, with particular attention to technological neutrality around crypto, DeFi and fintech, and to a more consistent application of the VAT group.
Definitive decision-making is still a long way off and requires EU legislation with unanimity in the Council, but political momentum is growing; financial institutions would be well advised to determine their preferred direction now and to actively contribute their views through industry associations.
Why modernise?
The VAT exemption for financial services dates back to 1977, when taxing complex financial services was considered technically unfeasible and there was a desire to keep the cost of consumer credit low. That original justification has since been partly overtaken by advances in digitalisation and improved information provision. Nevertheless, repeated attempts at reform, including the Commission proposals of 2007 and the impact assessment of 2020, have not produced results because the Member States failed to reach unanimous agreement.
Draghi, Capital Markets Union and EU competitiveness
The renewed attention does not come out of nowhere. According to the Commission President's mission letter drawn up in 2024, the Commission has been tasked with finding innovative solutions for taxing the EU financial sector. That mandate fits within the broader policy context of the Draghi report (2024), which identifies fiscal fragmentation within the internal market as a brake on economic growth — according to Draghi, even more damaging than external trade tariffs. These insights feed into the Commission's broader simplification agenda under the Competitiveness Compass.
The Capital Markets Union (CMU) and the Savings and Investments Union (SIU) also serve as important reference points. The CMU explicitly identifies taxation as one of the barriers to internal market integration. The SIU, which builds on the Draghi report and the political guidelines of the current Commission, emphasises that differences in national tax procedures create administrative burdens and barriers to cross-border investment.
The three directions for reform
The study elaborates the possible reforms into three "building blocks" with sub-topics:
Direction 1: modernise definitions
The first building block retains the existing exemption but modernises and simplifies the current rules.
Modernisation of the outdated and inconsistently applied definitions of exempt services, and introduction of new definitions for, among others, crypto services.
Simplification and harmonisation of the rules for pro-rata deduction, with three variants: (i) simplification through direct allocation for taxable transactions and the pro-rata method as the default for general costs, (ii) a mandatory fixed deduction rate, and (iii) an optional fixed (super-)deduction rate.
Direction 2: reduce hidden VAT
The second building block also leaves the exemption intact but aims to reduce distortions caused by hidden VAT.
Review of the (cross-border) VAT group and cost-sharing arrangements.
Making the option to tax mandatory for all Member States (currently still a so-called "may" provision).
Direction 3: revise the VAT exemption
The third and most fundamental building block revises the exemption itself and links it to harmonisation measures for sector-specific taxes.
Full abolition of the VAT exemption for financial services, bringing all financial services subject to VAT.
Taxing only fee-based services, thereby avoiding the practical challenges associated with interest-based remuneration.
As an alternative, the introduction of a Financial Activities Tax (FAT) on the sum of profits and remuneration at a revenue-neutral rate, coupled with a zero VAT rate for all financial services and the abolition of sector-specific taxes.
Next steps
The study has now been presented to the VAT Expert Group, marking the starting point for the substantive debate at EU level. The study is explicitly intended to inform the policy-making process and does not itself provide a definitive answer. The direction ultimately chosen is a political judgement. After all, fundamental reforms require budgetary choices and broad political consensus — and it remains to be seen whether sufficient support exists for this.
A coherent tax framework for the EU financial sector
The European Parliament has stepped up the pressure with its resolution of 7 July 2026, requesting the Commission to consider policy options.
The Parliament places strong emphasis on innovation and points out that the VAT Directive contains no provisions for, among others, crypto-assets, DeFi and fintech, which threatens to hamper innovation and competitiveness. The Parliament stresses that a modern VAT system must serve innovation and requests the Commission to provide clarity on the VAT treatment of emerging financial services in order to ensure technological neutrality and a level playing field.
In addition, the Parliament calls on the Commission to evaluate and publish the effects of the current VAT system and to develop policy options. It also asks Member States to implement the VAT group consistently and to explore the possibility of a cross-border VAT group.
Political momentum
There is a clear sense of urgency and political momentum for change. At the same time, the road is long. Every proposed revision of the VAT system requires an in-depth macroeconomic analysis and an inventory of sector-specific taxes. Because VAT derives from an EU directive, the reform must also be addressed at EU level, following the normal legislative steps through the European Parliament and unanimity in the EU Council.
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