This study, prepared in the consortium with: Syntesia srl, Intellera Consulting for the European Commission’s Directorate-General for Taxation and Customs Union (DG TAXUD), examines the tax framework for the financial sector. The purpose of the study is to (i) collect, analyse and present evidence of the existing problems with the current tax framework, (ii) provide insight on policy objectives and future considerations which could address these problems, and (iii) assess and compare the likely impacts of these considerations. The tax framework is assessed in terms of its two main components, namely: The EU VAT framework for the financial sector, which is characterised by the exemptions laid down in Article 135(1)(a)-(g) of the VAT Directive. This framework, in place since the introduction of the EU VAT system in 1977, was historically justified on technical grounds related to the difficulty of defining the tax base on services priced in terms of interest-rate spread and other implicit charges. Outside the VAT framework, Member States sovereignly apply a variety of sectoral taxes. These include taxes on the sale of certain products, such as insurance premium taxes (IPTs) and stamp duties, financial transaction taxes (FTTs), financial institution levies, payroll taxes on salaries in the financial sector, additional corporate income tax (CIT), and so-called windfall taxes targeting exceptional profits.
problems identified:
- Due to the VAT exemption, providers of financial services do not have the right of deduction. This in turn means that many of the sector’s input purchases are taxed, resulting in a tax burden that does not appear on invoices and therefore is commonly referred to as ‘hidden’ VAT.
- The overall framework is uncertain, complex and fragmented . Divergence across Member States is especially acute in the treatment of insurance-related services, fund and asset management, custody services, certain derivatives, payment value chains and some crypto-asset activities.
Consequences of the problems
- The exemption creates economic distortions and strong incentives to produce services in-house or within domestic VAT groups rather than purchasing them externally or cross-border. This reduces VAT neutrality, limits outsourcing, discourages specialisation and may slow down innovation and productivity improvements.
- The study also identifies important fiscal impacts. The overall VAT liability associated with the financial sector is estimated at EUR 72.4 billion in 2023, but most of this is hidden VAT on inputs rather than VAT on final consumption.
- The tax framework also imposes compliance burdens. Administrative costs for VAT compliance in the financial sector are estimated at around EUR 1.3 billion annually, with a further EUR 870 million for compliance with sectoral taxes.
The study concludes that the original technical rationale for the VAT exemption no longer remains fully valid. In combination with divergent national sectoral taxes, the current tax framework causes distortions, complexity, legal uncertainty and fragmentation. These problems are becoming more serious as the sector digitalises and value chains become more specialised.
