The European financial sector currently faces a heavy and fragmented tax burden. In order to address concerns, on 4 February 2025 the European Parliament’s Committee on Economic and Monetary Affairs (ECON) published a draft report on a coherent tax framework for the EU's financial sector (2024/2117(INI)) (the Report), calling for tax reform. The report advocates for (1) the abolition of the financial services VAT exemption and (2) the introduction of (harmonised) EU-wide financial transaction taxes (FTTs), bank levies and temporary windfall taxes. 

This note provides a summary of the Report and ECON’s rationale for its proposals and sets out our key takeaways.

Abolishing the VAT exemption

The current VAT exemption for financial services was introduced in 1977, a period when taxing fee‑ and margin‑based intermediation was considered technically unfeasible. The Report regards this rationale as outdated, noting that technological advancements now allow for clearer identification and taxation of specific services and charges. The VAT exemption also gives rise to the so-called “irrecoverable VAT problem”: institutions cannot deduct input VAT, leading to hidden costs and creating competitive disadvantages for outsourcing arrangements and fintech‑driven service models.

ECON highlights the persistent lack of reform despite multiple attempts by the European Commission (the Commission), including initiatives launched in 2007 and a 2020 inception impact assessment. It also highlights that planned amendments to the VAT Directive stalled in early 2023, leaving significant legal and operational gaps for crypto‑assets, decentralised finance, and other emerging fintech models.

The Report calls on the Commission to publish a proposal to reform the VAT rules for the financial sector and to address the apparent distortions created by the financial services VAT exemption.

Coordinated EU‑wide taxation: FTT and bank levies

The Report highlights a patchwork of 91 sector‑specific taxes across EU Member States, many of which were introduced to address gaps in the VAT framework or stem from financial crisis‑related measures. According to ECON, this fragmented tax landscape increases compliance burdens and creates structural barriers to the cross‑border expansion of financial services providers, weakening the competitiveness of the EU’s financial sector.

ECON notes that at least seven EU Member States already apply national versions of FTTs. However, in their view, their divergent scopes and rates reduces overall effectiveness and distort market activity. ECON expresses regret that the Commission announced the withdrawal of the FTT proposal in its 2026 work programme and urges the Commission to ensure that any future framework for taxing the EU financial sector provides a concrete plan to address the policy gap resulting from this withdrawal. Alongside the diverging national approaches to FTTs, bank levies are highlighted as another source of fragmentation in the current tax environment. 

ECON’s emphasis is not on introducing further uncoordinated charges, but on fostering coordination where EU‑level action is feasible, with the aim of minimising distortions and strengthening the functioning of the single market.

EU minimum standards for temporary windfall taxes

ECON acknowledges that coordinated temporary windfall taxes can complement long‑term sector‑wide taxation by generating short‑term revenue during periods of crisis without destabilising markets or distorting long‑term commercial activity. It emphasises that any such temporary measures must be transparent, proportionate, and strictly time‑limited, applying only to profits arising from circumstances unrelated to productivity gains or increased demand.

ECON calls for the introduction of common EU minimum standards for temporary windfall taxation. Such standards would enhance predictability and coordination across Member States and ensure that windfall profits are aligned with long‑term public investment priorities.

Key takeaways

ECON’s recommendations place the onus on the Commission to present actionable proposals regarding the financial services VAT exemption, FTTs, bank levies and windfall taxes. Whether the Commission will do so remains uncertain, particularly in light of previous unsuccessful attempts to modernise the VAT framework for financial services (in 2007 and 2020) and the Commission’s recent decision to withdraw the FTT proposal from its 2026 work programme. Even if the Commission did do so, any changes of this nature would require support from all Member States. 

In practical terms, a modernised VAT regime for financial services could distinguish between margin‑based services (typically more complex to tax) and explicit fee‑based services (more straightforward to bring within scope). Such an approach could help reduce irrecoverable VAT and support a more level playing field among banks, insurers, asset managers, and fintech providers.  It would be a fundamental change, leading for instance to a need to  revisit outsourcing arrangements and VAT grouping strategies, as well as reassess product pricing and (cross‑border) operating models.

A coordinated EU approach to FTTs and bank levies would be likely to simplify multi‑jurisdictional structuring and establish clearer rules for cross‑border issuance, trading, and post‑trade activities. Common EU minimum standards for temporary windfall taxes could also provide predictable, time‑bound responses during crises, targeting excessive profits without destabilising markets or discouraging long‑term investment.

Our team will continue to monitor legislative developments relevant to businesses in the financial sector. Regardless of ECON’s proposals, parties should consider whether their contractual documentation for financial transactions, particularly those with multi‑year terms, should include appropriate  risk allocation provisions, including those addressing possible changes in law.