The European Parliament's Economic and Monetary Affairs Committee released a draft report on 4 February 2026 proposing comprehensive taxation reforms for the EU's financial sector, with emphasis on modernising the outdated VAT exemption for financial services and addressing fragmentation caused by 91 diverse national financial-sector taxes across Member States.
The European Parliament’s Committee on Economic and Monetary Affairs has released a draft report on 2 February 2026 proposing a unified approach to taxing the EU’s financial sector. The document places particular emphasis on revising the VAT exemption for financial services and tackling the fragmentation caused by diverse national financial-sector taxes.
The European Parliament is reviewing proposals for unified taxation of the EU’s financial sector, following Commission President Ursula von der Leyen’s 2024 directive to Commissioner Wopke Hoekstra to develop innovative solutions promoting integration and cross-border activity.
Financial services have been exempt from value added tax since 1977, creating the “irrecoverable VAT problem”—institutions cannot deduct VAT on inputs. Modern technology now makes taxation feasible, and other jurisdictions have updated similar exemptions.
The Letta report (April 2024) and Draghi report (9 September 2024) highlight that tax fragmentation hinders growth and creates barriers equivalent to nearly 100% tariffs on financial services. Member States apply inconsistent approaches to financial transaction taxes, bank levies, and other taxes, causing legal uncertainty, market distortions, and reduced competitiveness.
At least seven Member States impose an FTT without coordinating scope, rates, or application. Despite Commission proposals from 28 September 2011 and 14 February 2013, no EU-wide agreement exists. Parliament supported an EU-wide FTT on 10 May 2023, but the Commission’s 2026 work programme proposes withdrawing the previous proposal.
These taxes emerged after the 2008-2009 financial crisis to ensure the sector contributes to public budgets and curbs speculation.
Financial sector VAT reform needed
The draft report concludes that technological advances have made the VAT exemption for financial services obsolete. This outdated system distorts markets, encourages self-supply within the sector, and puts EU institutions at a competitive disadvantage against non-EU rivals.
Multiple Commission attempts at reform have failed, including proposals from 2007 and a 2020 impact assessment. Most recently, planned amendments to the VAT Directive in early 2023 were shelved, leaving essential changes unaddressed.
Without specific VAT provisions for crypto-assets, decentralised finance, and fintech, member states apply inconsistent rules. This creates legal uncertainty, unequal treatment between traditional and new financial services, and stifles innovation.
The current exemption, combined with varying national tax rules, produces a fragmented system that increases compliance costs and operational expenses. Clear definitions and simplified rules are essential to ensure consistent EU-wide application and support innovation.
The report emphasises that taxing identifiable charges, such as fees and commissions, would reduce distortions without imposing an excessive administrative burden. It calls on the Commission to propose comprehensive reforms that consider the impact on consumers whilst ensuring the financial sector contributes fairly.
Mobilising revenue from financial sector taxation
The EU faces an annual investment shortfall of EUR 750 billion to EUR 800 billion to achieve its climate, digital, and strategic autonomy goals. With Member States committed to increasing defence spending, fair taxation of the financial sector could generate crucial public revenue.
In 2020, Parliament, the Council, and the Commission agreed on a roadmap for new own resources, including a Financial Transaction Tax (FTT). An FTT with 10 participating Member States would have generated approximately EUR 3.5 billion annually, rising to EUR 31 billion to EUR 75 billion with full Member State participation.
The Commission’s decision to withdraw the FTT proposal in its 2026 work programme is regrettable. The report urges the Commission to present a concrete plan addressing this policy gap in any future framework for taxing the EU financial sector.
Any tax proposal should ensure the financial sector contributes fairly under clear, predictable, and simple rules. The report highlights that coordinated temporary windfall taxes can complement long-term sector-wide taxation during crises without destabilising markets. Such taxes should be transparent, proportionate, strictly time-bound, and apply only to profits unrelated to productivity gains or demand surges.
The Commission is called upon to propose legislation for temporary taxation of exceptional financial sector profits during extraordinary macroeconomic circumstances.
