At EU level, the future of VAT for financial service providers is currently being considered. In this context, the study “Taxation of the Financial Sector” was published in June 2026 and prepared for the European Commission (source: https://op.europa.eu/en/publication-detail/-/publication/feb07b9e-7686-11f1-bf5e-01aa75ed71a1).
The study concludes that the current EU VAT framework for financial services is inadequate, primarily because it is outdated and overly complex. Its shortcomings are considered to result in excessive hidden VAT costs and legal uncertainty, which in turn lead to higher costs, reduced competitiveness, less innovation, and other negative effects.
The study clearly indicates that changes are needed and discusses several possible directions for reform, including certain targeted measures such as:
(1) MODERNISATION of existing definitions and rules
Potential amendments to the VAT legislation are being considered in relation to, for example, derivatives with underlying tangible assets, crypto-asset-related services, services provided within payment transaction chains, and similar areas.
However, this is a significantly delayed consideration by EU policymakers, as these products and services have existed in the market for many years and the financial sector has long had to deal with VAT risks arising from inadequate legislative provisions.
(2) SIMPLIFICATION AND HARMONISATION of input VAT recovery allocation rules
The study even considers the potential application of a prescribed fixed percentage for so-called “pro-rata” allocation.
However, while this could simplify compliance on one hand, on the other hand it raises concerns regarding fairness and it remains questionable what level of hidden additional VAT cost such an approach would create for certain taxpayers.
(3) REDUCTION OF HIDDEN VAT COSTS
Various options are being considered, including the expansion of optional VAT taxation in the B2B segment (either at taxpayer level or on a transaction-by-transaction basis), broader VAT grouping rules (including cross-border VAT groups), and other measures.
However, it is questionable whether such additional rules could be designed in a sufficiently simple and clear manner. To the extent that they are not, the optional application of certain rules may in practice become little more than a dead letter on a piece of paper.
In addition, one of the possible future directions mentioned is a FUNDAMENTAL REFORM involving the removal of the VAT exemption for the entire financial sector, or at least for all services supplied for consideration.
As experience has shown that bureaucrats are generally unable to define exemptions and special rules in a sufficiently clear, precise, practical and future-proof manner, most attempts to reduce the final VAT burden through specific exemptions and special regimes have ultimately resulted in significant implementation difficulties, considerable uncertainty regarding the correct interpretation of those rules, and additional compliance costs. For that reason, the most promising direction for future VAT reform in the financial sector may be precisely such a fundamental change, under which the financial sector would, to the greatest extent possible, become subject to the ordinary VAT rules (to the extent that it is feasible).