Changes from report parliamentary committee draft to plenary report

At a time when the European Union urgently needs investment, stability and public trust, the absence of a coherent tax framework for the financial sector has become a structural weakness. Over the past decade, the EU has made significant steps towards integrating its financial markets through the Banking Union, the Capital Markets Union and, most recently, the Savings and Investment Union. Yet these projects remain incomplete. As Enrico Letta and Mario Draghi underline in their 2024 reports, tax fragmentation continues to hold back integration, growth and competitiveness across the Single Market.

Fragmented national tax rules impose growing costs on financial institutions, hampering cross-border operations and distorting capital allocation. In a sector that is inherently cross-border and increasingly digital, these inefficiencies weaken EU financial competitiveness and undermine the Single Market. They create unequal conditions between Member States, encourage tax-driven corporate structures, and open avenues for regulatory arbitrage, tax avoidance, and fraud. As Draghi warns, without greater coordination in the taxation of capital investment, Europe will struggle to unlock the growth and the investment it so urgently needs. The consequences of inaction are increasingly evident. The EU faces a major investment challenge, with an estimated annual gap of €750 - 800 billion threatening its ability to deliver on climate, digital and strategic autonomy objectives.

At the same time, despite high levels of household savings, a significant share of these savings is invested outside the Union, reflecting the continued fragmentation of European capital markets. A coherent tax framework for the financial sector is crucial to completing the Banking Union and Savings and Investments Union while enabling the EU financial sector to scale across borders and realise its full economic potential. Without a more coherent approach, the EU risks constraining its ability to mobilise capital effectively and to align financial activity with long-term investment needs. The EU’s framework for taxing the financial sector remains outdated, fragmented and not fit for purpose.

What is more, EU banks have recorded very high profits in recent years, driven not by innovation or improved services, but by exceptional macroeconomic conditions, including post-pandemic recovery, high inflation following Russia’s invasion of Ukraine, and rising interest rates, highlighting the need for a coordinated and predictable framework to ensure a fair contribution of the financial sector in such circumstances.

The VAT exemption for financial services, introduced nearly fifty years ago as a temporary technical measure, is misaligned with today’s economic and technological realities. Rather than promoting a level playing field and Europe’s financial competitiveness, the exemption creates hidden costs, distorts business models, discourages outsourcing and innovation, and places some firms - particularly fintech and digital financial services - at a competitive disadvantage.

Beyond the outdated VAT framework for the sector, a patchwork of uncoordinated national taxes across Member States - ranging from financial transaction taxes and bank levies to ad hoc windfall taxes - has emerged in the absence of an EU-wide approach. This fragmentation weakens the Single Market, increases uncertainty for investors, and risks undermining financial stability while delivering uneven and short-term fiscal outcomes.

The repeated failure to agree on an EU-wide Financial Transaction Tax, and the Commission’s decision to withdraw the proposal from its 2026 Work Programme, leave a clear tax policy gap. Without a coherent alternative, the EU risks drifting further into regulatory inconsistency, missed revenue opportunities and declining public confidence in the fairness of the financial system.

This report argues that the status quo is no longer tenable. Reforming the VAT rules for the financial sector is necessary, though it is far from a complete remedy. Given the technical complexity of taxing financial services, the report does not pre-empt the final design of such a reform and recognises the importance of the Commission’s ongoing study in informing future policy choices. The EU must move decisively towards a modern, integrated and progressive tax framework for the financial sector - one that matches the reality of cross-border finance, secures fair and predictable revenues, and supports long-term investment and stability.

Accordingly, your rapporteur advocates for a balanced mix of reforms to secure public revenues for shared priorities while safeguarding financial stability, long-term investment and market efficiency, notably by:

• Modernising the VAT treatment of financial services to correct structural flaws, remove hidden costs and distortions, level the playing field, and boost EU competitiveness and innovation in digital and fintech services;

• Advancing coordinated EU-wide taxation where feasible, to reduce fragmentation and arbitrage, strengthen the CMU and SIU and allow EU financial markets to scale across borders; and

• Developing common EU minimum standards for temporary windfall taxation, to ensure predictability and coordination and alignment of exceptional profits with long-term public investment priorities.

Ultimately, a coherent tax framework for the EU’s financial sector is a political choice. It is a choice between continued fragmentation, short-term political caution and inertia, or ambition, coordination and fairness. At a moment of profound economic and geopolitical challenge, the European Union cannot afford further delay.