Brussels, 28 November 2007
VAT: The European Commission proposes to
modernise the current legislation for financial services and
The European Commission has adopted today a
proposal for a Directive aiming at modernising and simplifying the complex VAT
rules for financial and insurance services and securing a level playing field in
the pan-EU market for these services as far as VAT is concerned. These services
are generally exempt from VAT but the exemption dates from 1977 and the
legislation has not kept abreast of developments since then. Today, the
exemption is not applied uniformly by the Member States and thus frequently the
European Court of Justice has been asked to fill the legislative gap and clarify
the correct interpretation. The proposal will create more certainty and security
for Member States and for financial and insurance institutions by setting clear
modern definitions of exempt services. It will also allow these institutions to
manage the costs of non deductible VAT by allowing them to opt for taxation and
by clarifying and extending the tax exemption for cost sharing arrangements.
“Leaving things as they are is not an option! I am convinced that the
balanced package of measures being proposed is the best option for VAT reform in
the financial and insurance sectors. It will increase certainty for the
industries as well as improve budgetary security for Member States by reducing
the potential for legal challenge. It will also improve the competitiveness of
the EU banking and insurance companies by allowing them to manage better their
operations without hidden VAT. With this increased efficiency, I expect that
this proposal will also benefit all consumers of these services " said
László Kovács, Commissioner for taxation and customs.
The proposal follows a three fold objective:
- to increase legal certainty for all concerned, from the business sector to
national tax administrations and thereby reduce their administrative burden in
correctly applying the VAT provisions on their services.
- to ensure a more consistent application of the tax and deliver a level
playing field in the internal market, at least as far as VAT is concerned.
- to allow businesses to manage better the impact of non-deductible VAT on
These objectives will be achieved by the three
measures contained in the proposal:
- Redefinition of the scope of the exempt services to ensure that the
exemption better reflects the complexity and diversity of the modern industries.
The proposal for a Directive is accompanied by a proposal for a Regulation which
expands the definitions of exempt services and will apply directly in all Member
- Possibility for banking and insurance companies to opt to tax their services
if they wish. Such an option to tax already exists in the VAT Directive but is
currently at the discretion of Member States and not widely used. Its limited
availability today is potentially distortive and should therefore be equally
accessible across the Community. This will allow institutions to reduce their
exposure to non-recoverable tax, in particular in business to business
activities. VAT taxable persons clients of bank and insurance companies will
also reduce their costs as they will be able to deduct the VAT paid on financial
and insurance services.
- Introduction of an industry specific exemption from VAT on cost sharing
arrangements, including those which are cross border. This will enable
institutions to pool their operations and to share costs between the group
members without creating additional non-recoverable VAT.
VAT current legislation (adopted in 1977) exempts financial services and
insurances. Because institutions cannot recover VAT on their purchases of
services or goods, this creates "hidden VAT" charges in supplies which financial
and insurance companies provide to other businesses. They cannot deduct this
input VAT on services or goods (e.g. outsourced services or computers) supplied
to them because the services they supply themselves, are exempt. Their charges
to customers will therefore reflect this VAT cost and, as it cannot be recovered
by business customers, cascades through the system increasing the operating
costs of EU business and cost of the goods and services they themselves
VAT should not generate unnecessary obstacles to the
achievement of an
integrated, open, efficient and competitive market for financial services.
Efficient markets for financial services and insurances will benefit European
business and consumers. VAT should be applied in a manner consistent with a
level playing field.
Furthermore, the growing list of cases handled by the European Court of
Justice in the recent years in this area of VAT demonstrates that there is an
imperative need to modernise the legislation in line with the current
development in the markets.
Further information on the proposal is available
on the following website:
 As set out in the new
Financial Services Policy (2005-2010); see IP/05/1529