News & Views

Will VAT Exemption of Financial and Insurance Services Become History?

29 October 2020

Authors: Piia Ahonen and Isabella Kartila

Based on a roadmap published on 22 October, the EU Commission intends to present a legislative package to change the outdated VAT rules for financial and insurance services. A legislative proposal is expected to be given already by the end of 2021. At this stage, the Commission is seeking for views on the current situation, including problems and potential solutions, to update the outdated rules.

Complex and Outdated VAT Rules

In Finland, financial and insurance services are generally exempt from VAT. The VAT exemption means that financial and insurance service operators, such as banks, certain investment funds, and insurance companies, cannot deduct VAT paid on goods and services purchased for their VAT-exempt supplies. Correspondingly, the same applies to all companies supplying VAT-exempt financial and insurance services. Thus, VAT often constitutes a cost for such service providers and, ultimately, for their customers, unless the cost burden can be alleviated by means of existing instruments, such as VAT groups.

The VAT exemption of financial and insurance services is based on rules from 1977. Originally, the reasons behind the exemption were mostly related to the technical difficulties in calculating the tax base and the amount of the VAT deductible at that time as well as to the existence of other taxes. One reason was also to avoid an increase in the cost of consumer credits.

Over the years, the VAT rules for financial and insurance services have become outdated as they have not kept pace with the developments of new services in the sector and the increased use of technology-based solutions and outsourcing. Additionally, the operators have criticised the rules for being too complex and difficult to apply in practice. Moreover, the rules have been applied inconsistently by the Member States, which has contributed to distortions within the EU and in exchanges with third countries.

Since the VAT rules for financial and insurance services are based on the VAT Directive, modernisation of the rules requires a proposal by the Commission to amend the Directive. The Commission attempted to review the rules already back in 2007, but the discussions ended in a standstill due to disagreements amongst the Member States. As a result, the legislative package was withdrawn and the VAT rules remained outdated.

Potential Solutions

The Commission has now relaunched the law-making process to address the adverse effects of the VAT exemption and to ensure the uniform VAT treatment of financial and insurance services across the EU. Currently, the Member States can allow entities to opt for VAT on financial and insurance services instead of applying the VAT-exemption rules. However, only few Member States have decided to adopt this approach. It seems that the Commission is now considering whether the outdated VAT rules should be amended more fundamentally. 

In this new initiative, the Commission is evaluating the following options:

  • removing the existing VAT exemption and fully taxing financial and insurance services;
  • modifying the scope of the VAT exemption to tax only certain types of services (e.g. fee-based as opposed to interest-based); or
  • leaving the VAT exemption unchanged.

According to the Commission, the removal of the VAT exemption would not only free the suppliers of financial and insurance services from irrecoverable input VAT, but it would also greatly simplify the VAT rules for the sector. If the initiative led to the removal of the exemption, all financial and insurance services could become taxable. Consequently, operators in the field would need to re-evaluate their business models, such as VAT group arrangements, from the VAT perspective.

In addition to the traditional bank and insurance sector, the removal of the exemption would also affect the private equity and real estate investment sectors on a fundamental level as the investment activities in these sectors would no longer be tax-exempt. Additionally, this would also remove the VAT exemption of management services supplied to funds with a VAT-exempt status. In this scenario, one way to reduce the impact of the change in the VAT treatment could be to allow the use of reduced rates for financial and insurance services instead of the standard rate.

Although the removal of the exemption would simplify the current VAT rules, the Commission notes that modifying the scope of the exemption would, however, probably allow to better address the risks of the impact of the legislation amendment on consumer prices. In this connection, the Commission raises several measures to be considered when addressing the distortive effect of the exemption, such as cost-sharing arrangements as a way to limit the problem of non-deductible input VAT.

One of the main objectives of the review is to clarify the VAT rules for financial and insurance services, which should make tax compliance easier. Depending on the option followed, the taxpayers should get more clarity on the taxation of their supplies, the qualification of different types of services under the VAT rules, and the treatment of the input VAT.

Chance to Influence 

Given the importance of the initiative, financial and insurance service operators should pay particular attention to the process as the Commission is expected to give the legislative proposal already by the end of next year.

For more information on the initiative, please find a link to the roadmap here. The roadmap is open for feedback until 19 November, and the feedback channel may be accessed from here.


For any related questions, please do not hesitate to contact our Tax team.