On Thursday, June 6, 2024, the Supreme Court ruled in a five-case case on how to tax box 3. Following the so-called "Christmas Judgment," the legislature introduced a new system for the taxation of box 3. After all, the system then in place was deemed by the Supreme Court to be in violation of the European Convention on Human Rights (ECHR) and the First Protocol (EP) to that convention.
The new system was introduced through the Box 3 Legal Restoration Act (the "Restoration Act") and the Box 3 Bridging Act (system from 2023), so that it would better reflect the actual return. However, the revamped system still assumed a flat-rate return.
On June 6, 2024, the Supreme Court ruled that even the amended legislation still violates the ECHR and the EP. Legal redress should be provided in cases where the actual return is lower than the flat rate return.
The original box 3 regime (2017)
As of 2017, an asset mix applied for taxation in Box 3. The more assets someone owned, the more this person was expected to invest and thereby earn a higher return. The less assets a person owned, the lower the fixed rate of return. On December 24, 2021, the Supreme Court ruled that this system violated the ECHR and the EP.
The Recovery and Bridging Act box 3 (recovery 2017 - 2022 and from 2023)
To remedy the violation of the ECHR and the EP of the original box 3 regime, the legislator introduced the Recovery Act. From then on, taxation in Box 3 was based on three different asset categories: bank balances, debts and other assets. A notional rate of return is allocated to each of these asset categories. The value of the asset categories, multiplied by the notional rate of return results in a notional return, which is included in the box 3 levy. This is therefore consistent with the actual distribution of assets across the asset categories and no longer a notional asset mix is used. The notional return percentages are determined annually on the basis of national averages, with the aim of better matching the actual return achieved.
Supreme Court ruling
The Supreme Court has now ruled that, in principle, the Recovery Act approximates the actual rate of return for people with mere savings. However, this is different for people with other assets. Indeed, the differences within this asset category can be very substantial. Risky investments can yield high returns, but also substantial losses (e.g. offensive securities account). While investors who are risk-averse try to achieve as certain a return as possible (e.g., government bonds). Relatively unequal treatment of taxpayers occurs according to whether they are more or less successful with their investments. There is no justification for this unequal treatment, according to the Supreme Court. Therefore, the Recovery Act also violates the ECHR and the EP in the event that the actual return achieved is lower than the fixed return. The size of this difference does not matter.
In addition, the Supreme Court has ruled that the Box 3 Bridging Act, which system follows the Recovery Act, also violates the ECHR and the EP. Also for the system under the Bridging Act, legal redress must be offered to taxpayers if the actual return is lower than the fixed return.
The Supreme Court has ruled that in principle no interest is paid by the Tax Administration. There is one exception. The tax authority does have to pay interest if the amount of statutory interest is more than the amount of tax relief in box 3.
What is real return
The taxpayer must demonstrate that the actual return achieved is lower than the flat rate return. The question then arises as to what is meant by actual return. Specifically, according to the Supreme Court, the following rules apply for determining the actual return:
- The actual rate of return should be determined on the assets as a whole and not for each asset individually;
- Inflation plays no role in determining actual returns;
- the actual return achieved is determined from year to year separately. No allowance is made for positive or negative returns in other years;
- both realized, and unrealized changes in equity must be included when determining the actual return achieved. This means that price gains on shares not yet sold, among other things, are taxed;
- Costs are not taken into account when determining the actual return achieved. Interest on debts belonging to the assets in box 3 are included in the calculation of the actual return achieved;
- In determining the actual return to be taxed, no account is taken of the tax-free capital.
The Tax Administration has anticipated this Supreme Court ruling. The Tax Office has presented a draft version of a digital statement form actual return. With this digital form the actual return can be declared and the comparison with fixed return can be made immediately. Software suppliers are meanwhile making the form available for tax service providers so that we can assist you in completing the digital form. To complete this form, a lot of information is required. Among other things, the annual changes in value of the various assets must be specified, whether any assets have been purchased or sold, and what the income (e.g., dividends, interest or rent) has been.
What does this mean for you?
If your actual return is lower than the fixed return in box 3 and you have not yet received a final income tax assessment, we advise you to object to the final income tax assessment as soon as it is imposed.
If you have already received a final income tax assessment and have indicated that you wish to object to this assessment, we have already taken care of this for you. However, we still have to prove at a later date that the actual return achieved by you is lower than the fixed return.
If you have not indicated that you wish to object to the final income tax assessment, then your final assessment will not have been objected to. However, you may still be eligible for restoration of rights under the mass objection plus procedure. This ongoing procedure means that all taxpayers, including those who did not file an objection (or did so too late), are eligible for restoration of rights box 3 for the years 2017-2020. The Supreme Court has yet to address this question of whether the restoration of rights should also be offered to this presumably large group of non-objectors.
In conclusion
Do you have questions about your situation? Please contact us through your relationship manager, by phone at 040 - 2 504 504 or using the contact form below.