Box 3: compensation until 2024, new system from 2025

25/04/22

With the Judgment of 24 December 2021, the Supreme Court labeled Box 3 as untenable due to violation of the fundamental rights of taxpayers, requiring restoration of rights with a levy on actual yield. The Secretary of State responded by granting all objections under the mass objection procedure for the years 2017 until 2020.

On 15 April 2022, the Secretary of State informed the House of Representatives about options for restoration of rights and about the possible outline of a new Box 3 system. The Secretary of State presented the House of Representatives with two options for providing compensation for the years 2017 until 2022. The chosen option will also form the basis for the temporary design of Box 3 in 2023 and 2024. In addition, the Secretary of State draws the contours of how income from capital will be taxed from 2025, based on actual yield.

On 20 April, these proposals were discussed in the House of Representatives. Before 1 June 2022, as part of the spring decision-making process, the government will decide on the form of compensation. A large number of (political) choices will have to be made in this respect. These include who will be granted legal restoration (only those who appealed or everyone), the new calculation, the handling of requests for supplementary restoration and the temporary legislation.

What does this mean for you?

If you have filed an objection to your income tax assessments for the tax years from 2017 up to and including 2020, then your objection has already been granted and you will automatically receive legal restoration. If you have not objected to your income tax assessments for these years, the Dutch Parliament may still decide that you will receive legal restoration as well. The restoration would consist of a tax refund if - based on the new method of calculation - your fixed yield is lower than the fixed yield based on the current method of calculation. Below, under the heading ‘legal restoration 2017 up to and including 2020’, you can read in more detail what this restoration could look like, depending on which option is ultimately chosen.

The aim is to finalize the decision making on the legal restoration around 1 July 2022. Subsequently, the aim is to implement the restoration for all objections under the 2017-2020 mass objection procedure by 4 August 2022.

Although the restoration as a result of the Supreme Court judgment has not yet been incorporated into the digital tax return module for 2021 and 2022 on the website of the Tax Authorities, it has already been indicated that the 2021 and 2022 tax assessments will automatically be aligned with the yet to be selected option for restoration. The 2021 income tax assessments containing box 3 income are currently only imposed if this leads to a refund. Income tax assessments due 2021 will not yet be imposed. A collection pause will be introduced for provisional 2022 income tax assessments, to make sure you will not owe collection interest until a (provisional or final) 2022 income tax assessment is imposed in 2023.

Box 3 in 2017 up to and including 2020: legal restoration

For the years 2017 up to and including 2022, the government proposes to provide automatic legal restoration based on a new fixed-rate calculation method that approximates the actual yield as closely as possible. This calculation will be based on the actual mix of savings and investments of individual taxpayers, as reported in their tax returns. The current system is still based on a fixed mix of capital in three different categories. If the newly calculated flat rate yield is lower than the originally calculated flat rate yield, a taxpayer will receive a tax refund.

The Secretary of State has worked out two options for the restoration. In any case, all taxpayers who have filed an objection and taxpayers whose tax assessment for 2017-2020 has not yet become irrevocable will receive the automatic restoration. Whether all taxpayers will automatically receive the restoration, including those whose assessments for those years have already become final, is a political question and is still open.

Flat rate savings alternative

The first alternative is based on the actual mix of capital. Within this mix, three categories are distinguished: savings, debts and other assets.

For savings, the current savings rate is assumed: 0.25% in 2017 decreasing to about 0% in the following years.
For debts, the rate is aligned with mortgage rates: from over 3% in 2017 to just under 2.5% in 2021.
For other assets, the multi-year average yield for investments (bonds, stocks and real estate) is assumed - as in the current system.

Flat rate alternative for all categories of capital

The second alternative is also based on the actual mix of capital, but for all existing categories of capital the flat rates are adjusted to reflect the average yield for the respective individual categories in a year. In this way, the actual yield is approximated as closely as possible. The nine categories of capital are: savings, securities, cash and receivables, real estate, the non-exempt part of capital insurances, rights to periodic benefits, net annuities and net pensions, other assets and debts.

Partner distribution

Partners are given the opportunity to revise the allocation of box 3 assets in their income tax return. The current allocation can be adjusted until the moment the (after tax) assessments of both partners are irrevocably fixed.

The new flat rate calculation method will be built into the digital income tax return 2021 on the website of the Tax Authorities, so that taxpayers can use it to calculate the best distribution. To do this, however, a taxpayer will have to submit a new tax return. With this commitment from the Secretary of State, you do not have to wait to file your 2021 tax return; however, you may want to change the allocation of your box 3 assets between you and your partner after the new flat rate calculation method has been incorporated. The aim is to include the new flat rate calculation method in the digital personal income tax return for 2020 as well.

Additional legal restoration per taxpayer?

Taxpayers who do not agree with the option that is ultimately chosen may subsequently object to it and file legal proceedings. The Secretary of State suggests that the House of Representatives considers how to deal with this, either by dealing with rebuttals directly, or by conducting trial proceedings on this matter once again that can provide the desired clarity for the larger group.

Box 3 in 2023 and 2024: temporary design

The government proposes to shape the emergency legislation for Box 3 in 2023 and 2024 identically to the final design of the restoration of rights. The possibility of introducing a wealth tax as of 2023 was also investigated, but this is technically not feasible and a temporary wealth tax lacks logic when the actual return based on capital growth will be taxed as of 2025.

The main difference with the restoration of rights as described above is that with the temporary design of box 3, taxpayers could also end up having to pay more box 3 tax than under the current system. After all, the current system will be abolished as of 2023 and will no longer offer an upper limit.

Box 3 as from 2025: levy on actual return

The government proposes to design the new box 3 system as a capital growth tax, whereby the regular income (such as interest, dividends, rent and leases minus costs) and the value development of capital assets (such as price gain or price loss of shares and value increase or decrease of real estate) are taxed annually. Thus, a capital growth tax, in which only regular income and capital gains (on the sale of an asset) are taxed annually is not proposed. The choice for a capital growth tax was made, among other things, to avoid lengthy deferral of taxation. The basis of box 3, or the composition of assets in box 3, will remain the same.

Real estate

For real estate, another temporary rule will apply from 2025. The yield on real estate consists of the annual change in value of the real estate and the regular income, such as rent and lease. The income such as rent and lease from immovable property will be taxed under the new system according to the actual yield. However, even in 2025 not enough data is available to tax the actual annual change in value. For example, the WOZ (Real Estate Valuation Act) decree becomes available too late to serve as a basis for the box 3 valuation. Therefore, for the time being a fixed amount will be used that is based on the yield of only immovable property. Thereafter, the transition to a levy based on actual yield will be made as quickly as possible.

Receivables and debts

Interest received on receivables and interest paid on debts will be included in box 3 income (positive and negative income respectively), as will changes in value that occur when there is a downward revaluation, a remission or currency differences. An upward or downward revaluation of a receivable leads to a capital change only for the creditor. With regard to a waiver of debt because of poor financial circumstances on the part of the debtor, an exemption for that debtor is being considered.

Loss offset

There will probably be an option to set off box 3 losses against box 3 profits. This is still under consideration, as are the loss offset periods.

Tax-free income, rate and exemptions

The use of a tax-free capital allowance in a system of actual yield with different categories is complex. A tax-free income allowance per tax partner is better suited. The amount of the tax-free income allowance has yet to be determined. The design (for example a flat tax or a progressive rate) and the rates still have to be decided as well. The current exemptions, such as those for green investments, will in principle be retained unless this is not logical or desirable under the new system.

Further legislative process and entry into force

With tight planning, a draft bill could be presented for consultation as early as a few months from now. Any interested party can respond to this internet consultation. After that, the final bill will be submitted to Parliament. The subsequent parliamentary process should be completed in 2023. The implementation in the Tax Administration's systems could then be ready in time for the legislation to take effect as of 2025.