Supreme Court: box 3 must be based on actual yield (2017)

This article was last updated 24 January 2022.

Box 3 in its current form violates taxpayers’ fundamental rights and is therefore no longer tenable. This is what the Dutch Supreme Court ruled in its judgment of 24 December 2021. The Court also offered a remedy: for the taxpayer in question, the box 3 tax will not be levied on the basis of the lump sums but on the basis of the actual yield. This procedure is part of the mass appeal procedure for box 3 in the years 2017 and 2018.

The Supreme Court has already ruled in previous years that box 3 was contrary to taxpayers’ fundamental rights of taxpayers, namely the right to property and the prohibition on discrimination. However, the Court held that it was up to the legislator - not the courts - to rectify the situation by amending the law. As a result, taxpayers were proven right by the court, but gained nothing from it. Following these earlier judgments, box 3 was amended as per 2017. According to the Dutch Supreme Court, the current box 3 system is still not in line with taxpayers’ fundamental rights. In doing so, the Dutch Supreme Court follows the opinion of Advocate General Niessen, who previously argued that the current system is also not sustainable. The wide margin of appreciation that the Dutch legislator has in the design of taxes does not alter this conclusion. According to the Court, there is no reasonable relationship between the interests that the legislator sought to serve with the system and the inequality that arises from that system.

Reaction of the State Secretary

On 24 January 2022, the State Secretary for Finance (Taxation and Tax Administration) indicated that, because the Supreme Court did not formulate an explicit legal rule on how the actual yield should be determined, it is currently being investigated how the ruling of the Supreme Court should be applied on this point. Furthermore, the full scope of the group of citizens eligible for restoration of rights has not yet been determined. Various options for restoration of rights are currently being mapped out. In February, the State Secretary will inform the House of Representatives about the design of restoration of rights.

Ongoing processes

In cases involving income from box 3, or when the box 3 situations cannot be isolated in the Tax Authorities' process, no tax assessments and decisions will be imposed until further notice. There are two exceptions to this:

1. if there is a risk of limitation. This is the case if the limitation period threatens to expire, as a result of which no (additional) assessment can be imposed. This applies to the 2017 and 2018 assessments, among others;
2. if the citizen has an interest in the continuation of the process. This applies to provisional assessments, loss relief and averaging requests.

For 2022

As announced on the website of the Dutch tax authorities, the provisional assessments for 2022 are not yet in accordance with the ruling of the Supreme Court, but citizens do not have to take action on this now. These assessments will be corrected later with the final assessment.

Coalition Agreement 2021 - 2025

The Coalition Agreement announced that a new box 3 system based on actual yield will be introduced in 2025. In this new system, regular benefits will be taxed, such as interest, dividends and rental income, as well as changes in value. In preparation for this, the so-called vacant value ratio (in Dutch: leegwaarderatio; a tax facility for the valuation of rented real estate in box 3) will be abolished as per 2023. As a result of this, the taxation of the income from rented property in box 3 will be more in line with taxation of the actual income. In addition, the exemption in box 3 will be increased to EUR 80,000. Finally, the value development of real estate will first be taxed at a flat rate, whereby the transition to the actual yield will be made as quickly as possible.

This announcement was also addressed in the judgment, and partly because the transition to taxation on actual returns is taking long, the Dutch Supreme Court feels forced to offer reparation itself. In general, the court is reluctant to grant legal remedies, especially in box 3, because it is based on political choices. But in this case, the Dutch Supreme Court considered important to rectify the injustice itself, partly because "the currently applicable regulation still contains the same shortcomings as those before 2017 and 2018, and that although the legislator has been working since 2015 on the speedy introduction of a levy based on actual returns, that introduction cannot be expected before 2025."

Why does box 3 violate taxpayers’ fundamental rights?

When determining the yield tax, the Dutch tax authorities assume that taxpayers who fall into the second bracket ( EUR 50,650 to EUR 101,300) invest ⅓ of their assets, taxpayers who fall into the third bracket (EUR 101,300 to EUR 1,013,000) invest 79 per cent of their assets, and taxpayers who fall into the highest bracket (EUR 1,013,000 and above) invest their entire capital. The fixed returns for savings and other assets are 'mixed' according to this assumed assets ratio. The assumptions for this asset mix do not come out of the blue but are based on research into the actual build-up of savings and investment assets of taxpayers.

The same applies to the fixed returns, which are also based on empirical research. The legislator then takes the average outcomes from these studies and applies these averages to all taxpayers.

At first glance, this sounds logical and reasonable. However, it is only so if indeed most people within certain limits would be in a similar situation. And that is exactly not the case. The averages are hardly representative for large groups of taxpayers. Many taxpayers pay (much) too little tax in the current box 3 system. We will not hear them complain. But just as many taxpayers pay far too much tax under the current box 3 system. And these people are therefore right to object to the levying of tax on their income from assets.