Box 3 and individuals

Up to and including 2016

In 2019, the Dutch Supreme Court already ruled on the tax on an individual's privately held assets in Box 3 for the years 2013 and 2014, which actually regarded the Box 3 system that applied up to and including 2016. At the time, the Dutch Supreme Court ruled that on a systematic level, the fundamental freedoms as included in the European Convention on Human Rights may have been violated. However, the Dutch Supreme Court only wanted to intervene if there would be an excessive burden on the individual. This is because the legislator has a wide margin of appreciation for the design of taxes and the Dutch Supreme Court found that the tax legislation at that time still remained within these limits. 

Therefore, according to the State Secretary, there is no need for financial compensation for those years. However, the last word has not yet been said regarding the mass objection procedure for the years 2013 and 2014 (this procedure will continue for the years up to and including 2016). This is because the case is still pending before the European Court of Human Rights (ECHR). If the ECHR rules that a violation of the right to property took place in the years 2013 and 2014 at its basis and grants financial compensation for those years to the petitioners, it is likely that those who are covered by the mass objection procedure from 2013 and 2014 will also receive compensation. The State Secretary has previously indicated that no legal redress will be offered for these years unless the ECHR rules otherwise. The Cabinet will then follow the judgement of the ECHR in this respect.

Therefore, there is still a possibility for financial compensation based on the judgement of the ECHR for the years 2013 and 2014 if you were part of the mass objection procedure. We will of course keep you informed about these developments

Box 3 for the years 2017 up to and including 2022

As of 2017, the Box 3 taxation system made use of an imputed notional return based on an assumption of the composition of your assets. This means that two return classes served as the starting point: bank deposits and investments. The higher the combined value of your assets, the more it was assumed that you would have invested part of it. Of course, this need not be the case on an individual level. 

The fact that the individual mix of assets is not taken into account is in fact the reason for the Dutch Supreme Court's opinion that the current Box 3 system infringes on the fundamental rights of taxpayers in such a way that it is untenable. This is because the current design of the system based on deemed returns does not adequately reflect the actual returns achieved on an individual level. The assumed asset mix leads to an unfair treatment of most prominently people who only or mainly have a savings account, given the low actual return for this group. 

Specifically, the system violates the right to property and the prohibition on discrimination of the European Convention on Human Rights, in cases where the actual return achieved is lower than the calculated fictitious return. If this is the case for you, then the Dutch Supreme Court is of the opinion that, because the system of taxation on deemed returns is so far out of line with reality, the government must offer you legal redress. This legal redress must take place on the basis of the actual return. In fact, this means that if your assets in the years 2017 to 2022 consisted mainly of bank deposits, there is a good chance that you will be eligible for legal redress. You can read more about the legal redress and which conditions apply below.

Box 3 in the years 2021 and 2022

For the years 2021 and 2022, the current Box 3 regime still applies in principle. However, given the perceived discrimination of this system for the 2017 tax year, you will be eligible for legal redress in certain cases, also for these years. Temporary legislation has been introduced as of 2023, after which the government will introduce a new Box 3 regime in 2027.

Legal redress for Box 3 levy in 2017 through 2022

Based on the Dutch Supreme Court ruling, the government must provide legal redress to taxpayers who have been disadvantaged. The legal redress has also officially become part of law as part of the 2023 Tax Plan Package. We now know that the legal redress as envisaged by the legislature is also unacceptable according to the Dutch Supreme Court. In its judgments of 6 June 2024, the Supreme Court has now determined what that legal redress should look like. Below we explain how the legal redress will take place, to whom it will apply and how you as a (potential) entitled party can obtain legal redress. 

Fixed-rate savings variant as basis for legal redress

For the years 2017 through 2022, the Cabinet has decided to offer - at least three groups of taxpayers - automatic legal redress based on a new flat-rate calculation method that according to the Dutch Cabinet approximates the actual return as closely as possible (please refer to ‘For whom?’ below for further information regarding the three groups of taxpayers). This has been done from a practical point of view, in order to be sufficiently in line with reality but also to keep the legal redress practicable. As mentioned above, the Supreme Court has now ruled that the lump-sum calculation method is also insufficient from the perspective of legal redress in certain cases. However, if the method devised by the Supreme Court itself for these situations is more unfavourable than the legislator's lump-sum calculation method, you are entitled to apply the more favourable of the two. Thus, the lump-sum calculation method has not yet lost its relevance.

The calculation under the flat-rate savings variant is in line with the actual distribution of three categories of assets:

1. The first category of assets regards bank deposits (incl. cash), taking into account the value thereof at the start of the calendar year (the ‘reference date’). This includes both domestic and foreign deposits.
2. The second category of assets regards all other assets the taxpayer had on the reference date. This includes investments, receivables, other immovable property, endowment insurance, rights to regular payments and other assets that are not bank deposits.
3. The third category of assets regards debts the taxpayer had on the reference date. Note that debts only are taken into account above a certain threshold (€ 3.000 in 2017; € 3.100 in 2018, 2019, 2020; € 3.200 in 2021 and 2022). 

The return on the three asset categories is determined by multiplying the value of the assets in a category by the corresponding fixed deemed returns in the following table:

* The flat-rate return on category 1 is based on the average of the monthly interest rates on deposits of households redeemable at notice of up to three months, as published by De Nederlandsche Bank, over a period of eleven months, with the percentage for the month of November counting double.
** The flat-rate return on category 2 is the deemed return as was applicable in the relevant year for asset category II of box 3.
*** The flat-rate return on category 3 is based on the average of the monthly interest rates on the total outstanding amount of household mortgages, as published by De Nederlandsche Bank, over a period of eleven months, with the percentage for the month of November counting double..

The return in asset category 1 and 2 are added and then reduced by the return in asset category 3. If the calculation on the return leads to a negative amount, the return will be deemed nil. To calculate the new benefit from savings and investments, the rate of return is first calculated by dividing the new flat-rate return by the basis of return and then the calculated rate of return is multiplied by the basis of savings and investments.

If your newly calculated benefit from savings and investments is lower than the originally calculated benefit from savings and investments, your income in box 3 will be reduced.

You have already reported your bank deposits and other assets and liabilities in your tax return. This is different if you have received a postponement for the tax return. You can use the box 3 calculation tool of the Dutch Tax Authorities, which shows whether the new or the old calculation method is the most favourable for you. 

Partner allocation

Under the legal redress, the situation may arise that due to recalculation of the aggregate income, more expenses for specific healthcare costs or tax deductible gifts become deductible. When granting the legal redress, the additional portion of deductible expenses will follow the existing allocation of healthcare expenses and tax deductible gifts as reported by the tax partners in the tax return.

For whom?

At least the following groups of taxpayers will receive the legal remedy:

1. Taxpayers who have filed a timely objection to their income tax assessment for the respective tax year and are part of the mass appeal for the years 2017-2020;
2. Taxpayers who have not filed an objection, but whose assessments for the years 2017-2020 had not yet been irrevocably determined on 24 December 2021; or whose assessments was determined after 24 December 2021 without taking into account the Christmas Judgment or the Decree for legal redress of 1 July 2022; and
3. All taxpayers for the years 2021-2022.

Please note that these groups of taxpayers will only receive legal redress in case the newly calculated return from savings and investments is indeed lower than the (previously) calculated return based on the current law.

Non-objectors: late or no objection raised

Has one or more of your assessments become irrevocably fixed for the years 2017 through 2020? Then, in principle, you are too late to object. In such a situation, the only option open to you is to submit a request for an 'ex officio’ reduction. However, the Dutch Supreme Court ruled on 20 May 2022 that someone who objects too late (by means of a request for ex officio reduction) is not entitled to legal redress on the basis of the statutory regulation.

Through a separate letter, it was announced on Budget Day 2022 that the government will not offer legal redress to non-objectors. Ex officio requests will therefore be rejected. The main reason for this is of a budgetary nature. The government gives priority to supporting the purchasing power of citizens and businesses. This means that if you did not object or objected late, you will only get legal redress if the court eventually decides that you would be entitled to it based on an ex officio reduction request. Because many ex officio reduction requests have been filed and more are expected, it was decided on 4 November 2022 to launch a so-called 'mass objection plus' procedure in which all non-objectors will automatically participate. Should these procedures result in legal redress for non-objectors, the Dutch Tax Authorities will grant these rights to all Box 3 taxpayers. Incidentally, the secretary of state considers this procedure to have little chance of success.

It is possible that the procedure could eventually end up before the European Court of Human Rights (ECHR) as well. A side note in that case is that a ruling of the ECHR is not covered by the 'mass objection plus' procedure. Therefore, for a very small and specific group of taxpayers with substantial investments, where the actual income is significantly lower than the determined income in box 3, it seems sensible to still file an ex officio reduction request independently. Please note that you can submit an ex officio reduction request up to five years after the end of the tax year. So for tax year 2019, an ex officio reduction request can be submitted up to 31 December 2024.

Only legal redress for fiscal partner who filed an objection

If only one of the fiscal partners filed an objection, only that partner will get legal redress. Despite the fiscal partnership, both partners are individually taxable and an assessment is subsequently imposed on both partners individually. It follows from the systematics of the legislation that an objection must be filed per assessment.

PwC has developed a calculation tool (in Dutch) that allows you to calculate your box 3 income using the flat rate savings variant. In the result, you can see which calculation method is most favourable for you. 

How do you claim the legal redress and by when?

In principle, the legal redress takes place as follows:

1. You will automatically receive legal redress if you are among the mass objectors.
2. You will automatically receive a legal redress if your tax assessment has not yet been set for the years 2017 up to and including 2020. This will take place in phases starting in mid-September 2022.
3. You will also be entitled to a legal redress for the tax years 2021 and 2022. You do not need to take any specific action for this.

In short, in the above cases no action is required from you for the time being. 

In case you are part of one of the categories of taxpayers who may receive legal redress and your income tax return for the calendar year was already determined, while under the new method of calculation the return over your assets would be lower, then the tax inspector will reduce the assessment by the difference. You do not have to file a request for this. If the calculated new return is higher, the assessment will not be adjusted. You will receive a decision from the inspector if this is applicable for you. 

If an assessment for the calendar year has not yet been determined and the calculated new return is lower than the deemed return under the current law, then the assessment will include the new return. The assessment will be based on the deemed return under the current law in case the newly calculated return is higher.

Should you expect a refund for the 2021 tax year, please be aware that an automatic provisional assessment will be imposed on you based on the current Box 3 system. The new interpretation of the law will only be incorporated into the final assessment. 

A new version of the online tax return program is available on the Tax and Customs Administration's website, which will take the new system into account for 2021 and 2022. You may also revise your tax return. If you are expecting a refund, it may therefore be interesting to re-submit your tax return later in the year. 

Disagree with the (refused) legal redress?

If you do not agree with the (refused) legal redress, you can take the following actions depending on which group of taxpayers you are part of:

Group 1: Mass appeal

If you do not agree with the decision to reduce your income tax assessment or the decision to refuse legal redress, you can submit a request for an ex officio reduction of the income tax assessment.

Group 2: Not part of the mass appeal and the income tax assessment for the years 2017-2020 have not yet been irrevocably determined

If, at the time the Decree of 1 July 2022 entered into force, you could no longer file an objection, then you can submit a request for an ex officio reduction.

Group 3: Taxpayers for the calendar years 2021 and 2022

You can file an objection with the tax inspector within six weeks after the date of the income tax assessment. You can also submit a request for an ex officio reduction.

The request for ex officio reduction must be submitted within five years after the end of the calendar year to which the request relates. Jurisprudence from a date after the assessment became irrevocably determined does not lead to an ex officio reduction, unless the State Secretary of Finance decides otherwise. Therefore, the Inspector will reject a request (for legal redress) from a taxpayer who has not timely filed an objection against the income tax assessment. You can object to this rejection and file an appeal.

Tenability legal redress

Although the government takes into account the actual asset mix of the taxpayer with this legal redress, the returns are once again deemed. The Supreme Court, however, has indicated that when the actual return is lower than the flat rate return, legal redress should be provided. Taxpayers with returns lower than the applied flat rates felt disadvantaged and have litigated on this issue. The question was whether the flat rate savings variant is sufficiently in line with the actual return.

Actual return according to the Dutch Supreme Court

In its judgment of 6 June 2024, the Dutch Supreme Court ruled that the legal recovery offered by the legislature was indeed insufficient. Subsequently, the Supreme Court determined how legal recovery should take place in those cases, namely on the basis of the actual return. The following principles apply here:

• Actual return includes not only regular benefits from assets (such as interest, dividends and rent) but also changes in the value of those assets
• This includes positive and negative as well as unrealised changes in value
• Interest on box 3 debt is deductible but other expenses are not. 
• It concerns the nominal return, so no inflation correction takes place.
• Positive or negative returns in other years are not taken into account (no 'loss set-off').
• Levy-free assets are not taken into account to determine whether levying on the basis of actual returns is more advantageous than the Legal Redress Act or 'ordinary' box 3 legislation.

In his parliamentary letter of 18 July 2024, the State Secretary indicated in response to this Supreme Court ruling that taxpayers can prove the achieved actual return with the ‘Opgaaf Werkelijk Rendement’ (OWR) form. The Tax Administration is scheduled to make this OWR form available in June 2025. Taxpayers eligible for additional legal redress will be notified in October 2024. According to the current planning, the bill for additional legal redress will be submitted to the House of Representatives in the first quarter of 2025.

The Dutch Supreme Court does not specify in which year direct income should be included in the actual return. According to the State Secretary, the so-called cash accounting system should be used for this purpose, as this was also the guiding principle in the design of the ‘old’ box 3 system. This means that direct income is included in the actual return at the time it is received.

Furthermore, the Dutch Supreme Court ruled on 14 June 2024 that for the valuation of assets, the statutory provisions should be followed. The main rule is the economic value (WEV, market value). However, to determine the return on a property, the Supreme Court takes the WOZ value at the beginning and end of the year as a basis. The WOZ value is the value under the Dutch Valuation of Immovable Property Act (WOZ).  

Outstanding Points on Additional Legal Redress

The State Secretary responds in his letter to the House of Representatives dated September 17, 2024, to several outstanding points following the Supreme Court rulings.

Target Group for Additional Legal Redress in Box 3

The State Secretary indicates that the target group eligible for additional legal redress, and thus can use the counter-evidence scheme for Box 3, is being expanded. Those whose relevant assessment was already irrevocably determined on June 6, 2024, but not yet on December 24, 2021, are also eligible for additional legal redress. The condition is that a request for a reduction ex officio is made within the five-year period. Filling out the OWR form is considered a request for a reduction ex officio. 

Determination of Actual Return in Box 3 for Purchase and Sale of Homes

The Supreme Court has determined that the valuation of homes in Box 3 must align with the WOZ value. For the purchase and sale of homes during the year, the cabinet proposes to proportionally divide the value development in that year between the seller and the buyer. For a sale on July 1, the value development is thus equally divided between the seller and the buyer.

Determination of Actual Return in Box 3 for Personal Use of Homes

Based on case law and legislative history, the cabinet considers the personal use of a real estate property as part of the actual return for the calculation of legal redress in Box 3. The Supreme Court is expected to rule on this personal use issue in the fall of 2024. If necessary, the OWR form will be adjusted accordingly. 

Prevention of Double Taxation in Box 3

The Supreme Court has set rules for calculating the reduction to prevent double taxation when the actual return is used to determine the Box 3 income. These rules imply that the calculation of the reduction to prevent double taxation is based on the proportion in which the actual foreign return in Box 3 is part of the total actual return in Box 3.

Application of Debt Threshold in Box 3

Debts are only part of the Box 3 base insofar as they (collectively) exceed the debt threshold. For practical reasons, the debt threshold is disregarded when determining the actual return, making the entire interest on all Box 3 debts deductible. 

Reduction of Exemption for Green Investments in Box 3

Green investments are partially exempt in Box 3. In 2024, the exemption is a maximum of 71,251 euros (142,502 euros for fiscal partners) and as of January 1, 2025, a maximum of 30,000 euros (60,000 euros for fiscal partners). When applying the actual return in Box 3, this exemption is applied pro rata based on the situation on January 1. For an exemption of 30,000 euros, a taxpayer with 60,000 euros in green investments on January 1 will have 50 per cent of the actual return on the green investments exempted.

Adjournment objection procedures box 3

The State Secretary is in contact with various interest groups regarding the follow-up of possible proceedings. Procedural arrangements are made to lower the burden for taxpayers, tax advisers and the Tax Authorities. In his letter of April 20, 2023, the State Secretary indicated that current objection procedures regarding box 3 for the years up to and including 2021 will be adjourned from March 13, 2023. The Tax Authorities will now have to settle them in accordance with the system of taxation based on the actual return as designed by the Supreme Court. In order to be eligible for the procedure in which the objection is adjourned, the objection must be substantiated – at least briefly.

Adjournment final assessments for 2021 and 2022 

The same letter states that the Tax Authorities is not yet imposing final income tax assessments for 2021 and 2022 for assessments with box 3 income, unless there are only savings accounts. The Tax Authorities want to prevent an abundance of objections. The final assessments will still be imposed after the Supreme Court has ruled in the ongoing proceedings. When imposing the final assessments, the Tax Authorities will have to take into account the outcome of the judgments from June 6, 2024. Provisional assessments for 2021 and 2022 will still be imposed. The Tax Authorities will also continue to impose final assessments for the tax years up to and including 2020. It may be useful to object to these assessments in order to preserve rights.

Box 3 in 2023 up to and including 2026: bridging regime until introduction new system

The Dutch Cabinet needs time to convert the Box 3 system to one based on the actual return. This new system is not expected until 2027 at the earliest. For this reason, the Cabinet has introduced bridging legislation as of the year 2023. In concrete terms, this means that you will pay tax based on the flat-rate savings variant used for the legal redress. In other words, you will pay tax based on the deemed returns on your real asset mix, where there are three categories: your bank deposits, your other assets and your debts.

The main difference with the legal redress for the years 2017-2022, with the temporary design of Box 3, taxpayers may also have to pay more tax than in the system for the years 2017-2022. After all, the system with two limits for the years 2017-2022 will lapse as of 2023.

It was up for debate whether the flat-rate savings variant sufficiently aligns with the actual return as intended by the Dutch Supreme Court. This is not the case. In its judgment of 6 June 2024, the Supreme Court ruled that the judicial remedy provided by the legislature was indeed insufficient as well.

We discuss below the main change in the flat-rate savings variant for 2023 to 2026 compared to the flat-rate savings variant for the years 2017 to 2022.

Refinement of the bridging period for box 3

The 2023 Spring Memorandum and the letter to Parliament on 'refinement of box 3' of April 26, 2023 contain a number of options for refining the flat-rate system during the bridging period of box 3. The options mentioned by the State Secretary are an increase in the green investment tax credit, aligning the fixed return for (certain) receivables and debts and a further breakdown of the other assets category. The other assets category could be split into the following categories, each with its own fixed return: securities, real estate, endowment insurance, periodic benefits, taxable net pensions and taxable net annuities and other assets. These measures are expected to be able to be introduced in 2024. 

In case of a refinement of the fixed returns, the box 3 rate will possibly increase to 38 per cent. The fact is, the refinement will lead to a budgetary loss, which should be covered by that rate increase.

The refinements introduced through the 2024 Tax Plan are as follows:

Increased tax rate for box 3 in 2024 and no indexation of tax-free allowance

The box 3 tax rate has increased from 32 per cent to 36 per cent as of January 1, 2024. In addition, the tax-free allowance in box 3 has not been indexed as of January 1, 2024. The tax-free allowance therefore remains 57,000 euros in 2024.

Homeowners’ association share and escrow account notary qualify as bank deposits

The share in the assets of a homeowners' association or the assets in an escrow account of a notary qualifies, retroactively to January 1, 2023, as bank deposits for the purposes of the taxation of savings and investments (box 3). This category better suits these assets, because they are usually held in a bank account.. This would mean that the lower flat-rate return calculation for bank deposits will apply.

Tax exemption for mutual receivables and debts in box 3

Effective from 1 January 2023, mutual receivables and debts between fiscal partners, such as those arising from annual settlement clauses in prenuptial agreements, and between parents and underage children are retroactively exempted from taxation. This means that these receivables and debts no longer need to be included in the income tax return. For parents and minor children, this only applies in situations where the income of the minor child is attributed to the parents, as only then the receivable and debt can be offset within the same tax return.

Reference date arbitrage

The bridging legislation introduces provisions aimed at preventing taxpayers from shifting within asset categories around the reference date of 1 January in order to increase assets in the category with the lowest flat rate of return (bank deposits) to achieve a lower box 3 taxation. This can be done, for example, by selling other assets and repurchasing them immediately after the reference date or taking on debts and repaying them after the reference date. This is called reference date arbitrage.

To avoid reference date arbitrage, temporary conversions of assets within an arbitrage period are ignored for calculating the savings and investment benefit. This is a continuous three-month period starting before and ending after the reference date. This means that conversion acts before 1 October and after 31 March do not qualify as arbitration acts. There is also no arbitrage act if there are more than three months between the conversion and the original transaction. Conversion of other assets into savings (bank deposits) will constitute an arbitration act if 1) the value of the other assets is lower on the reference date than at any other point in the arbitration period after the reference date; and 2) the value of the savings at any point in that period but after the reference date is lower than on the reference date. Reference date arbitrage with debts will be ignored to the extent that the value of those debts is higher on the reference date than at any other time in the arbitration period. 

Business considerations at reference date arbitrage

On request, you can make a plausible case that the conversion acts took place at arm's length. If so, there is no reference date arbitrage. Business considerations means non-fiscal considerations.

At the tax inspector's request, you must make a reasonable case for your business considerations. Under the free evidence doctrine (‘vrije bewijsleer’), it does not matter in what way you do this. The burden of proof lies primarily on you as the taxpayer. For this, it is sufficient that the conversion acts are based on some business interest. The government currently sees no reason to give a certain weight to business considerations. However, by ministerial regulation, it is possible that further rules are implemented on the application of the arbitrage provision. If, as at reference date 1 January 2023, you conclude that your case involves reference date arbitrage, you can either rectify this by applying for or correcting a provisional assessment for 2023, or correct it in your 2023 income tax return in 2024.

Green investment bridging legislation

Green investments should be divided into green bank deposits and green investments.

Green bank deposits fall into the asset category of bank deposits, to which the low flat rate of return applies. Green investments fall into the other assets category, to which a higher flat rate of return applies. If a taxpayer invests in both asset categories, the green investments exemption is deducted first from the green investments and any remaining part of the exemption is deducted from the green bank deposits. This sequence of applying the exemption is to the advantage of the taxpayer.

No loss relief under bridging legislation

There is no possibility of loss relief in the box 3 bridging regime. This applies both within box 3 and between boxes. Loss relief only suits a system of taxation based on actual returns.

Flat-rate return box 3

The flat-rate return for the different categories in box 3 for the years 2023 to 2026 are as follows:

* These are provisional percentages, which are used for the provisional assessments. These percentages will only be finalised after the end of the year.

Asset category 3 consists of debts on the reference date. First, a threshold is deducted from the balance of debts (€3,400 in 2023; €3,700 in 2024).

Actual return under the Supreme Court system

As mentioned above, the Supreme Court has ruled that even this bridging legislation still violates the ECHR and can have a discriminatory effect in certain cases. In doing so, the Supreme Court has determined how legal redress should take place in those cases, namely on the basis of the actual return. Here, the same principles apply as for the legal redress for the Box 3 levy for the earlier years (2017-2022):

• Actual return includes not only regular benefits from assets (such as interest, dividends and rents) but also changes in the value of those assets
• This includes positive and negative as well as unrealised changes in value
• Interest on box 3 debt is deductible but other expenses are not. 
• It concerns the nominal return, so no inflation correction takes place.
• Positive or negative returns in other years are not taken into account (no 'loss set-off').
• Levy-free assets are not taken into account to determine whether levying on the basis of actual returns is more advantageous than the Legal Redress Act or 'ordinary' box 3 legislation.

If this is more advantageous for you, you will be entitled to this more advantageous treatment. You will then have to object and prove that your actual return is lower than the return calculated under the bridging legislation. Incidentally, if the bridging legislation scheme is most advantageous for you, you can simply continue to apply this legislation.

In his parliamentary letter of 18 July 2024, the State Secretary indicated in response to this Supreme Court ruling that taxpayers can prove the achieved actual return with the ‘Opgaaf Werkelijk Rendement’ (OWR) form. The Tax Administration is scheduled to make this OWR form available in June 2025. Taxpayers eligible for additional legal redress will be notified in October 2024.

The Dutch Supreme Court does not specify in which year direct income should be included in the actual return. According to the State Secretary, the so-called cash accounting system should be used for this purpose, as this was also the guiding principle in the design of the ‘old’ box 3 system. This means that direct income is included in the actual return at the time it is received.

Furthermore, the Dutch Supreme Court ruled on 14 June 2024 that for the valuation of assets, the statutory provisions should be followed. The main rule is the economic value (WEV, market value). However, to determine the return on a property, the Supreme Court takes the WOZ value at the beginning and end of the year as a basis. The WOZ value is the value under the Dutch Valuation of Immovable Property Act (WOZ).

Outstanding Points on Additional Legal Redress 

The State Secretary responds in his letter to the House of Representatives dated September 17, 2024, to several outstanding points following the Supreme Court rulings. 

Target Group for Additional Legal Redress in Box 3 

The State Secretary indicates that the target group eligible for additional legal redress, and thus can use the counter-evidence scheme for Box 3, is being expanded. Those whose relevant assessment was already irrevocably determined on June 6, 2024, but not yet on December 24, 2021, are also eligible for additional legal redress. The condition is that a request for a reduction ex officio is made within the five-year period. Filling out the OWR form is considered a request for a reduction ex officio.  

Determination of Actual Return in Box 3 for Purchase and Sale of Homes 

The Supreme Court has determined that the valuation of homes in Box 3 must align with the WOZ value. For the purchase and sale of homes during the year, the cabinet proposes to proportionally divide the value development in that year between the seller and the buyer. For a sale on July 1, the value development is thus equally divided between the seller and the buyer. 

Determination of Actual Return in Box 3 for Personal Use of Homes 

Based on case law and legislative history, the cabinet considers the personal use of a real estate property as part of the actual return for the calculation of legal redress in Box 3. The Supreme Court is expected to rule on this personal use issue in the fall of 2024. If necessary, the OWR form will be adjusted accordingly.  

Prevention of Double Taxation in Box 3 

The Supreme Court has set rules for calculating the reduction to prevent double taxation when the actual return is used to determine the Box 3 income. These rules imply that the calculation of the reduction to prevent double taxation is based on the proportion in which the actual foreign return in Box 3 is part of the total actual return in Box 3. 

Application of Debt Threshold in Box 3 

Debts are only part of the Box 3 base insofar as they (collectively) exceed the debt threshold. For practical reasons, the debt threshold is disregarded when determining the actual return, making the entire interest on all Box 3 debts deductible.  

Reduction of Exemption for Green Investments in Box 3 

Green investments are partially exempt in Box 3. In 2024, the exemption is a maximum of 71,251 euros (142,502 euros for fiscal partners) and as of January 1, 2025, a maximum of 30,000 euros (60,000 euros for fiscal partners). When applying the actual return in Box 3, this exemption is applied pro rata based on the situation on January 1. For an exemption of 30,000 euros, a taxpayer with 60,000 euros in green investments on January 1 will have 50 per cent of the actual return on the green investments exempted.   

Box 3 from 2027: introduction of a tax on actual returns or a refined flat-rate system?

The cabinet has designed a new box 3 system with the proposal Wet werkelijk rendement box 3’ ('Actual Return Box 3 Act'), which was published for consultation on 8 September 2023. As a main rule, the new box 3 system assumes taxation of actual returns according to a capital gains system. This system taxes realised and unrealised income from assets and allows related expenses to be deductible. The letter to Parliament of January 25, 2024 with accompanying annexes, contains some adjustments to this proposal. In addition, according to the letter to Parliament of 15 April 2024, the initially differential treatment of shares in family enterprises has been removed due to state aid risks, so that these shares are taxed under the main rule (asset accumulation tax). Only immovable property and shares in start-up companies are subject to capital gains tax (parliamentary letter 15 May 2024). This means that the increase in value of these assets is only taxed upon realisation, such as upon sale. 

The Parliament letter of 19 June 2024 shows that the bill was forwarded to the Council of State for advice on 14 June 2024 with some amendments. 

This new box 3 system should enter into force on 1 January 2027. It is up to the new cabinet to actually submit the draft bill - whether in amended or new form.

Depending on the composition of your box 3 assets, this new box 3 system could have a solid impact. The system now submitted for consultation meets a lot of criticism of the current box 3 system and would no longer tax assets on a flat-rate basis, but would be based on actual returns. A major drawback, it seems to us, is the complexity that this new system introduces. On the other hand, a flat-rate system has also become complex due to court rulings and can deviate enormously from the returns actually realised. The question is whether the current design strikes a proper balance in this respect.

The system in outline

In the new Box 3 system, as a main rule, the actual return on savings and investments will be taxed on the basis of capital gains, i.e. both income from assets and capital growth will be taxed annually. This requires, as now, the annual valuation of assets and liabilities to fair value. Because a capital gains system taxes capital growth annually, it avoids lengthy tax deferral. It also prevents taxpayers and chain partners such as banks and insurers from having to keep long-term records of historical cost prices and investments. However, a disadvantage of a capital gains tax for taxpayers is that they also have to pay tax on value developments that they have not yet realised.

To avoid paying tax on less (or non-)liquid assets, those assets are only taxed when you have actually realised a profit. To this end, real estate property and participations in start-up companies are valued at the acquisition price, and when you sell them, for example, you have to pay tax on the difference between this acquisition price and the proceeds: the capital gain. This has been corrected in the amended proposal. Since the flat-rate returns in the current system include capital growth, the assets already held by the taxpayer at the start of the new system, would be valued at market value (WEV) at the start of calendar year 2027 (the intended entry into force date of the new regime). Otherwise, pre-2027 capital gains or losses would be unfairly included in future taxation. Income from these assets, such as dividends, is already taxed in the year of realisation. For residential properties, the market value at the beginning of the calendar year 2027 will be set at the WOZ value with a valuation date of January 1, 2027. The WOZ value (the value under the Dutch Valuation of Immovable Property Act (WOZ) is often below market value.

The wealth taken into account under the new Box 3 system remains the same as under the current system and can be divided into two components:

1. real estate and shares/profit certificates in start-ups: here, actual income and asset accumulation is taxed; and
2. other assets and liabilities, including bank balances: here, actual income and capital gains are taxed.

The amended proposal provides that foreign exchange gains on bank deposits will be taxed, unlike in the draft proposal , where bank balances formed a separate category. Take for instance bank deposits held in foreign currency. This change does increase the administrative burden for taxpayers with foreign currency payment accounts. However, this is expected to be a relatively small group.

Real estate: capital gains tax

The parliamentary letter of 19 June 2024 further elaborates on the taxation of property in Box 3 via a capital gains tax.

The indirect return (the increase or decrease in value of the property) is taxed when it is finally realised, usually on sale. Improvement costs, for example for an extension or solar panels, are deductible in this respect.

Direct return is the return (whether in kind or not) that a taxpayer earns annually from the property, such as rent and lease. This depends on the use of the property, hence a division into three categories.

1. Is the property rented out for at least 90% of the year?
   Then the rental and lease income received is taxed. Costs such as maintenance are deductible.
2. Is the property not rented out?
   In that case, the benefit for availability for own use is taxed. This benefit is calculated on the basis of a property addition of 2.65 per cent of the WOZ value. This percentage already takes maintenance costs into account.
3. Is the property rented out, but less than 90 per cent of the year?
   Then the net rental income is compared with the property addition. The higher of the two amounts is taxed.

Rate and levy-free income

The current levy-free assets will be replaced by a levy-free income. The amended bill mentions a tax rate of 36 per cent and a levy-free income of EUR 1,250. According to the Headline Agreement, the Box 3 rate (2024:36 per cent) should actually be reduced, but it is not known to what percentage. However, the 2025 Tax Plan package does not mention this, thus the box 3 rate remains at 36 per cent in 2025.

Deductible expenses

In determining actual income, expenses may be deducted. The basic principle is that only costs related to the collection, preservation and acquisition of earnings may be deducted. Consider bank and management fees, transaction costs for buying and selling investments or costs for interest paid. To avoid discussions, the legal text will designate costs that are not deductible.

Total benefit idea and taxation of own use

The new Box 3 system taxes the total return (all benefits minus costs) from assets: the total benefit rationale. This principle is designed on the basis of the total profit principle that applies to entrepreneurs. With this, doctrines such as good business practice apply mutatis mutandis, taking into account the difference between a business and assets, the legal exceptions and derogations in Box 3. An important difference between the total benefit concept and the total profit concept is that box 3, as mentioned above, also taxes capital gains as a main rule. This is done by valuing the relevant assets annually at their economic value (WEV). Another important difference is that for box 3, it is determined by law which assets belong in box 3 and therefore no asset labelling applies.

The box 3 benefit is determined by asset comparison. The starting point here is the nominal value of the starting and ending capital of the total box 3 assets. Inflation is therefore not taken into account. In the equity comparison, a correction applies for deposits and withdrawals (against WEV) not related to the box 3 assets. With this, only taxable changes in assets in box 3 are taxed.

As part of the total benefit concept, the arm's length principle applies. When determining the total benefit, the starting point is business as usual. This is to prevent box 3 planning by, for example, acting at arm's length between parent and child, creating losses or by constructions with impractical fees in relation to box 1 and box 2. To avoid complicating the system unnecessarily, an efficiency margin for e.g. interest on receivables/debt applies as a practical concession. The amount or percentage of this efficiency margin is not yet known. For immovable property, the economic rental value for own use, less related costs, will form part of the Box 3 tax base on a flat-rate basis. Movable property for own use, such as cars, caravans and boats, will remain outside taxation, as under the current Box 3 system, unless held mainly for investment.

Remission benefit exemption

There will be a remission benefit exemption, somewhat comparable to that in income tax and corporate tax. The remission benefit for the debtor is exempted if there is remission of a financially impaired claim and to the extent that the income exceeds the offsettable losses.

Green investments and savings

The new system no longer includes an exemption for green savings and investments, but does include an increase in the tax credit for green investments and savings.

Start-ups

The amended proposal defines a start-up as follows. This is an unlisted body that runs an enterprise, was established no more than 15 years ago, has an annual turnover of less than EUR 30 million and whose shares are ultimately held no more than 25 per cent by an entity that is not a start-up company. The amended proposal includes the possibility of excluding companies in sectors yet to be designated from qualifying as a start-up company.

Loss set-off

Loss set-off becomes possible with other Box 3 income, but not across boxes. The loss carry-forward is unrestricted. The initial backward carry-forward of losses with the previous year is dropped in the amended proposal. For efficiency reasons, there will be a loss relief threshold of € 500 (Parliamentary letter dated 19 June 2024). Thus, small losses are not offsettable against other years.

Higher administrative burden for taxpayer

A system based on actual returns requires more data than the current flat-rate system. Data from chain partners will remain relevant, so as much data as possible will be pre-completed in the tax return. But more data will often be relevant. As a result, there will also be an administration obligation for taxpayers with box 3 assets, which is still being looked at how to set this up as efficiently as possible.

Next steps

Whether the targeted introduction on 1 January 2027 is feasible depends on several factors. A legislative process usually takes a year and a half, followed by another year and a half for implementation. A major reason for the government to send the bill to the Council of State is that implementation by 2027 is expected to become infeasible if the process is started later.

Furthermore, to meet the targeted date of introduction,the legislation should be published in the Dutch Government Gazette by 31 December 2025. After all, the year 2026 is needed for the chain partners to build the software and test the new data deliveries with the Dutch Tax Authorities . All this means that the proposal must be submitted to the Dutch parliament by September 2024 at the latest. Whether this bill will actually be submitted after advise by the Dutch Council of State is up to the cabinet.

The existing situation costs the treasury a lot of money because the Supreme Court recently ruled that in no case may box 3 tax be levied on more than the actual return. The impact of the recent Supreme Court rulings in June 2024 on the introduction of the new regime is now being examined, in particular due to the additional burden on the Tax Administration's IT systems involved in implementing those rulings. The latter could, according to the state secretary, mean that the entry into force of the new system would have to be postponed to 2028.