Global Daily Tax News, Dutch Supreme Court Rules Against Replacement Box 3 Tax Rules, (Jun 10, 2024)

In a new ruling, the Dutch Supreme Court has decided that the Government's new rules for box 3 income – on income from savings and investments – remain unlawful.

Under Dutch tax rules, savings income is grouped together with income from investments in box 3 of the income tax return.

Under the disputed rules, tax is applied based on a deemed return from savings and investments. Controversially, the rules provide that as a taxpayer's savings and investments increase, more should be attributed to investment activity, which is deemed to generate a greater return for the taxpayer. This is regardless of whether the taxpayer in fact has only savings. Consequently, a higher rate of return is assigned to those with more assets and more tax applies.

On December 24, 2021, the Supreme Court ruled that the way in which capital is taxed in box 3 is in violation of the European Convention on Human Rights (ECHR). According to the Supreme Court, only the actual return on capital may be taxed, but it did not specify how this should be determined.

Earlier, the Government had proposed introducing taxation based on actual returns from 2025. Implementation was then delayed until January 1, 2027.

The new rules seek to better approximate taxpayers' returns from their savings and investments, as an interim arrangement. For example, the composition of a taxpayer's assets is taken into account to a certain extent. This is done by dividing the assets into three categories: bank balances, other assets, and debts. Each of the three categories has its own percentage of fixed return: the percentage for bank deposits in 2017 was 0.25 percent, whereas the percentage for other assets was 5.39 percent in 2017.

The percentage is based on a fictitious mix of different types of investments and assumes average returns on those types of investments.

The Supreme Court has ruled that where the notional return is greater than a taxpayer's actual return, the taxpayer may request taxation based on the actual return. It noted that the potential for discriminatory tax treatment is greatest for taxpayers investing in risky assets, with actual returns varying greatly depending on whether they are more or less successful with their investments.

Responding to the ruling, the Dutch tax agency said: "The Supreme Court has ruled that the Recovery Act and the Bridging Legislation are contrary to the European Convention on Human Rights (ECHR). According to the ruling, we may only tax the actual return on your assets if this is lower than the notional return."

"The Ministry of Finance is now studying the ruling. After a political decision, we will hear how we can correctly calculate the box 3 income."

"We work closely with the Ministry of Finance to carefully develop legal restoration. A final decision will be made during the year. If the ruling has consequences for your box 3 income, we will send you a letter later this year."