Amsterdam Court of Appeal recently ruled that the income tax levied on income from savings and investments (Box 3) constitutes an excessive burden. This relates to a (mass objection) procedure initiated by the Taxpayers’ Association.
However, the situation is not (yet) as bad as it first appeared. The Court is, in fact, allowing the legislature some time to amend the law on this point.
Excessive burden
The proceedings concerned an income tax assessment for the year 2014. The flat-rate return on which the tax in box 3 is calculated amounted to 4% in that year. However, according to the Court, it was not possible for a private individual to achieve such a return in 2014. Consequently, the tax constitutes an excessive burden.
Achievable return
The Court infers from the parliamentary explanatory notes accompanying the introduction of Box 3 that, in setting the level of the flat-rate return, the legislature intended that this return should be achievable for a private investor who is willing to take only a limited amount of risk. Investments in shares and property do not fit this description. The Court therefore aligns its approach with investments in savings accounts and government bonds. In doing so, the Court takes the real rate of return into account. This means that inflation is also factored in.
The Amsterdam Court of Appeal thus appears to be taking a different approach to that adopted by the Supreme Court to date. It is not yet clear whether the Supreme Court will have the opportunity to “weigh in” on this matter. After all, as the Court of Appeal has not attached any consequences to its conclusion, there is no need for the Ministry of Finance to lodge an appeal in cassation.
Amendment to Box 3
The Court offers the legislature the opportunity to remove the excessive burden. Only in 2017 The legislator has taken measures to address this by adjusting the calculation of the flat-rate return and increasing the tax-free allowance. A further adjustment of this kind was made with effect from 1 January 2018.
Only time will tell whether these adjustments will be sufficient to ensure that the tax courts do not attach any consequences to the excessive burden that the tax in box 3 now places on many taxpayers. The Rutte III Government has announced that it will investigate how the tax in box 3 can be linked to the actual return on investment. It might well be wise to press ahead with that investigation.
Massive objection
If all that doesn’t go quickly enough and if the tax tribunal were to overturn the tax assessment in box 3, then all taxpayers would benefit from that. Because the objections, as mass objection have been classified as such, the outcome of the proceedings applies to all taxpayers.
Incidentally, many taxpayers have long since opted to get the best of both worlds by transferring their Box 3 assets to a private limited company (or an open-ended mutual fund).