The capital gains tax under Box 3 has been classified by the legislator as an income tax. A flat-rate return on the value of the capital is taken as the basis for taxation. The return has been set at 4%. According to the legislator, this is the rate of return that an investor could achieve without risk and over a long period of time. The capital gains tax could just as easily be classified as a wealth tax. In fact, tax is levied on the value of the assets, regardless of the return achieved. The capital gains tax is the successor to the former wealth tax and the old, progressive income tax on income from capital.
Box 3 under discussion
There has been debate for years regarding both the nature of taxation under Box 3 and the level of the flat-rate return. An opinion issued by the Advocate General (AG) at the Supreme Court has intensified this debate. According to the AG, under certain circumstances there may be a disproportionate infringement of the right to property.
A clash with property rights?
In general, the levying of tax does not conflict with the right to property. According to the Supreme Court, this also applies to taxation under Box 3. However, the Supreme Court has previously stated that taxation under Box 3 may conflict with the right to property if it is established that:
1. retail investors who, without making any investment at all, can achieve a return of at least 4%, and
2. the applicable rate results in an unreasonably heavy burden.
The Advocate General concludes from judgments of the European Court of Human Rights that taxation which leads to the erosion of capital, in combination with other factors, may be disproportionate. In the context of Box 3, the following circumstances are at issue. Firstly, Box 3 is based on an untenable flat-rate. Secondly, Box 3 results in an arbitrary and unpredictable tax burden for asset holders. The Advocate General considers there to be a significant risk that the levy will lead to an excessive tax burden. In the light of evolving legal understanding, the Advocate General has concluded that the capital gains tax must be regarded as disproportionate in relation to the public interest. Consequently, this tax is contrary to Article 1 of the First Protocol to the European Convention on Human Rights.
According to the Advocate General, judicial intervention is not the obvious course of action. The legislature must be given the opportunity to replace the existing scheme with one that does not have the identified shortcomings.
Opinion of the State Secretary
The State Secretary for Finance has since responded to the Advocate General’s opinion. He does not share the Advocate General’s view. According to the State Secretary, the capital gains tax falls within the broad discretion afforded to the legislature. The State Secretary refers to a judgment in which the Supreme Court stated that the flat-rate system under Box 3 does not, in principle, constitute an infringement of the right to property. Only if it transpires over a longer period that a return of 4% is not achievable might this be otherwise. The State Secretary is of the opinion that the Supreme Court can uphold the Court of Appeal’s ruling that there is no infringement of the right to property.