In our article “Savings of up to €440,000 are tax-free” Since the start of this week, we’ve been focusing on the positive side of the announced changes regarding the levying of income tax on income from savings and investments (Box 3). In that article, we also highlight the downside for investors, who will face a significant increase in tax under these plans. We would like to explain this downside in more detail. Perhaps it will soon be time to play the joker!
On 23 June 2020, State Secretary Vijlbrief of Finance announced in the House of Representatives that the plans described in this article would not go ahead. It is not yet clear how the tax in box 3 will be adjusted.
Investors
By the term ‘investors’, we mean anyone who holds assets subject to tax under Box 3 other than bank balances. These may include securities (shares, bonds or other instruments), as well as property and claims (for example, against children, including acknowledgements of debt).
For the definition of the term ‘savings balance’, please refer to the Wft. In essence, this means that only genuine bank accounts fall under this term. It therefore (broadly speaking) covers current accounts, savings accounts, term deposits and other similar balances held with banking institutions.
Flat returns
Under the new system for Box 3, the returns on which tax is calculated more closely reflect the actual return. However, calculations are still based on returns determined in advance (on a flat-rate basis). This is because, with a view to the national budget, the government wants to be able to accurately estimate the amount of income tax due on income from savings and investments.
Based on current rates of return, the flat-rate income on savings would amount to: 0,09%. This is in line with the current savings interest rate. Based on the current situation, the flat-rate income on other assets in Box 3 would amount to 5,33%. Finally, a flat-rate interest rate is set for debts of 3,03%.
The flat-rate returns are set annually on the basis of recent actual returns. The new system is due to come into force on 1 January 2022. It is, of course, not yet possible to predict what the current returns will be at that time.
Property
To illustrate that this involves a substantial amount of additional income tax, let’s work through a simple example together.
A property investor, with no tax partner, has a current account in Box 3 with a balance of €10,000 and a savings account containing €140,000. They also have a modest investment portfolio, valued at €275,000. The property is valued at €2,500,000 and is financed by debt amounting to €1,500,000.
| Current account | 10.000 |
| Savings account | 140.000 |
| Total bank balances | 150.000 |
| Securities portfolio | 275.000 |
| Property | 2.500.000 |
| Total assets in Box 3 | 2.925.000 |
| Debts | -1.500.000 |
| Box 3 balance | 1.425.000 |
Tax in box 3 will be calculated as follows in 2019:
| Box 3 balance | 1.425.000 |
| Tax-free assets | -30.360 |
| Basis | 1.394.640 |
| Calculation of returns | |
| 1.9351% * 71.650 | 1.386 |
| 4,4513% * 918.086 | 40.867 |
| 5,6% * 404.904 | 22.675 |
| Total return | 64.928 |
| Tax 30% | 19.478 |
The tax burden, relative to wealth, amounts to: 1,37%.
Applying this situation to the plans announced by the State Secretary leads to the following:
| Bank balances | 150.000 | 0,09% | 135 |
| Other assets | 2.775.000 | 5,33% | 147.908 |
| Debts | -1.500.000 | 3,03% | -45.450 |
| Total return | 102.593 | ||
| Tax-free income | -400 | ||
| Taxable return | 102.193 | ||
| Tax 33% | 33.724 | ||
The tax burden, relative to wealth, currently stands at: 2,37%.
Conclusion: from 2022 onwards, this property investor will pay significantly more income tax on his assets in box 3. This amounts to €14,246 (€33,724 – €19,478).
Special offer!
It is not yet advisable to take any action at this stage, other than assessing the potential effects of the new scheme. At present, there is, in fact, nothing more than a letter in which State Secretary Snel sets out his plans to the House.
The bill required to bring about the change will not form part of the 2020 tax plans due to be presented next Tuesday (Prinsjesdag). Snel expects to have the bill ready before the 2020 summer recess (which usually means the documents will be sent to the House of Representatives in June 2020). Hopefully, the House will then consider the proposals in the second half of 2020 and there will be clarity on the final scheme by the end of 2020. We will then have until 31 December 2021 to implement the measures.
Complications
However, the situation is complicated by the fact that further relevant changes have been implemented and/or announced. For example, the tax rate on income from a substantial interest (box 2) will be increased from 25% to 26.25% in 2020 and to 26.9% in 2021. We consider it highly unlikely that this rate increase, like the reduction in corporation tax, will be reversed in the 2020 tax plans.
And directors and major shareholders must take into account the measures designed to combat excessive borrowing from their own private limited company (also known as the current account measure). We describe this measure in our article “Combating excessive borrowing from own BV“. The legislative texts relating to this measure are expected to be published on Prinsjesdag.