The temporary system for levying income tax on income from savings and investments (Box 3) incorporates a leverage effect.
Leverage effect
Leverage is an economic principle: the return on an investment can be higher if the investment is partly financed with borrowed money.
Suppose you buy a property for €1,000,000 and finance half of it with your own funds and the other half with a bank loan. You pay 4% interest on the loan. Renting out the property yields an annual return of 6.5%.
The property then generates €65,000 a year. You pay the bank €20,000 in interest. On balance, you are left with €45,000 per year. Relative to your equity of €500,000, your return is then 9%. Due to the leverage effect, this is higher than the 6.5% annual return.
Box 3
This effect will also apply to Box 3 from 2023 to 2025 inclusive (it is not yet clear what form this tax will take from 2026 onwards). This is because, when determining the flat-rate income, a higher rate of return is applied to other assets than to debts.
Here is a simple calculation example in which we assume that only the property mentioned above, including any financing, falls under Box 3. For the sake of simplicity, we have not included the tax-free allowance in the calculation.
The flat-rate return on other assets in 2023 is: 6.17% (6.17% * €1,000,000 = € 61.700). The flat-rate return on the debts is not yet known, but is expected to be around 2.5% (2.5% * €500,000 = € 12.500). The taxable income in box 3 then amounts to €49,200. In relation to the net capital subject to tax in box 3 (€500,000), this means that a return of almost 10% is taxed (instead of 6.17%).
Change
Whether this method of calculating the flat-rate income in box 3 is acceptable is a matter for politicians to decide. This adjustment is not incorporated into the statutory system that will remain in force until the end of 2022. Put simply, the flat-rate income would be calculated as follows under that system: 6.17% * (€1,000,000 -/- €500,000) = €30,850.
Investors who have partly financed their assets in box 3 with debt should bear in mind that, from 2023 onwards, they will pay (often significantly) more income tax. In addition to the leverage effect described above, the tax rate will also be increased, from 31% in 2022 to 32% in 2023 (2024: 33% and 2025: 34%).