State Secretary Snel of the Ministry of Finance stated in a letter His proposals regarding changes to the income tax levied on income from savings and investments (Box 3) have been presented to Parliament. These are due to come into force on 1 January 2022.
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.
€440,000 tax-free
That is the gist of the headline that appeared in many news reports at the end of last week. And that is certainly true for someone whose income from savings and investments consists solely of interest on savings balances. For tax partners, therefore, the exemption is doubled to €880,000.
However, under Snel’s plans, people who invest most of their savings will face a significant increase in income tax. The same applies to property investors, particularly where the property has been (partly) financed by loans.
The new system
Under the proposed scheme, the following steps are taken to calculate the income tax payable:
- First, it is determined whether the balance of assets and liabilities exceeds the tax-free allowance (the tax-free allowance is approximately €30,000 per tax partner);
- If that is the case, an assessment is made to determine what proportion of the assets consists of savings;
- any assets other than savings are treated as other properties designated;
- Finally, we look at how much the debts is.
Income is determined by applying a flat-rate percentage to each of these asset categories. These flat-rate percentages are set annually on the basis of recent actual returns. Based on the year 2020, these flat rates would amount to (the final percentages for 2022 will be set at the end of 2021):
| Savings balances | 0,09% |
| Other assets | 5,33% |
| Debts | 3,03% |
Tax-free income
In addition to the tax-free allowance (see above), a tax-free income threshold is being introduced. Based on current figures, it is estimated that the tax-free income threshold will amount to (approximately) €400.
A simple calculation then gives a tax-free savings balance of €440,000. A flat-rate return of 0.09% is calculated on the €440,000 savings balance. That works out as: 0.09% * €440,000 = €396, which falls neatly within the €400 tax-free allowance.
In 2019, the flat-rate income on €440,000 of assets in Box 3 amounts to no less than: €16,432
If you invest the full €440,000 in securities under Box 3, the outcome under Snel’s plans will be very different. In that case, the flat-rate return is: 5.33% * €440,000 = €23,452. After deducting the tax-free allowance, the taxable income amounts to €23,052.
That is clearly more than the €16,432 in income calculated for 2019.
If your assets in Box 3 consist of €440,000 worth of property, which you have financed with a loan of €250,000, you may deduct the following amount of interest from your income: 3.03% * €250,000 = €7,575. Your income in box 3 is then: €23,452 - €7,575 = €15,877 (after deduction of the tax-free allowance: €15,477).
In 2019, the flat-rate income – calculated on the basis of €440,000 – €250,000 = €190,000 – amounts to just €5,303.
Reference Date Arbitrage
It goes without saying that the system outlined above could make it an attractive option to convert assets into savings balances towards the end of each year. The State Secretary also recognises this risk. He has therefore announced that measures will be incorporated into the new legislation to prevent this ‘reference date arbitrage’.
Higher rate
In order to implement the plans in a budget-neutral way, the tax rate in box 3 needs to be raised slightly. At present, this rate is 30%. From 2022, you will pay 33% in income tax on your income from savings and investments.