Supreme Court puts an end to current box 3 system

According to the Supreme Court, the flat-rate method of taxation in box 3 still violates the prohibition of discrimination and property rights. If the actual return of an individual taxpayer is lower than the statutorily determined (flat-rate) return, then the actual return must be taken into account. The Supreme Court has determined how the actual return should be calculated.

What do these rulings mean for your box 3 taxation? These rulings have direct consequences for taxpayers with income taxed in box 3 in the situation that an objection has been made against a tax assessment that has already been imposed or the tax assessment has recently been imposed and the objection period has not yet expired. In addition, these rulings will be of great importance for all yet to be imposed tax assessments with box 3 income until a new system is introduced.

Background on box 3

In box 3, income tax is levied on the income from your assets (such as bank balances, investment portfolios, real estate, receivables and/or debts). How the income from your assets is determined has been a subject of debate for years. According to the legal calculation method, the return on your assets is determined in a flat-rate manner by using fictitious percentages.

In late 2021, the Supreme Court ruled in the so-called "Christmas Judgment" that, among other things, the flat-rate calculation method violated the prohibition of discrimination and the right to property from the ECHR and that income had to be determined using the actual return if it was lower than the flat-rate return. In response, new laws and regulations (the Restoration Decree, the Restoration Act, and the Bridging Act) were introduced for tax years starting in 2017 with the goal of more closely approximating the actual rate of return. To this end, annual rates of return are set (again determined on a flat-rate basis) for three fixed categories: bank balances, other assets and debts. These rates of return are the same for all taxpayers. This system would apply until a new box 3 system that is based on the actual rate of return was introduced (expected 2027)

The Supreme Court's rulings of June 6, 2024 addressed, among other things, whether these new laws and regulations, following the enactment of the Restoration Act, provide sufficient legal redress if an individual taxpayer's actual return is lower than the statutory (flat-rate) return.

Supreme Court

The Supreme Court has ruled that even under the Restoration Act and the Bridging Act, there is a violation of the prohibition of discrimination and the right to property under the ECHR. If an individual taxpayer's actual return is lower than the statutorily determined (flat-rate) return, then the actual return must be taken into account. For this purpose, it does not matter how big the difference is between the standard return and the actual return.

The Supreme Court has determined how the actual rate of return should be calculated:

• To determine the actual return, the entire wealth of the taxpayer is taken into account, without deduction of the tax-free capital in box 3;
• It is the nominal return, i.e. without taking inflation into account;
• The positive or negative returns in other years are not taken into account;
• The actual return includes not only benefits drawn from assets, such as interest, dividends and rent, but also changes in value (positive and negative) of those assets;
• Unrealized changes in value are also part of in the actual return;
• Costs are not taken into account, with the exception of interest on debts belonging to box 3 capital.

The tax authorities will have to reduce your income tax assessment if you can prove that your actual return is lower than the fixed return. Importantly, the tax authorities do not have to reimburse any interest to you if you qualify for a reduction of a tax assessment, unless the amount of statutory interest is more than the amount of your box 3 tax reduction.

What does this mean for you?

The Supreme Court rulings have provided more clarity on determining your actual return in box 3. If you have proven that your actual return is lower than the statutorily determined flat-rate return, the inspector must take the actual return as the starting point for taxation. To calculate the actual return, it is necessary to know your return for each component of your assets. This includes interest, dividends, rent or changes in value (negative, positive, realized and unrealized). It is expected that the tax authorities will publish a special digital form ('opgaaf werkelijk rendement') to declare your actual return.

Want to know more?

Consult your Forvis Mazars advisor to look together at the possibilities in your situation. You can also contact Nick Brinkman by e-mail or by phone: +31 (0)88 277 18 51 or Christian Koedam by e-mail or by phone: +31 (0)88 277 23 33 . They will gladly assist you further.