The sum of the assets and loans not already included in box 1 or box 2 has for years been taxed in box 3 at a fictional yield. The question is whether this will continue to be tenable in future.
A landlord’s real estate portfolio is generally placed in box 3 in income tax . More on this can be found in the informative blog written for Interhouse by Rob Antonis.
The taxpayer is taxed on a notional yield in box 3. In other words, the taxpayer is deemed to have earned a certain return from which tax needs to be deducted. The actual return is irrelevant here.
The downward trend of interest rates on savings – some banks are now even charging negative interest rates – has recently generated a great deal of debate on this notional yield. The ever-widening gap between the notional yield and the return savers can realistically earn via risk-free investment means that box 3 taxpayers are in fact forced to choose between paying tax over a return that is nowhere near the one they have actually earned and exposing themselves to a high level of risk by making aggressive investments. This is obviously far from a desirable situation.
In 2019, the Supreme Court even ruled that box 3 as applied in 2013 and 2014 is contrary to the European Convention on Human Rights (ECHR) at ‘system level’, more specifically the fundamental right of ownership.
Since then, a number of reforms have been introduced. At the moment, for instance, a distinction is made in box 3 between ‘class I return’ and ‘class II return’, described as savings and investments respectively, whereby box 3 taxpayers are deemed to earn a significantly lower return over class I than over class II. It should be noted that a notional yield is also applied here, and that’s not all: taxpayers’ actual savings and investments are not taken into account on allocation to classes I and II, but rather they are deemed to save 67% of assets up to €72,797 and invest 33%, over which they are deemed to earn a return of 5.28% (2020). Where a larger amount of assets is involved, the fictitious allocation to savings and investments shifts more towards ‘investments’, resulting in those taxpayers with box 3 assets in excess of (roughly) one million euros being deemed to invest 100% of their assets.
It should be noted here that former State Secretary for Finance Menno Snel submitted a legislative proposal for reforming box 3 to the Lower House of the Dutch Parliament in September 2019. This proposal, which is supposed to come into effect on 1 January 2022, provides for a change to the fictitious allocation of the assets to the portion deemed to be savings and the portion deemed to be invested. If this proposal is approved, on its introduction the actual allocation to savings and investments will be applied.
Yet some tax consultants believe this doesn’t go far enough. The only distinction made here is between ‘savings’ and ‘investments’, for example. The fact that the return to be earned on an investment depends greatly on the type of investment is not take into account in this proposal. Under the proposal, if a notional yield over ‘class II return’ is applied as in 2020, all investments, i.e. box 3 assets other than savings, will be deemed to earn a return of 5.28%.
It is perfectly possible that the notional yield will in itself result in the current method of taxation in box 3 no longer being tenable. The obvious option is to use the actual return earned on box 3 assets.
This type of reform would have significant consequences for taxpayers who own real estate portfolios, as the actual rent received will need to be reported in tax returns. How increases in property values are dealt with also needs to be considered.
While some tax consultants are considering turning to the European Court of Human Rights in Strasbourg for a ruling on the Dutch notional yield, the Dutch government is adopting a cautious stance. The State Secretary for Finance believes that the current box 3 system is tenable under the ECHR and that no further reforms are necessary, although the Lower House of the Dutch Parliament has asked the Parliamentary counsel to issue advice on the legal soundness of the current system.
We need to await publication of this advice and the outcome of any European Court case before we can draw any conclusions, but these developments do make these interesting times for box 3.
On 24 June we received an important update on this topic:
The State Secretary for Finance, Hans Vijlbrief, is scrapping his predecessor’s plans for altering the tax on imputed return on investment. According to Vijlbrief, there is too much of a discrepancy between the amount that people pay over the yields from their investments and what they pay over the interest on their savings. The State Secretary claims that this discrepancy is not only unfair, it is also legally infeasible.
This means that the alteration to Box 3 – which would have an adverse impact on many private real estate investors – is off the table for the time being. Vijlbrief will now go back to the drawing board to come up with a simpler plan that will “largely spare small savers and investors”.