December 9th, 2024
Following up on our article from June 28, 2024, we would like further explain the implications of the Supreme Court’s ruling and how it affects the calculation of taxable income from savings and investments.
The taxation of this type of income has been a contentious subject for many years. This has to do with the fact that the statutory box 3 income tax system uses legal fictions resulting in deemed box 3 income to which the tax is charged. This deemed income may be (much) higher than your actual box 3 income.
The purpose of this message
The purpose of this message is to update you on recent developments on the subject and to advise you on the potential steps you can take, or we can instigate for you.
The statutory system of taxing savings and investment income
Savings and investment income consists of all sorts of income an individual earns in regard of her / his “possessions”. These possessions consist of bank and savings accounts, share and mutual fund investments, (government) bonds and real property, to name a few. From the aggregate gross income these possessions generate, costs are deducted to come to an individual’s net income. An example of such costs is the interest paid on a loan taken out to finance a property.
The most important point of the statutory system is that an individual is taxed for savings and investment income which she / he is deemed to have earned (as opposed to the actual income the individual earned).
An individual’s actual savings and investment income is — in principle — not of importance. For example, an individual is not taxed for (i) the actual interest she / he receives on bank and savings accounts and (ii) the actual dividends and capital gains an individual receives and makes respectively in regard of share and mutual fund investments. The same is true for costs. The actual interest paid on a loan taken out to finance an investment property is, for example, not relevant.
An individual’s actual net income may be higher or lower than the individual’s deemed income. In both cases, the individual is taxed for her / his deemed income under the statutory system.
If an individual’s actual income is higher than her / his deemed income, then the current statutory system is not a subject of contention. In this case, the individual pays less box 3 income tax than she / he would have paid on the basis of her / his actual box 3 income.
However, the statutory system is more problematic, if an individual’s deemed income is higher than her / his actual income. In this instance, an individual is still taxed for her / his higher deemed income under the statutory system.
As long as the difference between an individual’s actual and deemed income is not too big, then most people will probably not object to the statutory system. However, when an individual’s deemed income exceeds actual income to too large an extent, then most people will perceive the statutory system as unfair: they are being taxed for a (much) higher deemed income than the income they have in fact earned (= actual income).
Cases like the latter have led to many court cases over the years. Earlier this year, the Dutch Supreme Court decide on a few items that may be relevant for you, as we will explain in the remainder of this message.
Dutch Supreme Court rulings
Earlier this year, the Dutch Supreme Court issued several rulings on the current statutory method of calculating savings and investment income. The Supreme Court ruled that the statutory system infringes on the right of property of citizens under the European Convention on Human Rights.
In summary, the Supreme Court ruled that an individual should be taxed for her / his actual savings and investment income, if this income is lower than her / his deemed income.
In practical terms, this means that if your actual box 3 income is lower than your deemed income, then your tax assessment should be reduced accordingly. However, if your actual box 3 income exceeds your deemed income, then you will still be taxed for your deemed income on the basis of the statutory rules. In other words, you will never be worse off as a result of the Supreme Court rulings.
The Supreme Court rulings have tremendous implications for the government’s public finances. The rulings result in all sorts of financial, but also practical problems. Although the government is preparing an introduction of a system in which actual income is taxed, the tax administration cannot implement the necessary changes to its IT system to achieve this within the coming years. Until then the tax administration will need to create temporary fixes to allow the imposition of the box 3 income tax in accordance with the Supreme Court rulings.
What the rulings mean for you
The above applies to all years for which a final income tax assessment has not yet been imposed (and in some instances for older years as well).
Until now, the tax administration has refrained from imposing final income tax assessments for the year 2021 through to 2023 when an individual has declared box 3 income. The tax administration did this to await the outcome of the Supreme Court rulings. You should thus be able to investigate whether your actual box 3 income for these three years is lower than your deemed income. If it is indeed, you may then invoke the rulings and have your lower actual income be taxed for a particular year. This test will be done on a per-year basis. For example, if your actual income for 2021 is higher than your deemed income, whereas for 2022 it is the other way round, then you may invoke the rulings for 2022 (= being taxed for your lower actual income) and not invoke the rulings for 2021 (= being taxed for your lower deemed income).
Is my actual income lower than my deemed income?
The above raises the question: is my actual box 3 income for a particular year lower than my deemed box 3 income?
We calculated your deemed box 3 income for the tax returns we prepared for you. We did not, however, calculate your actual box 3 income for these tax returns. Thus, we cannot tell you at current whether your actual box 3 income for a particular year is lower than your deemed box 3 income. In many cases, we also cannot calculate your actual box 3 income as yet because we lack the necessary information in our files to make these calculations.
We also cannot say in general terms whether your actual income for a particular year is expected to be lower than your deemed income. It very much depends on the mix of assets you owned and loans you had in the year at hand. A truly meaningful answer to the question at hand requires an in-depth analysis of your particular circumstances on an annual basis.
We do have two general observations.
- The year 2022 is generally considered a bad year for equity investments in companies, mutual funds and the like. Many investors incurred losses on their share portfolio in 2022. If you are one of these unlucky equity investors, you could consider to focus on the year 2022 firstly.
- If you own Dutch property, your actual income of such property may be higher than you think. The Supreme Court ruled that unrealized capital gains on properties count towards actual income and also that one has to use the officially appraised values of these properties (the WOZ values). Since Dutch property values have generally been rising for quite some time now, the calculation of “actual yield” on Dutch properties tend to be higher than the deemed yield.
How do I calculate my actual box 3 income?
In its rulings, the Supreme Court gave further guidance as to how one should calculate actual box 3 income. Most of these rules are straightforward, others are less so. Below we will describe the most important rules for you.
- Interest, dividends and rent received during a particular year are examples of actual income. They are taxable for the amount received.
- Capital gains made and losses incurred are considered actual income. The capital gains and losses are calculated by comparing the fair value of the possessions at year-end to the fair value of the possessions as at the beginning of the year.
- Whether a capital gain / loss has been “realized” in the year, is not relevant for determining actual income: unrealized capital gains and losses are also considered actual income. You may, for example, own a property on 1 January 2023 which at this time was worth EUR 300,000. On 31 December 2023, the fair value of this property has increased to EUR 350,000. You did not sell the property in 2023, so you did not “realize” a capital gain. The unrealized value increase is, however, considered actual income in accordance with the Supreme Court rules.
- For Dutch properties, their official values (the so-called WOZ values) as appraised by municipalities have to be used to calculate actual income.
- Costs in regard of the box 3 income are not taken into account with the exception of interest paid on loans which are considered box 3 loans. The actual interest paid on such loans is a cost which reduces actual (gross) box 3 income to get to aggregate (net) box 3 income.
- It is unclear at current whether one should take into account an amount for the benefit of “self-use” of real properties as actual income. So, if you own a home which you use as your “weekend home” only (and do not rent it out during at least part of the year), it is unclear whether you need to report a (fictitious) amount as actual income for this self-use of your property.
- Actual income needs to be calculated on all your box 3 possessions and loans jointly. You may, for example, not exclude some box 3 possessions or loans, or use the statutory system for some possessions and the actual income rules for other possessions.
- The general tax exempt amount that applies to calculating deemed income is not taken into account for determining actual income.
- Negative box 3 income for a particular year (= a box 3 loss) cannot be carried back or forward to positive box 3 income for previous and later years respectively. The box 3 loss will also not reduce other taxable income for the year in which you incurred the loss.
Calculating actual income tends to be much more time consuming than calculating deemed income. It is definitely more difficult exercise.
You may not be able or not be willing to make the actual income calculations yourself. We can assist you with these calculations.
What happens next?
The tax administration is currently sending out (standard) letters to individuals who have declared box 3 income in the past couple of years. You may already have received this letter.
The letter is informative only and no immediate action is required by you at current.
The tax administration is in the process of updating its IT systems, so that it can accommodate those cases where actual income is lower than deemed income. It is expected that the necessary changes will only have been implemented in the second half of 2025. Until such time you cannot declare your actual income for the past couple of years yet.
This does give you time to investigate whether your actual income for the last couple of years is lower than your deemed income, so that you can take action once this is possible.
The year 2021 – action may be required by you
The tax authorities initially intended to delay issuing final income tax assessments for the years 2021 through to 2023 until its IT systems had been properly updated to reflect the changes due to the Supreme Court rulings.
For the year 2021, the tax authorities have now decided, however, to start imposing final income tax assessments due to the statutory deadline which is approaching quickly. If the tax administration misses this deadline in a particular case, it may then no longer impose a final tax assessment at all as a result whereof income would go untaxed altogether.
Filing a letter of objection for 2021
If you receive a final income tax assessment for 2021, we recommend that you file a letter of objection to secure your rights, in particular your right to go to court.
If you do not file a letter of objection in time for 2021, you will no longer be able to appeal against any decision of the tax administration you do not agree to. We believe it is wise to keep the appeal option open.
If you do not file a letter of objection in time, the tax administration will still look at your box 3 income for 2021 at a later stage, if you request them to do so. When the tax administration does, it will follow the Supreme Court rulings, so that you will still be taxed for your actual income for 2021, if it appears to be lower than your deemed income.
There is, however, still room for interpretation as to what constitutes actual income. If the tax administration were to interpret actual income differently than you believe it should, then you cannot present your case to court, if you did not file a letter of objection in time. It is for this reason that we recommend you file a letter of objection when you receive your final income tax assessment for 2021.
Please do not hesitate to contact us if you need any clarification or if you would like to discuss how the above specifically affects your tax situation. Also please keep us informed upon receipt of any letters from the Dutch tax authorities in this respect.
