The Dutch Box 3 / Wealth Tax and Recent Developments

On December 24, 2021, the Dutch Supreme Court (Hoge Raad) issued a ruling known as the Kerst-arrest (Christmas ruling). This ruling declared that the system of imputed returns taxation on wealth in the Box 3 category of income tax constituted prohibited discrimination.

The case focused on the Dutch tax system’s method for calculating tax on savings and investments, which was found to penalize taxpayers unfairly. The system previously applied a flat-rate deemed return that did not always reflect actual gains or losses, leading to perceived injustices and disparities. 

As a result of the Kerst-arrest, the tax authorities introduced the Box 3 Recovery Act (Wet rechtsherstel box 3 in Dutch) to address these issues and better align the system with the European Convention on Human Rights standards. This adjustment aimed to create a fairer way of calculating returns from savings and investments based on more realistic parameters. 

The new calculation of the deemed return under the Recovery Act generally resolved the issue for those whose assets consist mainly of bank deposits. However, for taxpayers with other assets, particularly those who engage in risky investments, the problem persisted. Essentially (using the percentages for 2024), a distinction was introduced between savings and investments.

Savings are now assumed to have a 1.03% return on investment, while investments are assumed to yield a 6.04% return. This deemed return is taxed at 36% in 2024

However, due to ongoing backlash and subsequent legal challenges, the Dutch Supreme Court issued a new ruling on June 6, 2024. This latest ruling declared that the Recovery Act Box 3 tax regime still contravenes the European Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR). According to the Supreme Court, the Recovery Act retained the same calculation method as the original system for assets other than bank deposits. Consequently, the discrimination identified in the Christmas ruling remained unaddressed. The Court held that the Recovery Act also violated the prohibition of discrimination and the protection of property rights where the deemed return on investments exceeds actual returns. 

This ruling necessitates adjustments to tax assessments to align taxation with taxpayers’ actual earnings on assets.

Following the Court’s decision, taxpayers now have the option to demonstrate if their actual returns are lower than the deemed returns, potentially benefiting from tax reductions—but this also requires careful documentation.  
 
Additionally, you can now choose the calculation method that benefits you most: if your actual return on investment is lower than the deemed return used by the tax authorities, you can adjust it (see details below). If your actual return on investment is higher, you can retain the deemed return used by the tax authorities.  

The tax authorities plan to introduce a specific form for calculating actual returns (the Opgaaf werkelijk rendement in Dutch) by the summer of 2025. It is good to check if this recalculation will benefit you. 

To help you prepare, we have outlined below the Supreme Court’s guidance on how the actual return should be calculated, which we expect the tax authorities will follow in the expected form: 

 New Calculation Method According to the Supreme Court 

The Supreme Court has provided the following guidelines for determining the actual return: 

  1. The entire wealth (including bank balances) of the taxpayer in Box 3 must be considered without deducting the tax-free allowance of €57,000 per person for tax partners. 
  2. The calculation should reflect the nominal return without adjusting for inflation. 
  3. Positive or negative returns from other years should not be included. 
  4. The actual return includes income from assets, such as interest, dividends, and rent, as well as both positive and negative changes in asset values. 
  5. Unrealized changes in value are also part of the actual return. 
  6. Costs are not considered, but interest on debts related to Box 3 assets is taken into account. 

Therefore, we expect that the tax authorities will assess the difference in asset value from January 1 to December 31. 

As you can see, based on the Supreme Court’s calculation method, this approach may not benefit everyone as much as the tax authorities’ deemed calculation. 

If, based on the above, you believe your actual return on investment may be lower than the 6.04% deemed return used by the tax authorities, please contact us next summer so we can assess your situation and take action if needed. The timing of this will also depend on when the official form becomes available.