Box 3 is going to change. The highest court previously struck down the way in which taxation took place on savings, securities and, for example, the rental of real estate, and now the repairs also seem to have been canceled.
For years, the tax authorities have been calculating fictitious returns that savers in particular are far from achieving. But taxing investors based on a notional return of 6.17 percent, while share prices plummeted sharply in 2022, is also unacceptable.
The new system, which can only come into effect from 2027, is based on two pillars. Roughly speaking, it provides for a capital gains tax on savings and securities and a capital gains tax on real estate. So no more fictitious returns, but actual returns are taxed.
This means that in addition to interest, dividend and rent, any realized or unrealized increase in value is also taxed. The tax on the increase in value of real estate is only levied upon sale, so that owners do not get into trouble. In the intended system of Box 3, losses can be offset to a limited extent.
Why have we reached this point? In 2001, Minister of Finance Wouter Bos introduced a notional yield tax. The fictitious return was set at 4 percent, the tax on this – initially 25 percent was mentioned – eventually became 30 percent. The wealthy Dutchman effectively paid 1.2 percent on his investment portfolio and savings.
But politicians wouldn’t be politicians if they didn’t try to raise taxes. That happened. A higher notional return – up to 6.17 percent for wealthy people – and a higher effective rate up to 34% in 2025.
The second disruptive factor was interest rates. The interest on savings even fell below 0 percent, making a 1.2 percent tax indefensible.
The new proposal has sympathetic elements, but there are also important objections. We list the six most important objections.
1. Not taking inflation into account
The new plan does not take inflation into account. That is fundamentally wrong and unjust. An investor who achieves a 4 percent return with 1 percent inflation has a real return of 3 percent. That could burden you. But with rising inflation – we have had 10 percent in 2022 – the effect is much greater.
An investor who achieved an 8 percent return must pay tax on that in the new system. The real return is already negative 2 percent. The investor becomes 2 percent poorer in purchasing power. The tax payment will be on top of that.
This methodology seriously infringes on property rights. The arguments given by the minister against taxing real returns are not valid and easy to refute.
2. Paying taxes forces you to sell
An investor holds a securities portfolio for the long term. Due to an end-of-year rally, the portfolio increases in value from 100,000 euros to 160,000 euros. After mediocre annual figures, the portfolio drops back to 120,000 euros. The investor receives a tax assessment on 60,000 euros in capital growth and then has to pay, for example, 15,000 to 20,000 euros in tax. More than 15 percent of the portfolio must be sold.
Paying taxes when the capital gain has not yet been realized is not practical for several reasons.
3. Investing in shares becomes more unattractive
The system of a flat-rate tax of 30 percent times 4 percent provides the investor or private individual with the freedom to make his investment choices independently of the tax payment.
Taxing based on growth results in a higher tax on equity investments. That is undesirable. This means that it becomes less attractive to provide risk capital to the business community. More money is held passively, less money is invested in the economy.
Compared to real estate, taxation is deferred until actual realization. Money will also flow from equities into real estate. In addition, for less liquid shares, a seasonal effect will occur in the period in which the tax must be paid by private investors.
4. The Netherlands is out of step internationally
In a number of countries the tax consists of a liberating withholding tax, a fixed percentage of the income (interest and dividends). Where there is a capital growth tax, this is only levied upon realization. A levy based on unrealized increases in value for almost all assets is unprecedented.
5. Negative side effects
The plan has a number of negative side effects:
a. an annual sales pressure to pay the tax and provides various wrong incentives
b. transfer from Box 3 to Box 2 for reasons other than economic reasons
c. less risk capital available for small and mid-cap companies due to the less liquidity in the share. (can be difficult to sell to pay taxes)
d. greater motive for fiscal emigration
e. even less supply of real estate
6. Practical problems for the tax authorities and taxpayers
The Tax Authorities assume that every investment can be valued annually. However, not all assets in Box 3 are listed and not all listed investments can be made liquid. Completing your tax return is becoming more challenging than ever.
At the same time, the Tax Authorities must carry out checks in many areas. This concerns the valuation of shares/assets, monitoring asset flows, interim changes and the like. That’s a lot of administrative hassle and a lot of work to check. If the Tax Authorities are already unable to cope with the work, this new arrangement will undoubtedly lead to even more implementation problems.
7. Uncertainty about tax revenue
This objection mainly applies to the government itself.
- A good estimate of the capital growth and the resulting tax revenues is not possible.
- In practice there may be significant fluctuations. Stock prices rose sharply in 2021 and fell again in 2022.
- If the economy is bad (for example, shrinking), then it is likely that capital growth will also be below average or negative. That is precisely when tax revenues drop. Especially when the government should invest extra to support the economy. Lower tax revenues in a recession year require the government to make cuts and therefore have a pro-cyclical budget policy.
The Ministry of Finance wisely submitted this plan for consultation after previous defeats at the Supreme Court. That’s sensible. This means that you too can make your voice heard.
IEX in Actie strongly advises you to participate in the consultation. This can be done via https://internetconsultatie.nl/wetwerkelijkoverzichtbox3/b1
You can answer the questions online and/or attach a letter (or email) with your own opinion.
You have two days left.
Take advantage of that opportunity!