Box 3 after Prinsjesdag: still a black box

On Prinsjesdag, it became clear that the government wants to include the financial coverage and further elaboration in the next budgetary decision-making process, which will probably be the 2027 spring budget. The Senate is therefore being asked to postpone consideration of the bill for the Box 3 Actual Return Act (Wet werkelijk rendement box 3) for a longer period.

The Supreme Court of the Netherlands ruled that the box 3 tax may constitute a violation of the prohibition of discrimination and the right to property in cases where the tax is based on an assumed rate of return that is higher than the actual return. Taxpayers may therefore declare their actual return, subject to certain conditions. If taxpayers can demonstrate that their actual return is lower than the assumed rate of return, tax is paid on the actual return. 

The rebuttal scheme is intended as a temporary solution, as a step towards a system in which tax is levied on the basis of actual returns.

A key point of discussion is the capital growth tax selected for many assets, which would see tax charged not only on realised gains, such as interest, dividends or rent, but also on unrealised gains. For certain assets, such as immovable property and shares in start-up companies, the bill provides for a capital gains system, whereby tax is levied upon realisation. 

The capital growth approach has led to criticism from both politicians and society. After all, this approach may see tax payable on paper returns, without any sale proceeds or liquid assets being available. 

The parliamentary groups of the VVD and CDA coalition parties, which had voted in favour of the bill in the House of Representatives, were considering voting against in the Senate. The government tried to reach a compromise, but ran into difficulties with the cost: who would pay the billions that a different system or further postponement would cost? The government now intends to use the coming period to hold further discussions, referring to the coalition agreement in which it was agreed to further develop the new system into a capital gains system on the basis of actual returns. The government sees a clear link between this and the investment and business climate, and intends to put forward widely supported proposals in the coming period that will contribute to future earning capacity and economic growth.

The government is currently considering four scenarios, none of which is straightforward, cheap or without political risks.

1. Improve the current bill
   The first option is to amend the Box 3 Actual Return Act (Wet werkelijk rendement box 3) without getting rid of the capital growth tax. Possible measures include loss carryback and improvements for taxpayers experiencing life events such as marriage or divorce. Encouraging sustainable investing and providing more favourable treatment for start-ups and scale-ups are also being considered. While this approach tackles a number of concerns, it does little to address the fundamental criticism of taxing unrealised capital gains.
2. First introduce the new system, then move towards capital gains tax
   A second option is to introduce the Box 3 Actual Return Act (Wet werkelijk rendement box 3) with effect from 2028 and then, through a new bill, move towards full capital gains tax from around 2030 (this can be combined with the improvements set out in scenario 1). The advantage is that, from 2028, tax would really be levied on actual returns, and the disadvantages of the current assumed-rate system with its rebuttal scheme would be eliminated. The downside is that taxpayers would still face capital growth tax in the intervening years.
3. Wait for a full capital gains tax
   The government is also exploring an option whereby the current bill would be withdrawn. This would see the existing assumed-rate system with a rebuttal scheme remain in place for the time being, followed by a direct transition to full capital gains tax around 2030. The advantage is that the desired end result would be achieved immediately. But this would mean that the shortcomings of the current system would persist for longer, and, according to the government, this approach would result in the greatest loss of revenue.
4. Accelerated transition to capital gains tax
   The fourth option is the most ambitious. Under this approach, capital gains tax would be introduced from 2028 for virtually all financial investments, such as shares, bonds and options. According to the government, a capital gains system would then apply to around 90% of the assets with value appreciation in box 3. The remaining assets would follow at a later date. However, this option presents significant implementation challenges, partly because banks are initially unable to provide all the data required for the pre-filled tax return.

Which option is ultimately chosen depends not only on tax preferences, but also on the question of how the budgetary consequences will be addressed. The government emphasises that each option will cost billions and that money from elsewhere will have to be found to cover this. Other tax matters may also come into play, such as Box 2, inheritance tax or the treatment of owner-occupied homes. The discussion on Box 3 is therefore not necessarily limited to Box 3.

Until the new system is in place, the current box 3 legislation will continue to apply. Anyone who can demonstrate that their actual return was lower than the assumed rate of return can use the rebuttal scheme. This scheme can reduce the tax, but not increase it. For many investors, this system is more favourable than taxation based on actual returns without a rebuttal scheme.

For property investors, rebuttal offers less of an obvious advantage. When determining the actual return, unrealised capital gains may also be taken into account, while maintenance and other operating costs are not tax-deductible in principle. As a result, the calculated actual return may be higher than the amount the owner has received as free cash flow.

For many savers, the difference is likely to be limited, as the assumed-rate return on bank balances is relatively closely aligned with the interest actually received. However, the exact outcome remains dependent on the individual’s mix of assets.

As far as Box 3 is concerned, Prinsjesdag now marks the start of negotiations above all. So in general, there’s no reason to rush things just yet. But it’s of course a good idea to discuss your personal situation with your financial adviser in good time.

While Box 3 is moving from fiction to reality, that reality is proving to be fiscally challenging. Taxing actual returns sounds fairer than working with rough assumed-rate figures. However, as soon as you get into the specifics of the system, various interests collide. 

Capital growth tax would generate revenue for the Treasury sooner, but may tax profits that exist only on paper. Capital gains tax would largely prevent that problem, but would postpone taxation and therefore create a shortfall in the budget in the early years. And when taxing actual returns, you have to accept that revenue fluctuates in line with interest rates, property prices and share prices. The legislator can set the rate, but not tomorrow’s returns. 

What’s more, developments surrounding Prinsjesdag show that the discussion goes further than just the question of how actual returns should be taxed. The government is explicitly linking the future structure of Box 3 to the investment climate and the future earning capacity of the Dutch economy.  

So this leaves Box 3 a black box for the time being, as politicians haven’t yet made a decision. For now, more or less all individual taxpayers can do is keep an eye on developments, have their own situation assessed in good time, and regularly review what the new rules might mean for their assets.  

If you’d like a better understanding of the short and long-term implications of your financial strategy, please get in touch with our advisers.

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• Box 3 after Prinsjesdag: still a black box