AG opines that Box 3 Legal Redress Act also violates prohibition of discrimination

Christmas ruling

On 24 December 2021, the Dutch Supreme Court ruled that the way the box 3 levy had been designed since the year 2017 violates both the prohibition of discrimination (art. 14 ECHR) and the right to peaceful enjoyment of possessions (art. 1 FP ECHR). By way of legal redress, the Supreme Court reduced the 2017 and 2018 income tax assessments (the years that were the subject of the proceedings) by taxing only the returns actually realised. However, the Supreme Court did not prescribe in general terms how legal redress should take place and merely indicated that compensation should be determined in accordance with reasonableness.

Box 3 Legal Redress

The aforementioned ruling resulted in the introduction of the Box 3 Legal Redress Act (Wet rechtsherstel box 3). With retroactive effect to 1 January 2017, this Act provides compensation to taxpayers who participated in the collective objection proceedings against box 3, to taxpayers whose income tax assessment for the years 2017 to 2020 - or one of these years - had not yet been irrevocably determined on 24 December 2021, and to all taxpayers with box 3 income for the years 2021 and 2022. This compensation will be based on the so-called flat-rate savings option. This still assumes a flat-rate return, but based on the actual composition of assets broken down into savings, other assets and debts.

The return on savings (which also includes cash) is determined using the average interest rate on deposits for the months of January to November in the year in question, with November counting double. For debts, it is the average interest rate on outstanding residential mortgages. There, too, the period January to November is used and the last month counts twice. In this way, current yields are taken into account as much as possible.

By contrast, the yield to be taken into account in the other assets category is calculated unchanged on the basis of a long-term average, and thus is already known at the start of the tax year. The government believes that it would be unfair to compensate investors for bad investment years when, viewed over a longer period, they have achieved a return equal to or higher than the standard return. However, this principle has again led to legal disputes between citizens and the Tax Administration.

Opinion AG Wattel

Meanwhile, Advocate General Wattel has also addressed this issue. He recently concluded that the Box 3 Legal Redress Act violates the ban on discrimination and the right to the peaceful enjoyment of possessions just as much as the Box 3 legislation introduced in 2017. Although savings returns are taxed more realistically under the Box 3 Legal Redress Act, this does not apply to the categories of other assets and liabilities. The AG believes that a box 3 tax based on average returns is constitutionally nonviable, as it leads, by definition, to structural over-taxation of risk-averse and unfortunate investors, while well-performing investors are instead taxed low. The wide dispersion in terms of investment results leads to a discriminatory taxation that is not in line with the principle of the Income Tax Act 2001 (Wet IB 2001) to levy tax according to the ability to pay derived from income actually earned. According to AG Wattel, a rebuttal rule is unavoidable in a levy based on averages. The AG points out that the courts deciding questions of fact already de facto allow rebuttal evidence, by taking the actually realised return as a basis if this is lower than the flat-rate return resulting from the Box 3 Legal Redress Act.

Margin of tolerance
AG Wattel comments on the above that a violation of the peaceful enjoyment of possessions only arises if there is a significant difference between the actual net return on all assets and liabilities of the taxpayer and the flat-rate return under the Box 3 Legal Redress Act. In the Christmas ruling, the Supreme Court referred to a ‘compensation aimed at legal redress’, the extent of which must be determined according to reasonableness. The AG therefore suggested that the Supreme Court establish a so-called margin of tolerance. It is now once again up to our highest court to decide on the matter.

Source: Opinion of the Advocate General 18 September 2023, ECLI:NL:PHR:2023:655