On 20 December 2024, the Supreme Court clarified how to assess the return on owner-occupied property in box 3.
Box 3 tax still discriminatory
On 24 December 2021, the Supreme Court ruled that the design of the box 3 tax that has been effective since 2017 violates both the prohibition of discrimination (art. 14 ECHR) and the right to peaceful enjoyment of property (art. 1 FP ECHR). Legal redress was offered through an alternative calculation of the return based on the so-called fixed-rate savings option.
On 6 June 2024 though, the Supreme Court ruled that this legal redress, too, fails to pass the test of criticism. Especially, the calculation of the return on assets other than savings is still discriminatory. The difference in tax treatment between successful and less successful investors is still significant, without there being a sufficient justification for this.
The Supreme Court even took this one step further in ruling that the above likewise applies to the Box 3 Bridging Act, as it is essentially based on the same principles.
Legal redress based on actual return
On 6 June 2024, the Supreme Court also detailed how legal redress should be provided. The tax assessment must be reduced such that income tax is levied in box 3 only on the actual return realised in a year. The Supreme Court goes on to provide various rules of thumb for calculating this return.
Calculation of the return on owner-occupied property
Some more judgments addressing legal redress in box 3 were pronounced on 20 December 2024. The Supreme Court took this opportunity to clarify the calculation of the return on owner-occupied property in box 3. As regards the unrealised changes in value in a year, the established decisions under the Valuation of Immovable Property Act (WOZ-beschikkingen) must be followed. The initial value is the WOZ value assessed for the year of taxation, with January 1 of the previous calendar year being the value reference date. The final value is the WOZ value of the following calendar year, with January 1 of the year of taxation being the value reference date. This is referred to as the t-1 calculation. The difference between these two amounts constitutes the unrealised return in the year of taxation. On disposal or acquisition of a property in the course of the year, the change in value is allocated to the seller and the buyer in proportion to time.
The Supreme Court further clarified that changes in value in box 3 that result from the application of valuation rules or exemptions do not qualify as a return. One of the situations in which this applies is when a house is purchased and the WOZ value of this immovable property applicable for that year differs from the purchase price.
Investments and maintenance expenses
The Supreme Court subsequently addressed the distinction between investments and current expenses, stressing that expenses related to improving or extending an immovable property should be treated in the same way as the original investment. As a result, increase in value of an immovable property resulting from additional investments does not qualify as a return. However, it is the taxpayer’s responsibility to reasonably argue that such a situation occurs. When owner occupied properties are involved this is a complex issue, because the change in value is based on the difference in the WOZ value at the start and end of a year. Only if the WOZ value is assessed with application of Article 18(3)(c) of the WOZ Act according to the condition of the property at the beginning of the year to which that value applies, the Supreme Court sees room for rebuttal evidence.
Own use of immovable property
Another aspect that is addressed is what value in box 3 the taxpayer must attribute to their own use of an owner occupied property. First and foremost, the Supreme Court argued that the benefit as a result of own use is part of the concept of return as envisaged by the legislator when box 3 was introduced. But, determining its extent requires political choices, which are more within the purview of the legislator than of the courts. Hence, in this case the Supreme Court does not take into account a fixed-rate return as a result of own use.
Owners’ Association reserve fund
In another case the additional question was raised of how to assess the return in respect of a share in the reserve fund of an Owners’ Association (Vereniging van Eigenaren, VvE). In this respect the Supreme Court considered that one-off or periodic deposits by members do not increase the return and that the payment of expenses by the Owners’ Association does not reduce the return.
Source: HR 20 December 2024, 24/00572 and 24/00573, ECLI:NL:HR:2024:1788