Internet consultation box 3 levy based on actual return has been amended

Internet consultation

In last year’s Outline Policy Document the government took the first steps to introduce a new box 3 tax system. The next step followed in September 2023, with the launch of the consultation version of the Box 3 Actual Return Act. This bill provides for a box 3 levy based on the actual return, effective from 2027. In January 2024, the government announced amendments to some components of the consulted version.

Combination of tax systems

The government introduces a capital growth tax as a starting point to replace the current flat-rate levy, with annual taxation of regular income and expenses as well as realised and unrealised changes in the value of assets. A major consideration for the government is that this will prevent long-term tax deferral. On top of that, this system will release taxpayers, banks and insurers from keeping long term records of the cost prices of assets.

However, taxpayers may face payment difficulties as a result of the capital growth tax, especially for less current assets. To tackle this issue, immovable property and shares in family businesses and innovative start-ups will be subject to a capital gains tax, with positive and negative value increases only being taxed upon realisation or termination of the tax liability in the Netherlands. The initial value of already owned immovable property and unlisted shares will be based on the market value as at 1 January 2027. This is the date when the new tax system is likely to come into force.

As a common denominator, both tax systems are based on profit determination rules. This means, for example, that the arm's length principle is introduced into box 3 and that taxation is based on nominal income.

Initially, the idea had been to only tax the net income from bank deposits, because the legislator did not want to unnecessarily complicate the Box 3 levy for these assets. However, the government has since indicated that any changes in the value of bank balances and cash (currency results) will also be included in the levy, as this would be more in line with the system applied.

A similar simplicity motive formed the basis for how the legislator wanted to tax a first home in box 3 that is intended for the taxpayer’s own use. Provided its value would not exceed EUR 1.2 million, such home would be fully taxed at a flat rate. Nevertheless, because the different treatment raised several questions this intention was cancelled as well.

Tax system

All assets and liabilities currently included in the capital yield tax base of box 3 will continue to fall under the scope of this levy under the new system. Existing exemptions will be maintained except for the exemption for green investments, which will be offset by an increase in the tax credit for such investments.

The valuation of rights of enjoyment will also change. The government’s original intention had been to value these rights at nil. As a result, for the beneficiary to the enjoyment the full purchase price for the right of enjoyment would be immediately deductible upon establishment, while for the bare owner it would be fully taxable. However, capitalisation of the purchase price paid is now prescribed after all, in order to prevent abuse. Next, the value of the right of enjoyment is reduced linearly over the period of establishment of the right.

The draft bill also contains valuation rules for determining the result from dwellings, securities, life insurance and loans between natural persons.

Since changes in the value of receivables and debts are also included in the levy under the new tax system, an exemption for debt relief income is proposed. This is done to prevent taxpayers in dire financial straits from still owing tax in box 3. This could discourage creditors from remitting debts and negatively affect entitlements to income-dependent schemes.

Expenses related to the result from assets and liabilities are in principle deductible on condition that they have been incurred solely for the purpose of acquiring, collecting and preserving income. Also, several deduction restrictions will be introduced in box 3, such as currently applied for determining business profits.

A new feature is the possibility to set off losses in box 3. It will now be possible to indefinitely carry forward negative results from assets and liabilities. Initially, the bill also envisaged a one-year loss carry-back. But that intention was cancelled due to the implementation costs involved and the high budgetary loss.

Finally, the tax-free assets in box 3 will be replaced by a tax-free income per taxpayer. The amount of this tax-free income and the tax rate have not yet been determined. It will be up to the new government to decide about that.

Provision of information

In the new system, the information required for the box 3 tax will also largely be provided by banks and other financial institutions, especially data on bank balances, securities and other financial products. Nevertheless, more demands will be placed on the provision of information by taxpayers and a statutory requirement to keep records will be provided for in box 3 to that end.

Closing

The target date of entry into force of the Box 3 Actual Return Act is 1 January 2027. But the State Secretary does indicate that the Tax Administration can only meet this deadline if the final bill is submitted to the House of Representatives by the summer of 2024 at the latest.