Supreme Court ruling 6 June 2024 in box 3 cases

On 6 June, the Dutch Supreme Court ruled in five cases concerning taxation of income in box 3 after the introduction of the box 3 Legal Restoration Act (in Dutch: Wet rechtsherstel box 3). In its ruling, the Supreme Court ruled that the system of the box 3 Legal Restoration Act and thus also the Box 3 Bridging Act (in Dutch: Overbruggingswet box 3) violates European law in cases where the deemed income is higher than the actual income.

What is the situation?

In a ruling known as the Christmas ruling in late 2021, the Supreme Court ruled that the box 3 system in place since 2017 violated the European Convention on Human Rights (ECHR). Legal restoration had to be provided so that the box 3 levy is (more) in line with the income actually enjoyed.

The legal restoration was provided through the box 3 Legal Restoration Act for the years 2017-2022. This law is almost identically extended in the Box 3 Bridging Act, which applies for the tax years starting from 2023, until a final adjustment for box 3 takes effect (expected as from 2027).

Under the Box 3 Legal Restoration Act and the Box 3 Bridging Act, savers will be taxed on the (approximate) interest actually earned. All other box 3 assets are taxed in the same way as before, with debts in box 3 leading to less deduction than before.

The question now arises whether the new system under the Legal Restoration Act and the Box 3 Bridging Act also violates the ECHR, especially for the ‘unfortunate investor’ who does not achieve the legally deemed income pursuant to the law.

It is not only the substantive elements under the Legal Restoration Act that are called into question. If a refund of overpaid box 3 tax is granted under the Legal Restoration Act and the Box 3 Bridging Act, the question also arises whether there is also a right to interest compensation. This interest compensation pertains to the loss suffered in the period between the payment of the box 3 tax and the refund of the overpaid amount in box 3.

In September 2023 and February 2024, two Attorneys-General concluded against the Dutch Tax Authorities on these questions.

Supreme Court ruling

The Supreme Court has ruled that to the extent the deemed income in box 3 is higher than the actual box 3 income enjoyed, this is in violation of European law. In this respect, it does not matter how big the difference is between the deemed income and the actual income.

The Supreme Court has ruled that the deemed income for the savings asset category generally approximates the actual income. This is different for the other categories: debts and other assets.

In its ruling, the Supreme Court provides guidance on how to calculate the actual income enjoyed. When calculating the actual income, the following elements should be taken into account:

• The taxpayer’s entire assets (i.e. including bank balances) in box 3 should be included in the calculation, without deduction of tax-free threshold;
• The actual, nominal income enjoyed matters, without taking inflation into account;
• Also, positive and negative income from other years should not be taken into account;
• Not only benefits from assets, such as interest, dividends and rents, but also positive and negative changes in the value of those assets are relevant to calculate the actual income;
• Unrealised changes in value are also considered part of the actual income; and
• Costs are not taken into account, except for interest on debts belonging to assets in box 3 is.

The Supreme Court also concluded that when reducing the assessment under Dutch tax law, in principle, no interest needs to be paid by the Dutch Tax Authorities.

How to proceed

It will have to be assessed on a case-by-case basis whether and to what extent the deemed income in box 3 pursuant to the law exceeds the actual income in a given year, taking into account the guidelines as outlined by the Supreme Court.

Furthermore, it remains to be seen how the incoming cabinet will respond to these rulings. Short-term repair in view of budgetary concerns seems likely.

Questions?

Do you have any questions regarding the above? Please feel free to contact our colleagues from the Atlas private clients team