On December 24, 2021, the Supreme Court, in the now well-known Christmas judgment, drew an end to the box 3 scheme applicable at the time. According to the Supreme Court, the old box 3 method, in which the tax amount was determined on a the amount of the savings and investment base, contrary to the right to property and the principle of equality from the European Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR).
The judgment of the Supreme Court has kept people busy in 2022. A compensation scheme was set up for savers and investors who objected. In addition, a new method was sought to levy tax on savings and other box 3 assets.
Reform box 3
The government now wants to move towards a levy on the actual return on box 3 capital as soon as possible. Originally, based on the coalition agreement, the intention was to have this system come into effect from 2025, but after an investigation by Capgemini, it was decided to postpone the levy based on actual return by one year to 2026. It turned out that there was more time necessary for a legislative process, the modernization of the ICT landscape of the Tax and Customs Administration and the cooperation with chain partners such as banks and insurers.
A temporary box 3 bridging legislation (Dutch: Overbruggingswet box 3) will therefore apply from 2023 to 2025.
In this bridging period, the box 3 assets of a taxpayer are classified in one of the following three categories:
- bank balances and cash;
- other assets and
- debts
And for each category a separate fixed return percentage will apply. In order to match the actual returns as closely as possible, the fixed return percentage for the categories bank balances and cash and debts will not be determined until early 2024.
The fixed return has already been determined for the category other assets. This will be 6.17% in 2023. To calculate the provisional assessments, provisional yield percentages are used for the categories bank balances and cash: 0.36% and debt: 2.57%.
What are other assets in box 3?
All assets, which are not savings or cash, are classified under other assets.
Without claiming to be exhaustive, the following can be classified as other assets and that can be quite a shock, since some investments do not yield any (or very limited positive) returns:
- An inherited house from parents;
- Money lent to friends or ex-partner;
- Second home (pied-à-terre);
- Stocks or Exchange Traded Funds (ETF)/Trackers;
- Family mortgage
- Crowdlending or peer-to-peer financing;
- Money lent to the BV via, for example, a DGA current account;
- A socially rented house or apartment.
Having to pay Box 3 tax is even possible in the event of losses suffered or negative returns on other assets. This is due to the assumptions mentioned above. The legislator expects a certain notional return. Not every ‘other assets’ such as a real estate portfolio will be held and there is a threat of large-scale sale of real estate. Please note, the asset reference date is leading in determining your asset position.
Step-by-step plan bridging act box 3
The tax due in box 3 is calculated in the new method on the basis of the following steps.
Step 1. Calculate the return per asset class using the return percentages or provisional return percentages. To calculate the return on the debt category, the debt threshold is first applied. This is 3400 euros per taxpayer in 2023.
Step 2. Add up the returns in categories 1 and 2 and subtract the return in category 3. You have now calculated the taxable return.
Step 3. Calculate the yield basis by subtracting the assets from the debts, after deducting the debt threshold.
Step 4. Calculate the effective yield by dividing the taxable yield by the yield basis.
Step 5. Calculate the basis for savings and investments by reducing the yield basis by the tax-free allowance. That is € 57,000 per taxpayer in 2023.
Step 6. Calculate the benefit from savings and investments by multiplying the basis for savings and investments by the effective return and
Step 7. Calculate the tax to be paid by multiplying the gain from savings and investments by 32%. That is the tax rate in box 3 this year.
Example
The following example from the website of the tax authorities clarifies the new box 3 method.
Two tax partners jointly have the following assets in box 3:
- Savings: € 100,000
- Investments: € 150,000 and
- Debts: € 50,000
the provisional rate of return for the amounts for
- Savings are: 0.36% for
- Other assets: 6.17% and
- Debts: 2.57%
- Debt threshold is € 3400 per taxpayer
- The tax-free allowance is €57,000 per taxpayer.
The tax due is now calculated as follows:
Step 1. Returns by asset class
- for savings: 0.36% * €100,000 = €360
- for the investments: 6.17% * € 150,000 = € 9,255
- and the debts: 2.57% * (€ 50,000 – 2 times the debt threshold of € 3,400) = € 1,111
Step 2. You add categories 1 and 2 minus category 3 € 360 + € 9,255 – € 1,111, so € 8,504
Step 3 You determine the yield basis: € 100,000 + € 150,000 minus the debt € 50,000 minus twice the debt threshold € 3,400 (€ 6,800) = € 206,800
Step 4. The effective return: € 8,504 divided by € 206,800 x 100% is 4.11%.
Step 5. The basis for savings and investments: € 206,800 minus (2 times the tax-free allowance (€ 57,000), then you end up at € 92,800
Step 6. Benefit from savings and investments: € 92,800 times the 4.11%, so € 3,814
Step 7. The tax to be paid then amounts to € 3,814 x 32%, which is € 1,220
Reference date arbitration box 3
The reference date for box 3 remains unchanged at 1 January. The new method may lead to taxpayers shifting their assets within the various asset classes for tax reasons, for example by selling category two investments and holding more category one savings, a considerable amount of tax can be saved.
To prevent this, a number of actions are regarded as benchmark arbitration. If so, those actions for box three are ignored. That is, the tax is levied as if those acts had not taken place.
The following acts are not considered arbitration acts:
- transactions before October 1;
- and after March 31;
- and if the period between sale and purchase or purchase and sale exceeds 3 months.
If there are two transactions that followed each other within 3 months and that both took place between October 1 and March 31, then these transactions are regarded as reference date arbitrage. This is not the case if the taxpayer can demonstrate that the transactions were made for business, not tax, reasons.
Example
On December 31, 2022, a taxpayer has a savings balance of € 500,000 and other assets of € 2.5 million
For savings deposits, the return percentage is 0.36%. For other assets this is 6.17%. And this taxpayer pays almost € 49,000 in Box 3 levy with an unchanged capital on January 1, 2023.
Suppose that on December 31, 2022, the taxpayer sells all other occupancies and adds them to the savings.
In that case, the tax to be paid is only € 3,390.
If the savings are subsequently converted into other assets only after March 31, 2023, the purchase and sale will not be regarded as an arbitrage transaction.
Suppose this taxpayer converts the savings balances into those other assets for an amount of € 1,000,000 before 1 April 2023. In that case, this amount is assumed to be an arbitration transaction.
The distribution that is now used for the box 3 levy is then € 2,000,000 in savings and one million other assets, so that the tax due is € 21,629.
Maintenance reserve fund and box 3
Box 3 includes claims and a reservation of the taxpayer in the maintenance reserve of the owners’ association (VvE). It was unclear whether this reservation at the VvE falls into the category of savings or in the category of other assets.
In a recent legal procedure, the Arnhem-Leeuwarden Court of Appeal ruled that the share in a reserve fund of an owners’ association for box 3 must be regarded as savings and not as other occupation.
The Court rightly refers to an article from the Civil Code which states that contributions to the VVE reserves must be held in a current or savings account.
A reform of box 3 has now taken effect from the beginning of January 2023. A Bliss advisor can map and analyze the impact of this temporary bridging scheme box 3 for you. Feel free to contact us without obligation to discuss your personal situation.
