Box 3 Legal Redress Act and Box 3 Bridging Act also violate ECHR | Deloitte Netherlands

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Box 3 Legal Redress Act and Box 3 Bridging Act also violate ECHR

On 6 June 2024, the Supreme Court ruled that both the Box 3 Legal Redress Act and the Box 3 Bridging Act violate the prohibition of discrimination and the right to peaceful enjoyment of possessions. The Supreme Court also provides rules on how legal redress should be offered.

7 June 2024

Christmas ruling

On 24 December 2021, the Supreme Court ruled that the design of the box 3 levy since 2017 violates both the prohibition of discrimination (Article 14 ECHR) and the right to peaceful enjoyment of possessions (Article 1 FP ECHR). To provide legal redress, the Supreme Court reduced income tax assessments for 2017 and 2018 (the years that were the subject matter of the proceedings) by limiting taxation to the actual return realised.

Legal redress box 3

Following the aforementioned ruling, the Box 3 Legal Redress Act (Wet rechtsherstel box 3) was introduced. This Act provides compensation with retroactive effect to 1 January 2017 to taxpayers who participated in collective objection proceedings against box 3; to taxpayers whose income tax assessment for (any of) the years 2017 to 2020 had not yet been imposed or had not yet been irrevocably determined on 24 December 2021; and to all taxpayers with box 3 income for the years 2021 and 2022. The compensation is based on the so-called fixed-rate savings option. This option still assumes a fixed-rate return, but based on the actual composition of a taxpayer's assets, broken down by savings, other assets and debts.

The return on savings (including cash) is determined using the average interest rate on deposits for the months of January to November in the relevant calendar year, with November counting twice. For debts, the return equals the average interest rate on outstanding residential mortgages for the period January to November, also with November counting twice. This procedure should ensure that actual returns are taken into account as much as possible.

In contrast, the return to be calculated for in the other assets category remains unchanged. It is based on a long-term average and is already known at the start of the tax year. The government believed it would be unfair to compensate investors for bad investment years while, viewed over a longer period, their actual returns realised equal or even exceed the fixed-rate return. But this premise once again led to legal disputes between taxpayers and the Tax Administration. In September 2023, Advocate-General (‘AG’) Wattel opined that the Box 3 Legal Redress Act violates the prohibition of discrimination and the right to peaceful enjoyment of possessions just as much as the box 3 legislation introduced in 2017. In February 2024, AG Pauwels likewise concluded that the Box 3 Legal Redress Act fails the test of criticism.

Supreme Court Judgment

On 6 June 2024, the Supreme Court issued its long-awaited judgment in five cases on the levy of income tax in Box 3 under the Box 3 Legal Redress Act.


Violation of the ECHR

The main question before it was whether the Box 3 Legal Redress Act removed the violation of Article 14 ECHR (prohibition of discrimination) combined with Article 1 ECHR (right to peaceful enjoyment of possessions), which violation was established in the Christmas ruling. The Supreme Court argues that this is not the case. Although attempts at a better approximation of the actual return have been made by dividing the assets into three categories and although the fixed-rate return for bank balances generally approximates the actual return, this is different for taxpayers with other assets. Under the Box 3 Legal Redress Act, the fixed-rate return on those assets is calculated in the same way as under the former statutory regime in place since 1 January 2017. For those assets, this does not alleviate the problem that prompted the Supreme Court to establish a violation of the ECHR in December 2021. Under the Box 3 Legal Redress Act, too, the difference in tax treatment between successful and less successful investors is significant. But, this difference is insufficiently justified. The ratio between the aim and means used on the one hand and the interests of taxpayers on the other is unreasonable. If the fixed-rate return is higher than the return actually realised, the box 3 levy still violates both the prohibition of discrimination (Article 14 ECHR) and the right to peaceful enjoyment of possessions (Article 1 EP ECHR).

The Supreme Court even took this one step further and ruled that the above likewise applies to the Box 3 Bridging Act, as the latter is based on virtually the same principles as the Box 3 Legal Redress Act. The Supreme Court went on to rule that it does not matter how big the difference between the fixed-rate and the actual return is. Hence, this leaves no room for a margin of tolerance, as A-G Wattel had advised.


Legal redress based on actual return

Unlike in the Christmas ruling, the Supreme Court has now detailed how legal redress should be offered. The tax assessment must be reduced such that in box 3 income tax is levied only on the actual return realised. However, the taxpayer is responsible for proving that the actual return is lower than the fixed-rate return. It should be noted that any calculation of the fixed-rate return under the Box 3 Legal Redress Act must be based on the assumption that a share in the reserve fund of an Association of Owners qualifies as an other asset instead of a bank balance.

Next, the Supreme Court provided some rules of thumb for calculating the actual return. The starting point is the concept of return envisaged by the legislator for the fixed-rate system in box 3.

  • When determining the return actually realised, the entire assets of box 3 should be taken into account, including bank deposits, but without deducting the tax-free assets.
  • The nominal return is key, without taking account of inflation.
  • A positive or negative return in previous years should not be taken into account.
  • The actual return includes not only benefits from asset components, such as interest, rent or dividends, but also positive or negative changes in value. This includes both realised and unrealised movements in assets.
  • Expenses should not be taken into account, but interest on debts classified under assets in Box 3 should.


Interest payment

Finally, the Supreme Court addressed the question whether the Tax Administration should pay interest on tax refunds arising from the Box 3 Legal Redress Act. Earlier on, the Arnhem-Leeuwarden Court had ruled that Article 41 ECHR provides a basis for this, while A-G Pauwels held that Article 13 ECHR provides an opening for this, under circumstances. However, the Supreme Court does not go along with this. Disregarding an interest payment based on national tax law does not violate the ECHR, unless the amount of statutory interest would exceed the amount of the tax reduction in box 3, something that seems quite unlikely to occur.


Judgments of 14 June 2024

On 14 June 2024, the Supreme Court pronounced a number of judgments in which it provided a more concrete interpretation of some of the aforementioned rules of thumb for calculating the actual return. For instance, our highest judicial body ruled that when determining the actual return of an owner occupied dwelling the ‘WOZ waarde’ (the value for the purposes of the Valuation of Immovable Property Act) at the beginning and the end of the relevant calendar year must be taken into account. Thus, determining the actual return of owner occupied dwellings as much as possible takes place in line with the concept of return envisaged by the legislator when designing the fixed- rate system in box 3.

In addition, the Supreme Court once again affirmed that when calculating the actual return, there is no room to deduct expenses and the tax-free assets may not be taken into account. An unrealised currency loss on investments, though, must be taken into account when calculating the actual return.

Finally, in the judgments of 14 June 2024, Supreme Court reiterated that it is indeed up to the Court to provide for the judicial failure associated with the violation of art. 14 ECHR and art. 1 EP ECHR with respect to the system of levying in box 3.


Sources:

• HR 6 June 2024, ECLI:NL:HR:2024:704
• HR 6 June 2024, ECLI:NL:HR:2024:705
• HR 6 June 2024, ECLI:NL:HR:2024:771
• HR 6 June 2024, ECLI:NL:HR:2024:756
• HR 6 June 2024, ECLI:NL:HR:2024:813
• HR 14 June 2024, ECLI:NL:HR:2024:855
• HR 14 June 2024, ECLI:NL:HR:2024:856
• HR 14 June 2024, ECLI:NL:HR:2024:857
• HR 14 June 2024, ECLI:NL:HR:2024:860

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