Collective judgment on mass objection box 3 published | Deloitte Netherlands


Collective judgment on mass objection box 3 published

The Supreme Court ruled that since 2017 the flat-rate investment yield tax in box 3 violates property rights and the prohibition on discrimination. The collective judgment on the objection was published on 4 February 2022.

12 May 2022

Investment yield tax through 2016

The benefit from savings and investments (box 3) is determined on the basis of a flat-rate yield rate, which was 4% in the years 2001 through 2016. The legislator assumed that taxpayers would be able to realise such a yield without having to take much risk.

Because taxpayers often actually achieved a lower return on their savings and other assets in box 3 than the 4% flat-rate yield, many considered the levy an unjustified infringement on property rights. Responding to this in 2019, the Supreme Court had already ruled that while a flat-rate levy as such does not violate article 1 of the First Protocol to the ECHR, this is different if it is established that private investors can no longer achieve the 4% return that the legislator assumed for a long series of years at the time, and that taxpayers, also in view of the applicable rate, are faced with an excessively heavy burden. The Supreme Court concluded that the legislator’s assumptions were no longer valid as of the year 2013, but offered restoration of rights. It was up to the legislator to come up with a solution.

Investment yield tax as of 2017

The government did not wait for the case law developments and changed the tax system in box 3 for the years as from 2017. The aim was to have the flat-rate yield be more in line with the average actual yield on assets. To achieve this, a distinction was made between the flat-rate return on savings and receivables on the one hand, and the return on real estate, shares, bonds, and other assets on the other. These yield rates are applied to a statutory, flat-rate asset mix. As the box 3 capital increases, it is considered to consist of investments for a larger part and a higher flat-rate yield is taken into account in box 3.

On 24 December 2021, in mass objection proceedings the Supreme Court ruled, however, that these changes have actually moved the flat-rate system further away from a levy on income that can be assumed to have actually been received by an individual taxpayer.

First and foremost the Supreme Court argued that, while the government has been given the power to levy taxes, the relationship between the means used and the objective pursued by the levy must be reasonable. For example, the legislator’s choices may not infringe on the prohibition of discrimination of article 14 ECHR. Likewise, the right to peaceful enjoyment of possessions implies that the government is limited in interfering in citizens’ choices in using or exploiting their possessions.

The Supreme Court observed that the new system restricts the freedom of disposition guaranteed by article 1 of the First Protocol to the ECHR, by attaching a relatively heavy financial burden to the choice to refrain from the risky investment of possessions. What’s more, the system disadvantages those who do engage in risky investments but who, due to a lack of insight or luck, still fail to realise a sufficient return. In partly basing income tax on the average return obtained on risky investments, the system creates unequal treatment based on circumstances beyond the taxpayers’ control.

This effect is reinforced because the current box 3 system does not take account of the actual composition of taxpayers’ assets. As a result, the levy they are faced may be higher than the actual return achieved. Although the Supreme Court indicated that a certain estimate is inherent in a flat-rate scheme, the conclusion is that the legislator has exceeded its discretion regarding the box 3 tax system applicable since 2017. This judgment does not affect the statutory scheme applicable through 2016.

The Supreme Court ruled that affected taxpayers must be given effective legal protection through a compensation aimed at restoration of rights. The amount of the compensation must be determined in accordance with the standards of reasonableness.

Consequences of judgment and objection

The Supreme Court judgment covers the years 2017 and 2018. However, since both the statutory regulation and the presented legal questions were almost identical for 2019 and 2020, the Tax Inspector has decided to include these years in the collective decision on the objection. This decision was published on 4 February 2022. The statutory term for the Tax Inspector to subsequently determine a refund is six months. On 28 April 2022, the State Secretary indicated how restoration of rights will be provided and who will be eligible for it. For more information, please see our news item on this subject.

Source: HR 24 december 2021, 21/01243, ECLI:NL:HR:2021:1963

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